10-K
As filed with the Securities and Exchange Commission on
February 28, 2008
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, 2007
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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. 1-3305
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. 22-1109110
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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
($0.01 par value)
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New York and Philadelphia Stock Exchanges
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Number of shares of Common Stock ($0.01 par value)
outstanding as of January 31, 2008: 2,165,289,746.
Aggregate market value of Common Stock ($0.01 par value)
held by non-affiliates on June 30, 2007 based on closing
price on June 30, 2007: $107,919,000,000.
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
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)
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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
Stockholders to be held April 22, 2008, 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
Merck & Co., Inc. (Merck or the
Company) is a global research-driven pharmaceutical
company that discovers, develops, manufactures and markets a
broad range of innovative products to improve human and animal
health. The Companys operations are principally managed on
a products basis and are comprised of two reportable segments:
the Pharmaceutical segment and the Vaccines segment. The
Pharmaceutical segment includes human health pharmaceutical
products marketed either directly or through joint ventures.
These products consist of therapeutic and preventive agents,
sold by prescription, for the treatment of human disorders.
Merck 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. The Vaccines segment includes human health vaccine
products marketed either directly or through a joint venture.
These products consist of preventative pediatric, adolescent and
adult vaccines, primarily administered at physician offices.
Merck 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 our pharmaceutical and
vaccine products to health care professionals in private
practice, group practices and managed care organizations.
For financial information and other information about the
Pharmaceutical segment and the Vaccines segment, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and
Item 8. Financial Statements and Supplementary
Data below.
Overview During 2007, Merck began realizing
benefits from its multi-year strategic plan designed to
reengineer the way the Company develops and distributes
medicines and vaccines worldwide. The Company is benefiting from
the evolution of a new commercial model designed to align the
Companys product research, development and marketing
efforts utilizing the latest technologies and broadening its
engagement with customers, physicians and scientific leaders to
get needed medicines and vaccines through the development
pipeline and to patients sooner. The Company is also working to
build a sustainable research and development advantage by
leveraging technologies to facilitate drug discovery and
development and has successfully reduced clinical development
cycle-time.
The progress of these efforts is demonstrated in part by the
Companys revenue growth in 2007, which reflected the
continued market penetration and global rollout of Gardasil
[Human Papillomavirus Quadrivalent (Types 6, 11, 16 and
18) Vaccine, Recombinant], a vaccine to help prevent
cervical cancer, pre-cancerous and low-grade lesions, vulvar and
vaginal pre-cancers, and genital warts caused by human
papillomavirus (HPV) types 6, 11, 16 and 18;
Januvia (sitagliptin phosphate), a medicine that
enhances a natural body system to improve blood sugar control in
patients with type 2 diabetes; and RotaTeq (Rotavirus
Vaccine Live, Oral, Pentavalent), a pediatric vaccine to help
prevent rotavirus gastroenteritis in infants and children,
coupled with the strong performance of several in-line products.
The growth in these products has more than offset 2007 revenue
declines associated with the 2006 loss of U.S. market
exclusivity for Zocor and Proscar.
Additionally, the Company continued the advancement of drug
candidates through its pipeline. During 2007, the U.S. Food
and Drug Administration (the FDA) approved both
Janumet (sitagliptin phosphate and metformin
hydrochloride), an oral antihyperglycemic agent that combines
Januvia with metformin in a single tablet to address all
three key defects of type 2 diabetes, and Isentress
(raltegravir), a
first-in-class
integrase inhibitor for the treatment of HIV-1 infection in
treatment-experienced patients. In addition, on January 25,
2008, the FDA approved Emend (fosaprepitant dimeglumine)
for Injection, an intravenous therapy for the prevention of
chemotherapy-induced nausea and vomiting (CINV).
Also, the Company anticipates the FDA will take action in 2008
on the New Drug Application (NDA) for
Cordaptive, the proposed trademark for MK-0524A, an
extended-release (ER) niacin combined with
laropiprant, a novel flushing pathway inhibitor, for cholesterol
management. Further, the Company made a supplemental filing with
the FDA in January 2008 for Gardasil, for an expanded
indication for women through age 45, and anticipates making
a supplemental filing for Isentress later in 2008, for an
expanded indication for use in treatment-naïve patients.
The Company currently has seven candidates in Phase III
development and anticipates making NDA filings with respect to
two of the candidates in 2008: MK-0524B, simvastatin
2
combined with laropiprant and ER niacin, and MK-0364,
taranabant, an investigational medication for the treatment of
obesity. The Companys research and development efforts are
more fully discussed in Research and Development
below.
As part of implementing the new commercial model, the Company is
reengineering its core business to be more efficient with the
goal of reducing aspects of its cost base and realizing gross
margin improvement. The reengineering includes the
implementation of manufacturing and marketing cost savings
initiatives. The initial phase of the global restructuring
program announced in 2005 was designed to reduce the
Companys cost structure, increase efficiency and enhance
competitiveness. The scope of this initial phase included the
implementation of a new supply strategy by the Merck
Manufacturing Division over a three-year period, focusing on
establishing lean supply chains, leveraging low-cost external
manufacturing and consolidating our manufacturing plant network.
As part of this program, through January 2008, Merck had closed,
sold or ceased operations at five manufacturing sites and two
preclinical sites and eliminated approximately 7,200 positions
company-wide (comprised of actual headcount reductions and the
elimination of contractors and vacant positions). The Company,
however, continues to hire new employees as the business
requires. The pretax costs of this restructuring program since
inception through the end of 2007 were $2.1 billion, of
which approximately 70% are non-cash, relating primarily to
accelerated depreciation for those facilities scheduled for
closure and approximately 30% represent separation and other
restructuring related costs. These costs were
$810.1 million in 2007 and are expected to be approximately
$100 million to $300 million in 2008, at which time
the initial phase of the restructuring program relating to the
manufacturing strategy is expected to be substantially complete.
Merck continues to expect the initial phase of its cost
reduction program, combined with cost savings the Company
expects to achieve in its marketing and administrative and
research and development expenses, will yield cumulative pretax
savings of $4.5 to $5.0 billion from 2006 through 2010.
On November 9, 2007, 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 already filed against the Company
in the United States. If certain participation conditions under
the Settlement Agreement are met (or waived), the Company will
pay 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 enter into the resolution process (the
Settlement Program). As a consequence of the
Settlement Agreement, the Company recorded a pretax charge of
$4.85 billion in the fourth quarter of 2007. In addition,
the Company recorded a pretax gain of $455 million relating
to insurance proceeds which the Company was awarded (or agreed
to receive pursuant to negotiated settlements) in the previously
disclosed arbitration with the Companys upper level excess
product liability insurance carriers relating to coverage for
costs incurred in the Vioxx product liability litigation.
These items are discussed more fully in Item 3. Legal
Proceedings below.
Also in the fourth quarter of 2007, the Company recorded a
pretax charge of $671 million in connection with the
anticipated resolution of investigations of civil claims by
federal and state authorities relating to certain past marketing
and selling activities, including nominal pricing programs and
samples. On February 7, 2008, the Company entered into
definitive agreements resolving the investigations. This item is
discussed more fully in Item 3. Legal
Proceedings below.
Earnings per common share (EPS) assuming dilution
for 2007 were $1.49 per share including the impact of the
U.S. Vioxx Settlement Agreement charge, costs
associated with the global restructuring program, the charge
related to the resolution of certain civil governmental
investigations and the gain from an insurance arbitration award
related to Vioxx product liability litigation coverage,
which collectively reduced EPS by $1.71 per share. In addition,
EPS in 2007 reflects an acquired research charge related to the
acquisition of NovaCardia, Inc. (NovaCardia),
additional reserves established solely for future legal defense
costs for Vioxx litigation and the favorable impact of
gains on sales of assets and product divestitures, as well as a
net gain on the settlements of certain patent disputes. All of
these items are discussed more fully in the notes to the
consolidated financial statements.
3
Product
Sales
Sales(1) of
the Companys products were as follows:
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($ in millions)
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2007
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2006
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2005
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Singulair
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$
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4,266.3
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$
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3,579.0
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$
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2,975.6
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Cozaar/Hyzaar
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3,350.1
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3,163.1
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3,037.2
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Fosamax
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3,049.0
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3,134.4
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3,191.2
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Zocor
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876.5
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2,802.7
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4,381.7
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Cosopt/Trusopt
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786.8
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697.1
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617.2
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Primaxin
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763.5
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704.8
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739.6
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Januvia
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667.5
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42.9
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-
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Cancidas
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536.9
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529.8
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570.0
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Vasotec/Vaseretic
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494.6
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547.2
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623.1
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Maxalt
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467.3
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406.4
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348.4
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Proscar
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411.0
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618.5
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741.4
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Propecia
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405.4
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351.8
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291.9
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Arcoxia
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329.1
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265.4
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218.2
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Crixivan/Stocrin
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310.2
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327.3
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348.4
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Emend
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204.2
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130.8
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87.0
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Invanz
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190.2
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139.2
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93.7
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Janumet
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86.4
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-
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-
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Other
pharmaceutical(2)
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2,465.9
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2,780.5
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2,295.1
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19,660.9
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20,220.9
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20,559.7
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Vaccines:(3)
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Gardasil
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1,480.6
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234.8
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-
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RotaTeq
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524.7
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163.4
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-
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Zostavax
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236.0
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38.6
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-
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ProQuad/M-M-R II/Varivax
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1,347.1
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820.1
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597.4
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Hepatitis vaccines
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279.9
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248.5
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194.5
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Other vaccines
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409.9
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354.0
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311.4
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4,278.2
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1,859.4
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1,103.3
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Other(4)
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258.6
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555.7
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348.9
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$
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24,197.7
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$
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22,636.0
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$
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22,011.9
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(1)
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Presented net of discounts and returns.
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(2)
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Other pharmaceutical primarily includes sales of other human
pharmaceutical products and revenue from the Companys
relationship with Astra Zeneca LP (AZLP) primarily
relating to sales of Nexium, as well as Prilosec.
Revenue from AZLP was $1.7 billion, $1.8 billion
and $1.7 billion in 2007, 2006 and 2005, respectively. In
2006, other pharmaceutical also reflected certain supply sales,
including supply sales associated with the Companys
arrangement with Dr. Reddys Laboratories
(Dr. Reddys) for the sale of generic
simvastatin.
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(3)
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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.
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(4)
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Other primarily includes other human and animal health joint
venture supply sales and other miscellaneous revenues.
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The Companys pharmaceutical products include therapeutic
and preventive agents, generally sold by prescription, for the
treatment of human disorders. Among these are Singulair
(montelukast sodium), a leukotriene receptor antagonist for
the chronic treatment of asthma and for the relief of symptoms
of allergic rhinitis; Cozaar (losartan potassium),
Hyzaar (losartan potassium and hydrochlorothiazide),
Vasotec (enalapril maleate) and Vaseretic
(enalapril maleate-hydrochlorothiazide), the
Companys most significant hypertension
and/or heart
4
failure products; Fosamax (alendronate sodium) and
Fosamax Plus D (alendronate sodium/cholecalciferol),
Mercks osteoporosis products for the treatment and, in the
case of Fosamax, prevention of osteoporosis; Zocor
(simvastatin), Mercks atherosclerosis product; Cosopt
(dorzolamide hydrochloride and timolol maleate ophthalmic
solution) and Trusopt (dorzolamide hydrochloride
ophthalmic solution), Mercks largest-selling
ophthalmological products; Primaxin (imipenem and
cilastatin sodium) and Cancidas (caspofungin
acetate), anti-bacterial/anti-fungal products;
Januvia and Janumet for the treatment of type 2
diabetes; Maxalt (rizatriptan benzoate), an acute
migraine product; Proscar (finasteride), a urology
product for the treatment of symptomatic benign prostate
enlargement; Propecia (finasteride), a product for the
treatment of male pattern hair loss; Arcoxia (etoricoxib)
for the treatment of arthritis and pain; Crixivan
(indinavir sulfate) and Stocrin (efavirenz) for the
treatment of HIV infection; Emend (aprepitant) for the
prevention of chemotherapy-induced and post-operative nausea and
vomiting; and Invanz (ertapenem sodium) for the treatment
of infection.
The Companys vaccine products include Gardasil, a
vaccine to help prevent cervical cancer, pre-cancerous and
low-grade lesions, vulvar and vaginal pre-cancers, and genital
warts caused by HPV types 6, 11, 16 and 18, RotaTeq, a
vaccine to help protect against rotavirus gastroenteritis in
infants and children, Zostavax (Zoster Vaccine Live), a
vaccine to help prevent shingles (herpes zoster), Varivax
[Varicella Virus Vaccine Live (Oka/Merck)], a vaccine to
help prevent chickenpox, ProQuad [Measles, Mumps, Rubella
and VaricellaVirus Vaccine Live], a pediatric combination
vaccine against measles, mumps, rubella and varicella, and
M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live),
a vaccine against measles, mumps and rubella. 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.
U.S. Product Approvals On March 30,
2007, the FDA approved Janumet, Mercks oral
antihyperglycemic agent that combines Januvia with
metformin in a single tablet to address all three key defects of
type 2 diabetes. Janumet has been approved, as an adjunct
to diet and exercise, to improve blood sugar (glucose) 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.
On October 12, 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 is the first medicine to
be approved in a new 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. The FDAs decision was based on a 24-week analysis
of clinical trials in which Isentress, in combination
with optimized background therapy in treatment-experienced
patients, provided significant reductions in HIV RNA viral load
and increases in CD4 cell counts. In February 2008, the Company
announced 48 week data that demonstrated Isentress,
in combination with other anti-HIV medicines, maintained
significant HIV-1 viral load suppression and increased CD4 cell
counts through 48 weeks of therapy compared to placebo in
combination with anti-HIV medicines, in two Phase III
studies of treatment-experienced patients failing antiretroviral
therapies. Patients in the studies had HIV resistant to at least
one drug in each of three classes of oral antiretroviral
medicines. By the end of 2007, the medicine was approved for use
in the EU, Canada and Mexico. Merck is also conducting
Phase III clinical trials of Isentress in the
treatment-naïve (previously untreated) HIV population.
Potent antiretroviral activity has been demonstrated with no
significant changes in serum lipids at week 48 and Isentress
was generally well tolerated in patients. The Company
anticipates making a supplemental filing with the FDA for the
treatment-naïve indication in 2008.
On January 25, 2008, the FDA approved Emend for
Injection, 115 mg, for the prevention of CINV. Emend
for Injection provides a new option for day one oral
Emend (125 mg) as part of the recommended
three-day
regimen that delivers five days of protection from nausea and
vomiting. Prior to the FDA decision, the European Union
(EU) on January 11, 2008 granted marketing
approval for Emend for Injection, known as IVEmend
in the EU, an action that applies to all 27 EU member
countries as well as Norway and Iceland.
Vioxx U.S. Product Liability Settlement
On September 30, 2004, Merck announced a voluntary
worldwide withdrawal of Vioxx, its arthritis and acute
pain medication. The Companys decision, which was
5
effective immediately, was based on new three-year data from a
prospective, randomized, placebo-controlled clinical trial,
APPROVe (Adenomatous Polyp Prevention on Vioxx).
On November 9, 2007, the Company 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 of the federal multidistrict
Vioxx litigation 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, which also applies to tolled
claims, was signed by the parties after several meetings with
three of the four judges overseeing the coordination of more
than 95 percent of the current claims in the Vioxx
litigation. The Settlement Agreement applies only to
U.S. legal residents and those who allege that their MI or
IS occurred in the United States.
Under the Settlement Agreement, if, by March 1, 2008
(subject to extension), plaintiffs enroll in the resolution
process (the Settlement Program) at least
85 percent of each of all currently pending and tolled
(i) MI claims, (ii) IS claims, (iii) eligible MI
and IS claims together which involve death, and
(iv) eligible MI and IS claims which together allege more
than 12 months of use, Merck will pay an aggregate 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. The Company expects
that the participation conditions will be met; however, if they
are not, the Company will have the right to waive the conditions
or terminate the Settlement Agreement.
Acquisitions On September 11, 2007,
Merck completed the acquisition of NovaCardia, a privately held
clinical-stage pharmaceutical company focused on cardiovascular
disease. This acquisition added rolofylline (MK-7418),
NovaCardias investigational Phase III compound for
acute heart failure, to Mercks pipeline.
Joint Ventures The Company has a number of
joint ventures relating to its Pharmaceutical and Vaccines
segments.
Pharmaceutical
In 2000, the Company and Schering-Plough Corporation
(Schering-Plough) entered into agreements to create
separate equally-owned partnerships to develop and market in the
United States new prescription medicines in the
cholesterol-management and respiratory therapeutic areas. In
December 2001, the cholesterol-management partnership agreements
were expanded to include all the countries of the world,
excluding Japan. In October 2002, Zetia (ezetimibe)
(marketed as Ezetrol outside the United States), the
first in a new class of cholesterol-lowering agents, was
launched in the United States. In July 2004, Vytorin
(marketed as Inegy outside the United States), a
combination product containing the active ingredients of both
Zetia and Zocor, was approved in the United States.
The Company and Schering-Plough sell Vytorin and Zetia
through their joint venture company, Merck/Schering-Plough
Pharmaceuticals (the MSP Partnership). On
January 14, 2008, the MSP Partnership announced the primary
endpoint and other results of the ENHANCE (Effect of Combination
Ezetimibe and High-Dose Simvastatin vs. Simvastatin Alone on the
Atherosclerotic Process in Patients with Heterozygous Familial
Hypercholesterolemia) trial. The MSP Partnership submitted an
abstract on the ENHANCE trial for presentation at the American
College of Cardiology meeting in March 2008 and was notified of
its acceptance by the College. ENHANCE was a surrogate endpoint
trial conducted in 720 patients with Heterozygous Familial
Hypercholesterolemia, a rare condition that affects
approximately 0.2% of the population. All analyses were
conducted in accordance with the original statistical analysis
plan. The primary endpoint was the mean change in the
intima-media thickness measured at three sites in the carotid
arteries (the right and left common carotid, internal carotid
and carotid bulb) between patients treated with
ezetimibe/simvastatin
10/80 mg
versus patients treated with simvastatin 80 mg alone over a
two year period. There was no statistically significant
difference between treatment groups on the primary endpoint.
There was also no statistically significant difference between
the treatment groups for each of the components of the primary
endpoint, including the common carotid artery. Key secondary
imaging endpoints showed no statistical difference between
treatment groups. The overall incidence rates of
treatment-related adverse events, serious adverse events or
adverse events leading to discontinuation were generally similar
between treatment groups. Both medicines were generally well
tolerated. Overall, the safety profiles of ezetimibe/simvastatin
and simvastatin alone were similar and generally consistent with
their product labels. In the trial, there was a significant
difference in low-density lipoprotein (LDL)
cholesterol lowering seen between the treatment
6
groups 58% LDL cholesterol lowering at
24 months on ezetimibe/simvastatin as compared to 41% at
24 months on simvastatin alone. This surrogate endpoint
study was not powered nor designed to assess cardiovascular
clinical event outcomes. The MSP Partnership is currently
conducting the IMPROVE-IT trial, a large clinical cardiovascular
outcomes trial comparing Vytorin (ezetimibe/simvastatin)
and simvastatin and including more than 10,000 patients.
Vytorin contains two medicines: ezetimibe and
simvastatin. Vytorin has not been shown to reduce heart
attacks or strokes more than simvastatin alone.
During December 2007 and through February 26, 2008, the
Company and its joint-venture partner, Schering-Plough, received
several joint letters from the House Committee on Energy and
Commerce and the House Subcommittee on Oversight and
Investigations, and one letter from 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.
On January 25, 2008, the companies and the MSP Partnership
each received two subpoenas from the New York State Attorney
Generals Office seeking similar information and documents.
Merck and Schering-Plough have also each received a letter from
the Office of the Connecticut Attorney General dated
February 1, 2008 requesting documents related to the
marketing and sale of Vytorin and Zetia and the
timing of disclosures of the results of ENHANCE. The Company is
cooperating with these investigations and working with
Schering-Plough to respond to the inquiries. In addition, since
mid-January 2008, the Company has become aware of or been served
with approximately 85 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.
In 1982, the Company entered into an agreement with Astra AB
(Astra) to develop and market Astra products in the
United States. In 1994, the Company and Astra formed an equally
owned joint venture that developed and marketed most of
Astras new prescription medicines in the United States
including Prilosec, 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, the Company and Astra restructured the joint venture
whereby the Company 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 which the Company maintains a
limited partner interest. The Partnership, renamed AstraZeneca
LP, 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 GAAP earnings.
In conjunction with the 1998 restructuring, for a payment of
$443.0 million, Astra purchased an option to buy the
Companys interest in the KBI products, excluding the
Companys interest in the gastrointestinal medicines
Nexium and Prilosec. The Company also granted
Astra an option (the Shares Option) to buy the
Companys common stock interest in KBI, at an exercise
price based on the present value of estimated future net sales
of Nexium and Prilosec.
In April 1999, Astra merged with Zeneca Group Plc, forming
AstraZeneca AB (AstraZeneca). As a result of the
merger, in exchange for the Companys 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, which is subject to a
true-up
calculation in 2008 that may require repayment of all or a
portion of this amount. The merger also triggers a partial
redemption of the Companys limited partner interest in
2008. Furthermore, as a result of the merger, AstraZenecas
option (the Asset Option) to buy the Companys
interest in the KBI products is exercisable in 2010 and the
Company has the right to require AstraZeneca to purchase such
interest in 2008. In February 2008, the Company advised AZLP
that it will not exercise the Asset Option. In addition, the
Shares Option is exercisable two years after Astras
purchase of the Companys interest in the KBI products. The
exercise of this option by Astra is also provided for in the
year 2017 or if combined annual sales of the two products fall
below a minimum amount provided, in each case, only so long as
AstraZenecas option in 2010 has been exercised. The
exercise price is based on the present value of estimated future
net sales of Nexium and Prilosec as determined at
the time of exercise subject to certain
true-up
mechanisms.
In 1989, the Company 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.
7
Significant joint venture products are Pepcid AC
(famotidine), an over-the-counter form of the Companys
ulcer medication Pepcid (famotidine), as well as
Pepcid Complete, an over-the-counter product which
combines the Companys ulcer medication with antacids
(calcium carbonate and magnesium hydroxide).
Vaccines
In 1994, the Company 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. The Company 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.
Other
In 1997, the Company and Rhône-Poulenc S.A. (now
Sanofi-Aventis S.A.) combined their respective animal health and
poultry genetics businesses to form Merial Limited
(Merial), a fully integrated animal health company,
which is a stand-alone joint venture, equally 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.
Competition The markets in which the Company
conducts its business are highly competitive and often highly
regulated. Global efforts toward health care cost containment
continue to exert pressure on product pricing and access.
Such competition involves an intensive 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 prepared to compete in the
search for technological innovations. Additional resources to
meet competition 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 joint ventures and
licenses and has been refining its sales and marketing efforts
to further address changing industry conditions. To enhance its
product portfolio, the Company continues to pursue external
alliances, from early-stage to late-stage product opportunities,
including joint ventures and targeted acquisitions. However, the
introduction of new products and processes by competitors may
result in price reductions and product replacements, even for
products protected by patents. For example, the number of
compounds available to treat diseases typically increases over
time and has resulted in slowing the growth in sales of certain
of the Companys products.
Legislation enacted in all states in the United States,
particularly in the area of human pharmaceutical products,
allows, encourages or, in a few instances, in the absence of
specific instructions from the prescribing physician, mandates
the use of generic products (those containing the
same active chemical as an innovators product) rather than
brand-name products. Governmental and other
pressures toward the dispensing of generic products have
significantly reduced the sales of certain of the Companys
products no longer protected by patents, such as Zocor,
which lost market exclusivity in the U.S. in 2006 and
the Company experienced a significant decline in Zocor
sales thereafter. Fosamax lost market exclusivity in
the United States in February 2008. Fosamax Plus D will
lose marketing exclusivity in the United States in April 2008.
As a result of these events, the Company expects significant
declines in U.S. Fosamax and Fosamax Plus D
sales.
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.
8
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 Pharmaceutical
and Vaccines segments.
Government Regulation and Investigation The
pharmaceutical industry is subject to global regulation by
regional, country, state and local agencies. 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 money
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 health care access
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 will ensure that
prescription drug costs will be controlled by competitive
pressures and by encouraging the appropriate use of medicines.
The U.S. Congress has considered, and may consider again,
proposals to increase the governments role in
pharmaceutical pricing in the Medicare program.
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 variously under
review. 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. One type of
federal initiative to contain federal health care spending is
the prospective or capitated payment system, first
implemented to reduce the rate of growth in Medicare
reimbursement to hospitals. Such a system establishes in advance
a flat rate for reimbursement for health care for those patients
for whom the payor is fiscally responsible. This type of payment
system and other cost containment systems are now widely used by
public and private payors and have caused hospitals, health
maintenance organizations and other customers of the Company to
be more cost-conscious in their treatment decisions, including
decisions regarding the medicines to be made available to their
patients. The Company continues to work with private and federal
employers to slow increases in health care costs. Further, the
Companys efforts to demonstrate that its medicines can
help save costs in other areas have encouraged the use of the
Companys medicines and have helped offset the effects of
increasing cost pressures.
Also, 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. The Company
was awarded a CDC contract in April 2007 which is in effect
until March 2008 for the supply of pediatric vaccines for the
Vaccines for Children program. As of January 1, 2006,
patients previously eligible for Medicaid who are also Medicare
beneficiaries (65 years and older or disabled) left the
state-administered Medicaid system to be covered by the new
Medicare prescription drug benefit.
9
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 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 European Commission is conducting a pharmaceutical sector
inquiry involving a number of companies concerning competition
and the introduction of innovative and generic medicines. As
part of its inquiry, the Companys offices in Germany were
inspected by the authorities beginning on January 15, 2008.
The Commission has not alleged that the Company or any of its
subsidiaries have engaged in any unlawful practices. The Company
is cooperating with the Commission in this sector inquiry.
As previously disclosed, in May 2007 the government of Brazil
issued a compulsory license for Stocrin, which makes it
possible for Stocrin to be produced by a generic
manufacturer despite the Companys patent protection on
Stocrin. In November 2006, the government of Thailand
stated that it had issued a compulsory license for
Stocrin, despite the Companys patent protection on
Stocrin, which the government of Thailand contends makes
it possible for Stocrin to be produced by a generic
manufacturer. The Company remains committed to exploring
mutually acceptable agreements with the governments of Brazil
and Thailand.
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.
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 amount of focus on
privacy and data protection issues with the potential to affect
directly 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.
10
Patent portfolios developed for products introduced by the
Company normally provide market exclusivity. The Company has the
following key U.S. patent protection and Pediatric
Exclusivity for major marketed products:
|
|
|
Product
|
|
Year of Expiration (in
U.S.)
|
|
Cancidas
|
|
2015 (compound) / 2017 (formulation)
|
Comvax
|
|
2020
|
Cosopt
|
|
2008
|
Cozaar
|
|
2010
|
Crixivan
|
|
2012 (compound) / 2018 (formulation)
|
Emend
|
|
2012 (compound) / 2015 (Patent Term Restoration)
|
Gardasil
|
|
2020
|
Hyzaar
|
|
2010
|
Invanz
|
|
2016 (compound and Pediatric Exclusivity) / 2017
(composition)
|
Isentress
|
|
2023
|
Januvia/Janumet
|
|
2022
|
Maxalt
|
|
2012 (compound) / 2014 (other)
|
Primaxin
|
|
2009
|
Propecia
|
|
2013
|
Recombivax
|
|
2020
|
RotaTeq
|
|
2014 (product) / 2019 (Patent Term Restoration)
|
Singulair
|
|
2012
|
Trusopt
|
|
2008
|
Zetia/Vytorin
|
|
2015 (ezetimibe component in both products) /
2016 (Patent Term Restoration)
|
Zolinza
|
|
2011 (compound) / 2015 (Patent Term Restoration)
|
Zostavax
|
|
2016
|
A basic patent is also in effect for Sustiva/Stocrin
(efavirenz). Bristol-Myers Squibb (BMS),
under an exclusive license from the Company, sells Sustiva in
the United States, Canada and certain European countries. The
Company markets Stocrin in other countries throughout the
world. The basic patent for Aggrastat (tirofiban
hydrochloride) in the United States was divested with the
product in 2003. The Company retains basic patents for
Aggrastat outside the United States.
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. For further information with respect to
the Companys patents, see Patent Litigation
below.
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, market exclusivity that may be available under federal
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.
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
11
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.
Fosamax lost market exclusivity in the United States in
February 2008. Fosamax Plus D will lose marketing
exclusivity in the United States in April 2008. As a result of
these events, the Company expects significant declines in U.S
Fosamax and Fosamax Plus D sales.
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 2007 on patent and know-how licenses
and other rights amounted to $156.4 million. The Company
also paid royalties amounting to $1.326 billion in 2007
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
11,700 people are employed in the Companys research
activities. Expenditures for the Companys research and
development programs were $4.9 billion in 2007,
$4.8 billion in 2006 and $3.8 billion in 2005. 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.
Mercks 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 such as atherosclerosis,
hypertension, diabetes and obesity, novel vaccines,
neurodegenerative and psychiatric diseases and targeted oncology
therapies. These therapeutic areas were carefully chosen based
on a set of criteria including unmet medical needs, scientific
opportunity and commercial opportunity. Within these therapeutic
areas, Merck will commit resources to achieve research breadth
and depth and to develop
best-in-class
targeted and differentiated products that are valued highly by
patients, payers and physicians.
The Company will also make focused investments in other areas of
important unmet medical need. In addition, the Company will
continue to pursue appropriate external licensing opportunities.
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 may be
marketed in the United States, recorded data on preclinical and
clinical experience are included in the NDA or the Biologics
License Application to the FDA for the required approval. The
development of certain other products is also subject to
government regulations covering safety and efficacy in the
United States and many foreign countries.
Once the Companys scientists discover a new 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.
12
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 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, a non-approvable letter, or an
approvable letter.
The Company has one drug candidate currently under FDA review:
In August 2007, the FDA accepted for standard review the NDA for
Cordaptive, the Companys investigational compound
containing Mercks own ER niacin and laropiprant, a novel
flushing pathway inhibitor designed to reduce flushing often
associated with niacin treatment. Merck anticipates FDA action
in April 2008. The Company is also moving forward as planned
with filings in countries outside the United States.
The Company anticipates filing two NDAs with the FDA in 2008:
The Company anticipates filing an NDA for MK-0524B, a drug
candidate that combines the novel approach to raising
HDL-cholesterol and lowering triglycerides from ER niacin
combined with laropiprant with the proven benefits of
simvastatin in one combination product. In November 2007, the
Company presented results of a study at the American Heart
Association 2007 Scientific Sessions which demonstrate ER
niacin/laropiprant (Cordaptive) coadministered with
simvastatin had significant additive effects on reducing LDL-C,
increasing HDL-C and reducing triglyceride levels in a
Phase III study with patients with primary
hypercholesterolemia or mixed dyslipidemia. In the study, 2 g
(two 1-gram tablets) of Cordaptive coadministered with
simvastatin (pooled across 20 mg or 40 mg doses)
reduced LDL-C by 48%, increased HDL-C by 28%, and reduced
triglyceride levels by 33% following 12 weeks of treatment.
The primary study endpoint was LDL-C reduction; secondary
endpoints included increased HDL-C, triglyceride reduction and
effects on other lipoproteins. A 1 g tablet of Cordaptive
contains 1 g of Merck-developed ER niacin and 20 mg of
laropiprant.
The Company also anticipates filing an NDA for MK-0364,
taranabant, a highly selective cannabinoid-1 receptor inverse
agonist that in early clinical studies has demonstrated weight
loss versus placebo. Taranabant was generally well-tolerated,
however, as reported with another cannabinoid-1 receptor inverse
agonist, some dose-dependent psychiatric adverse events were
observed. The Company previously announced the initiation of a
targeted Phase III program in 2006.
Merck currently has seven products in Phase III development
(including MK-0524B and MK-0364 discussed above):
MK-0974, an investigational oral calcitonin gene-related peptide
receptor antagonist, utilizes a new mechanism for the treatment
of migraines that has demonstrated efficacy at least comparable
to triptans in early clinical studies. In June 2007, clinical
results from a Phase II study were presented for the first
time at the American Headache Society annual meeting which
showed that MK-0974 significantly improved migraine pain relief
two hours after dosing compared to placebo, and the relief was
sustained through 24 hours. MK-0974 was generally well
tolerated in the study. In addition to the measure of migraine
pain, MK-0974 provided relief of migraine-associated symptoms,
including nausea and sensitivity to light and sound, and
improved functional disability two hours post dose, as well as
reduced patients need for rescue medication. The drug
candidate entered Phase III development during 2007. The
Company anticipates filing an NDA in 2009.
MK-7418, rolofylline, is a Phase III investigational drug
being evaluated for the treatment of acute heart failure.
Phase III pilot study preliminary results indicated that
rolofylline was generally well tolerated and that treatment
resulted in a greater proportion of patients with improved
dyspnea, fewer patients with worsening heart failure and greater
weight loss compared to placebo. These benefits were achieved
while preserving renal function compared to progressive
worsening of renal function in patients treated with placebo.
Merck acquired the drug candidate as part of the 2007
acquisition of NovaCardia and anticipates filing an NDA with the
FDA in 2009.
13
MK-8669, deforolimus, 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 reached in mid-2007. The Company anticipates filing an
NDA for a metastatic sarcoma indication in 2010.
A novel investigational hepatitis B vaccine, V270, currently is
being evaluated in a Phase III clinical trial in adults and
in patients undergoing dialysis treatment. Merck is jointly
developing V270 with Dynavax Technologies Corporation
(Dynavax) under an agreement reached in late 2007.
Merck anticipates filing an NDA in 2010 for adults.
MK-0822, odanacatib, is an investigational highly selective
inhibitor of cathepsin K enzyme, which is being evaluated for
the treatment of osteoporosis. The cathepsin K enzyme is
believed to play a role in both osteoclastic bone resorption and
in degrading the protein component of bone. The inhibition of
the cathepsin K enzyme by the investigational compound
odanacatib is a mechanism of action different from that of
currently approved treatments such as bisphosphonates. In
September 2007, twelve month results from a Phase IIB study with
odanacatib demonstrated dose-dependent increases in bone mineral
density (BMD) at key fracture sites, and reduced
bone turnover compared to placebo in postmenopausal women with
low BMD when given at doses of 10, 25 or 50 mg. These
findings were presented at the 29th Annual Meeting of the
American Society for Bone and Mineral Research. BMD reflects the
amount of mineralized bone tissue in a certain volume of bone,
and correlates with the strength of bones and with their
resistance to fracture. A BMD test is used to measure bone
density and to help determine fracture risk. The Phase III
program began in mid-2007. Merck anticipates filing an NDA with
the FDA in 2012.
Additionally, in December 2007, the Company announced it plans
to initiate a sequenced Phase III program in 2008 for
MK-0859, anacetrapib, its investigational selective cholesteryl
ester transfer protein (CETP) inhibitor, to obtain
additional clinical experience in patients before initiating an
outcomes study. In October 2007, the Company presented results
from a Phase IIb study demonstrating that MK-0859 significantly
reduced LDL-C and Apolipoprotein B and increased HDL-C and
Apolipoprotein
A-1 both as
monotherapy and in combination with atorvastatin 20 mg
compared to placebo in patients with dyslipidemia. Anacetrapib
produced these positive effects on lipids with no observed blood
pressure changes. CETP inhibitors work by inhibiting CETP, a
plasma protein that facilitates the transport of cholesteryl
esters and triglycerides between the lipoproteins.
The Companys clinical pipeline includes candidates in
multiple disease areas, including atherosclerosis, cancer, heart
failure, hypertension, infectious diseases, migraine,
neurodegenerative diseases, psychiatric diseases, ophthalmic
diseases, pain, and respiratory disease. 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. The Company completed 55 transactions
in 2007, including targeted acquisitions, research
collaborations, preclinical and clinical compounds, and
technology transactions across a broad range of therapeutic
categories.
In July 2007, Merck and ARIAD announced that they had entered
into a global collaboration to jointly develop and commercialize
deforolimus (MK-8669), ARIADs novel mTOR inhibitor, for
use in cancer.
In November 2007, Dynavax and Merck announced a global license
and development collaboration agreement to jointly develop V270,
which is currently being evaluated in a multi-center
Phase III clinical trial involving adults and in patients
on dialysis.
Also, in November 2007, GTx, Inc. (GTx) and Merck
announced 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. This collaboration
includes GTxs lead SARM candidate, Ostarine (MK-2866),
which is currently being evaluated in a Phase II clinical
trial for the treatment of muscle loss in patients with cancer,
and establishes a broad SARM collaboration under which GTx and
Merck will pool their programs and partner to discover, develop,
and commercialize current as well as future SARM molecules.
The chart below reflects the Companys current research
pipeline as of February 15, 2008. Candidates shown in
Phase III include specific products. Candidates shown in
Phase I and II include the most advanced
14
compound with a specific mechanism in a given therapeutic area.
Small molecules and biologics are given MK-number designations
and vaccine candidates are given V-number designations.
Back-up
compounds, regardless of their phase of development, additional
indications in the same therapeutic area and additional claims,
line extensions or formulations for in-line products are not
shown.
Phase I
Alzheimers
Disease
V950
Atherosclerosis
MK-1903
MK-6213
Cancer
MK-0646
MK-0752
MK-2461
MK-4721
V930
Cardiovascular
MK-0448
MK-1809
Diabetes
MK-0941
MK-2662
MK-8245
Phase I
Infectious Disease
MK-3281
MK-4965
MK-7009
MK-8122
V512
Neurologic
MK-8998
MK-4305
Ophthalmic
MK-0140
Parkinsons
Disease
MK-0657
Psychiatric Disease
MK-5757
Phase II
Alzheimers
Disease
MK-0249
Atherosclerosis
MK-0859
MK-0633
Cancer
MK-0457
MK-0822
Cardiovascular
MK-8141
Diabetes
MK-0893
HPV
V502
Infectious Disease
V419
V710
Neurologic
MK-0249
Ophthalmic
SIRNA-027(1)
Pain
MK-2295*
Psychiatric Disease
MK-0249
Respiratory Disease
MK-0633
Sarcopenia
MK-2866
Stroke
MK-0724
Phase III
Atherosclerosis
MK-0524B
Cancer
MK-8669
(deforolimus;
AP23573)
Heart Failure
MK-7418
(rolofylline;
KW3902)
Hepatitis B Vaccine
V270
Migraine
MK-0974
Obesity
MK-0364
(taranabant)
Osteoporosis
MK-0822
(odanacatib)
Under FDA Review
Atherosclerosis
Cordaptive
(pending trademark)
(MK-0524A)
2007
U.S. Approvals
Diabetes
Janumet
HIV
Isentress
(MK-0518)
2008
U.S. Approvals
CINV
Emend
for Injection
(MK-0517)
|
|
|
* |
|
Proof-of-Concept
Molecule |
|
(1) |
|
Clinical Program conducted by
Allergan, Inc. |
All product or service marks appearing in type form different
from that of the surrounding text are trademarks or service
marks owned by or licensed to Merck, its subsidiaries or
affiliates (including Zetia and Vytorin,
trademarks owned by entities of the Merck/Schering-Plough
partnership), except as noted. Cozaar and Hyzaar
are registered trademarks of E.I. du Pont de Nemours and
Company, Wilmington, DE and Prilosec and Nexium
are trademarks of the AstraZeneca group. The
U.S. trademarks for Vasotec and Vaseretic are
owned by Biovail Laboratories Incorporated. The
U.S. trademark for Aggrastat is owned by Guilford
Pharmaceuticals Inc.
Employees
At the end of 2007, the Company had approximately
59,800 employees worldwide, with approximately 31,700
employed in the United States, including Puerto Rico.
Approximately 20% of worldwide employees of the Company are
represented by various collective bargaining groups.
As part of a cost-reduction initiative announced in October 2003
and completed at the end of 2004, the Company eliminated 5,100
positions. The Company completed a similar program in 2005 with
900 positions being eliminated through December 31, 2005.
In November 2005, the Company announced the first phase of a
global restructuring program designed to reduce the
Companys cost structure, increase efficiency, and enhance
competitiveness. The initial steps included
15
the implementation of a new supply strategy by the Merck
Manufacturing Division, which is intended to create a leaner,
more cost-effective and customer-focused manufacturing model
over a three-year period. As part of the global restructuring
program, the Company announced that it expected to eliminate
approximately 7,000 positions in manufacturing and other
divisions worldwide by the end of 2008. About half of the
position reductions are expected to occur in the United States,
with the remainder in other countries. As of December 31,
2007, there have been approximately 7,200 positions eliminated
throughout the Company since inception of the program
(approximately 2,400 of which were eliminated during 2007
comprised of actual headcount reductions, and the elimination of
contractors and vacant positions). The Company, however,
continues to hire new employees as the business requires. Merck
previously announced its intention to sell or close five of its
31 manufacturing facilities worldwide and two preclinical sites
and to reduce operations at a number of other sites. Through the
end of 2007, four of the manufacturing facilities had been
closed, sold, or had ceased operations, and the two preclinical
sites were closed. The remaining facility was sold in January
2008. The Company has also sold certain other facilities and
related assets in connection with the restructuring program.
Environmental
Matters
The Company believes that it is in compliance in all material
respects with applicable environmental laws and regulations. In
2007, the Company incurred capital expenditures of approximately
$9.3 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
$19.5 million in 2007, $12.6 million in 2006, and are
estimated at $69.1 million for the years 2008 through 2011.
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
$109.6 million at December 31, 2007. 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 $54.0 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 39% of sales in
2007, 39% of sales in 2006 and 42% of sales in 2005.
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.
In recent years, the Company has been expanding its operations
in countries located in Latin America, the Middle East, Africa,
Eastern Europe and Asia Pacific where changes in government
policies and economic conditions are making it possible for the
Company to earn fair returns. 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 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).
16
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/corporategovernance and all
such information is available in print to any stockholder who
requests it from the Company.
You 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.
The Company faces significant litigation related to
Vioxx.
On September 30, 2004, the Company voluntarily withdrew
Vioxx, its arthritis and acute pain medication, from the
market worldwide. As of December 31, 2007, approximately
26,500 product liability lawsuits, involving approximately
47,275 plaintiff groups, alleging personal injuries resulting
from the use of Vioxx, have been filed against the
Company in state and federal courts in the United States. The
Company is also a defendant in approximately 262 purported class
actions related to the use of Vioxx. (All of these suits
are referred to as the Vioxx Product Liability
Lawsuits.) As discussed above, on November 9, 2007,
the Company 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 of the federal multidistrict Vioxx
litigation 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, which also applies to tolled claims, was
signed by the parties after several meetings with three of the
four judges overseeing the coordination of more than
95 percent of the current claims in the Vioxx
product liability litigation. The Settlement Agreement
applies only to U.S. legal residents and those who allege
that their MI or IS occurred in the United States.
Under the Settlement Agreement, if, by March 1, 2008
(subject to extension), plaintiffs enroll in the resolution
process (the Settlement Program) at least
85 percent of each of all currently pending and tolled
(i) MI claims, (ii) IS claims, (iii) eligible MI
and IS claims together which involve death, and
(iv) eligible MI and IS claims which together allege more
than 12 months of use, Merck will pay an aggregate 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. The Company expects
that the participation conditions will be met; however, if they
are not, the Company will have the right to waive the conditions
or terminate the Settlement Agreement.
Claims of certain individual third-party payors remain pending
in the New Jersey court, and counsel purporting to represent a
large number of third-party payors has threatened to file
numerous additional such actions. Activity in the pending cases
is currently stayed.
There are also pending in various U.S. courts putative
class actions purportedly brought on behalf of individual
purchasers or users of Vioxx and claiming either
reimbursement of alleged economic loss or an entitlement to
medical monitoring. All of these cases are at early procedural
stages, and no class has been certified. In New Jersey, the
trial court dismissed the complaint in the case of Sinclair, a
purported statewide medical monitoring class. The Appellate
Division reversed the dismissal, and the issue is now on appeal
to the New Jersey Supreme Court. That court heard argument on
October 22, 2007.
In addition to the Vioxx Product Liability Lawsuits,
various purported class actions and individual lawsuits have
been brought against the Company and several current and former
officers and directors of the Company alleging that the Company
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). In addition, various putative class actions
have been brought against the Company and several current and
former employees,
17
officers, and directors of the Company alleging violations of
the Employee Retirement Income Security Act (ERISA).
(All of these suits are referred to as the Vioxx
ERISA Lawsuits.) In addition, shareholder derivative
suits that were previously filed and dismissed are now on appeal
and several shareholders have filed demands with the Company
asserting claims against the Board members and Company officers.
(All of these suits and demands are referred to as the
Vioxx Derivative Lawsuits and, together with
the Vioxx Securities Lawsuits and the Vioxx ERISA
Lawsuits, the Vioxx Shareholder Lawsuits.)
The Company 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.) The Company has also been sued by seven states
and two counties with respect to the marketing of Vioxx.
The Company anticipates that additional lawsuits relating to
Vioxx will be filed against it
and/or
certain of its current and former officers and directors in the
future.
The SEC is conducting a formal investigation of the Company
concerning Vioxx. The U.S. Department of Justice has
issued a subpoena requesting information relating to the
Companys research, marketing and selling activities with
respect to Vioxx in a federal health care investigation
under criminal statutes. There are also ongoing investigations
by local authorities in Europe. A group of Attorneys General
from thirty-one states and the District of Columbia are
conducting an investigation of the Companys sales and
marketing of Vioxx. The Company is cooperating with
authorities in all of these investigations. (All of these
investigations are referred to as the Vioxx
Investigations.) The Company can not predict the
outcome of any of these investigations; however, they could
result in potential civil
and/or
criminal liability.
To date, in the Vioxx product liability litigation,
juries have decided in Mercks favor 12 times and in
plaintiffs favor five times. One Merck verdict was set
aside by the court and has not been retried. Another Merck
verdict was set aside and retried, leading to one of the five
plaintiff verdicts. There have been two unresolved mistrials.
With respect to the five plaintiffs verdicts, Merck
already has filed an appeal or sought judicial review in each of
those cases, and in one of those four, a federal judge
overturned the damage award shortly after trial. The Vioxx
product liability litigation is discussed more fully in
Item 3. Legal Proceedings below.
The outcomes of these Vioxx Product Liability trials
should not be interpreted to indicate any trend or what outcome
may be likely in future Vioxx trials.
The Company currently anticipates that a number of Vioxx
Product Liability Lawsuits will be tried in 2008. A trial in
the Oregon securities case is scheduled for 2008, but the
Company cannot predict whether this trial will proceed on
schedule or the timing of any of the other Vioxx
Shareholder Lawsuit trials. 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 2007, the Company spent $616 million, including
$200 million in the fourth quarter, in the aggregate in
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). In the
second quarter of 2007, the Company recorded a charge of
$210 million and in the third quarter it recorded another
charge of $70 million, to increase the reserve solely for
its future legal defense costs related to the Vioxx
Litigation from $858 million at December 31, 2006
to $522 million at December 31, 2007. In addition, as
noted above, the Company recorded a pretax charge of
$4.85 billion equal to the aggregate amount to be paid to
the qualifying claimants in the Settlement Program. Thus, the
Companys total reserve for the Vioxx Litigation at
December 31, 2007 was $5.372 billion (the
Vioxx Reserve). The Vioxx Reserve is
based on certain assumptions, described below under Legal
Proceedings, and is the best estimate of the amount that
the Company believes, at this time, will be spent through 2009.
The Company is not currently able to estimate any additional
amount of damages 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 has very little information as to 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
18
Settlement Program. 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,
in excess of the Vioxx Reserve, could have a material
adverse effect on the Companys business, cash flow,
results of operations, financial position and prospects.
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 price 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 results of operations.
Fosamax lost market exclusivity in the United States in
February 2008. Fosamax Plus D will lose marketing
exclusivity in the United States in April 2008. As a result of
these events, the Company expects significant declines in
U.S. Fosamax and Fosamax Plus D sales.
U.S. sales of Fosamax and Fosamax Plus D were
$2.0 billion in the aggregate in 2007. Sales of Fosamax
outside the United States have already been adversely
affected by the availability of generic alendronate sodium
products in some markets, including the United Kingdom, Canada
and Germany.
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.
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 Zocor
and Fosamax mean that the Companys future
success is dependent on its pipeline of new products, including
new products which it develops 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. To support its research and
development efforts the Company must make ongoing, substantial
expenditures, without any assurance that the efforts it is
funding will result in a commercially successful product. The
Company must also commit substantial efforts, funds and other
resources to recruiting and retaining high quality scientists
and other personnel with pharmaceutical research and development
expertise.
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 money. 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 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 Zocor and Fosamax,
lose patent protection or are displaced by competing products
or
19
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.
Issues concerning Vytorin and the ENHANCE clinical
trial could have a material adverse effect on sales of
Vytorin and Zetia.
The Company and Schering-Plough sell Vytorin and Zetia
through their joint venture company, Merck/Schering-Plough
Pharmaceuticals (the MSP Partnership). On
January 14, 2008, the MSP Partnership announced the primary
endpoint and other results of the ENHANCE (Effect of Combination
Ezetimibe and High-Dose Simvastatin vs. Simvastatin Alone on the
Atherosclerotic Process in Patients with Heterozygous Familial
Hypercholesterolemia) trial. ENHANCE was a surrogate endpoint
trial conducted in 720 patients with Heterozygous Familial
Hypercholesterolemia, a rare condition that affects
approximately 0.2% of the population. The primary endpoint was
the mean change in the intima-media thickness measured at three
sites in the carotid arteries (the right and left common
carotid, internal carotid and carotid bulb) between patients
treated with ezetimibe/simvastatin
10/80 mg
versus patients treated with simvastatin 80 mg alone over a
two year period. There was no statistically significant
difference between treatment groups on the primary endpoint.
There was also no statistically significant difference between
the treatment groups for each of the components of the primary
endpoint, including the common carotid artery.
During December 2007 and through February 26, 2008, the
Company and its joint-venture partner, Schering-Plough, received
several joint letters from the House Committee on Energy and
Commerce and the House Subcommittee on Oversight and
Investigations, and one letter from 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.
On January 25, 2008, the companies and the MSP Partnership
each received two subpoenas from the New York State Attorney
Generals Office seeking similar information and documents.
Merck and Schering-Plough have also each received a letter from
the Office of the Connecticut Attorney General dated
February 1, 2008, requesting documents related to the
marketing and sale of Vytorin and Zetia and the
timing of disclosures of the results of ENHANCE. The Company is
cooperating with these investigations and working with
Schering-Plough to respond to the inquiries. In addition, since
mid-January 2008, the Company has become aware of or been served
with approximately 85 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.
The Company has been closely monitoring sales of Vytorin
and Zetia following the release of the ENHANCE clinical
trial results in a press release on January 14, 2008. To
date, sales of both products in the U.S. have been below the
Companys prior expectations. In addition, wholesalers in
the U.S. have moderated their purchases of both products to
reduce their inventory levels.
These issues concerning the ENHANCE clinical trial could have a
material adverse effect on the MSP Partnerships sales of
Vytorin and Zetia. 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 government
investigations or the consumer fraud litigation concerning the
sale and promotion of these products could have a material
adverse effect on the Companys financial position,
liquidity and results of operations.
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 European Commission. 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
20
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.
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. 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.
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 results of operations and cash flow.
21
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 which 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 and results of operations.
The Company faces pricing pressure with respect to its
products.
The Companys products are subject to increasing price
pressures and other restrictions worldwide, including 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 which 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. The Company expects pricing pressures to
increase in the future.
The Company may experience difficulties and delays in the
manufacturing of its products.
The Company may experience difficulties and delays inherent in
manufacturing its products, particularly its vaccines, 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.
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.
The Company has no product liability insurance for products
first sold after August 1, 2004.
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 coverage that is
available and as such, has no insurance for certain product
liabilities effective August 1, 2004, including liability
for products first sold after that date.
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.
Cautionary
Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation
Reform Act of 1995)
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,
22
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. 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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Significant litigation related to Vioxx, including
whether the Settlement Agreement will be consummated.
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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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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.
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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.
23
Item 1B. Unresolved
Staff Comments.
None
The Companys corporate headquarters is located in
Whitehouse Station, New Jersey. The Companys
U.S. pharmaceutical business is conducted through
divisional headquarters located in Upper Gwynedd and West Point,
Pennsylvania. The Companys vaccines business is conducted
through divisional headquarters located in West Point. Principal
research facilities for human health products are located in
Rahway, New Jersey and West Point. The Company also has
production facilities for human health products at seven
locations in the United States and Puerto Rico. Branch
warehouses provide services throughout the country. 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 2007 were $1.0 billion compared
with $980.2 million for 2006. In the United States, these
amounted to $788.0 million for 2007 and $714.7 million
for 2006. Abroad, such expenditures amounted to
$223.0 million for 2007 and $265.5 million for 2006.
The Company and its subsidiaries own their principal facilities
and manufacturing plants under titles which 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 the Company 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, 2007, the Company had been served or was aware
that it had been named as a defendant in approximately 26,500
lawsuits, which include approximately 47,275 plaintiff groups,
alleging personal injuries resulting from the use of
Vioxx, and in approximately 262 putative class actions
alleging personal injuries
and/or
economic loss. (All of the actions discussed in this paragraph
are collectively referred to as the Vioxx Product
Liability Lawsuits.) Of these lawsuits, approximately
9,025 lawsuits representing approximately 26,275 plaintiff
groups are or are slated to be in the federal MDL and
approximately 15,575 lawsuits representing approximately 15,575
plaintiff groups are included in a coordinated proceeding in New
Jersey Superior Court before Judge Carol E. Higbee.
In addition to the Vioxx Product Liability Lawsuits
discussed above, the claims of over 6,350 plaintiffs had been
dismissed as of December 31, 2007. Of these, there have
been over 1,850 plaintiffs whose claims were dismissed with
prejudice (i.e., they cannot be brought again) either by
plaintiffs themselves or by the courts. Over 4,500 additional
plaintiffs have had their claims dismissed without prejudice
(i.e., subject to the applicable statute of limitations, they
can be brought again).
Merck entered into a tolling agreement (the Tolling
Agreement) with the MDL Plaintiffs Steering
Committee (PSC) that established a procedure to halt
the running of the statute of limitations (tolling) as to
certain
24
categories of claims allegedly arising from the use of Vioxx
by non-New Jersey citizens. The Tolling Agreement applied to
individuals who have not filed lawsuits and may or may not
eventually file lawsuits and only to those claimants who seek to
toll claims alleging injuries resulting from a thrombotic
cardiovascular event that results in a myocardial infarction
(MI) or ischemic stroke (IS). The
Tolling Agreement provided counsel additional time to evaluate
potential claims. The Tolling Agreement required any tolled
claims to be filed in federal court. As of December 31,
2007, approximately 13,230 claimants had entered into Tolling
Agreements. The parties agreed that April 9, 2007 was the
deadline for filing Tolling Agreements and no additional Tolling
Agreements are being accepted.
On November 9, 2007, Merck announced that it had entered
into an agreement (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. The
Settlement Agreement, which also applies to tolled claims, was
signed by the parties after several meetings with three of the
four judges overseeing the coordination of more than
95 percent of the current claims in the Vioxx
Litigation. 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 entire Settlement Agreement, including accompanying
exhibits, may be found at www.merck.com. The
Company has included this website address only as an inactive
textual reference and does not intend it to be an active link to
its website nor does it incorporate by reference the information
contained therein. If certain participation conditions under the
Settlement Agreement are met, which conditions may be waived by
Merck, Merck will pay a fixed aggregate amount of
$4.85 billion into two funds for qualifying claims that
enter into the resolution process (the Settlement
Program). Individual claimants will be examined by
administrators of the Settlement Program to determine
qualification based on objective, documented facts provided by
claimants, including records sufficient for a scientific
evaluation of independent risk factors. The conditions in the
Settlement Agreement also require claimants to pass three gates:
an injury gate requiring objective, medical proof of an MI or IS
(each as defined in the Settlement Agreement), a duration gate
based on documented receipt of at least 30 Vioxx pills,
and a proximity gate requiring receipt of pills in sufficient
number and proximity to the event to support a presumption of
ingestion of Vioxx within 14 days before the claimed
injury.
The Settlement Agreement provides that Merck does not admit
causation or fault. Mercks payment obligations under the
Settlement Agreement will be triggered only if, among other
conditions, (1) law firms on the federal and state PSCs and
firms that have tried cases in the coordinated proceedings elect
to recommend enrollment in the program to 100 percent of
their clients who allege either MI or IS and (2) by
March 1, 2008 (subject to extension), plaintiffs enroll in
the Settlement Program at least 85 percent of each of all
currently pending and tolled (i) MI claims, (ii) IS
claims, (iii) eligible MI and IS claims together which
involve death, and (iv) eligible MI and IS claims together
which allege more than 12 months of use. The Company has
the right to waive these participation conditions.
Under the Settlement Agreement, Merck will create separate funds
in the amount of $4.0 billion for MI claims and
$850 million for IS claims. Once triggered, Mercks
total payment for both funds of $4.85 billion is a fixed
amount to be allocated among qualifying claimants based on their
individual evaluation. While at this time the exact number of
claimants covered by the Settlement Agreement is unknown, the
total dollar amount is fixed. Payments to individual qualifying
claimants could begin as early as August 2008 and then will be
paid over a period of time. Merck retains its right to terminate
this process without any payment to any claimant, and to defend
each claim individually at trial if any of the aforementioned
participation conditions in the Settlement Agreement are not met.
After the Settlement Agreement was announced on November 9,
2007, judges in the Federal MDL, California, Texas and New
Jersey State Coordinated Proceedings entered a series of orders.
The orders: (1) temporarily stayed their respective
litigations; (2) required plaintiffs to register their
claims by January 15, 2008; (3) require plaintiffs
with cases pending as of November 9, 2007 to preserve and
produce records and serve expert reports; and (4) require
plaintiffs who file thereafter to make similar productions on an
accelerated schedule. The Clark County, Nevada coordinated
proceeding was also generally stayed.
25
As of February 26, 2008, more than 57,000 plaintiffs had
submitted registration materials, including more than 47,000
plaintiffs who allege an MI or IS. In addition, as of
February 26, 2008, more than 33,000 claimants have
started submitting enrollment materials. The registration and
enrollment materials currently are being evaluated for
eligibility, accuracy and completeness. The claims administrator
continues to receive new materials from plaintiffs.
Several Vioxx Product Liability Lawsuits are currently
scheduled for trial in 2008. The Company has provided a list of
such trials at its website at www.merck.com which
it will periodically update as appropriate. The Company has
included its website address only as an inactive textual
reference and does not intend it to be an active link to its
website nor does it incorporate by reference the information
contained therein.
The Company has previously disclosed the outcomes of several
Vioxx Product Liability Lawsuits that were tried prior to
September 30, 2007 (see chart below).
The following sets forth the results of trials and certain
significant rulings that occurred in or after the fourth quarter
of 2007 with respect to the Vioxx Product Liability
Lawsuits.
On October 5, 2007, the jury in Kozic v. Merck, a case
tried in state court in Tampa, Florida found unanimously in
favor of Merck on all counts, rejecting a claim that the Company
was liable for plaintiffs heart attack. In December 2007,
plaintiff filed an appeal but agreed to an order staying all
other post-trial activity pending his entry into the Settlement
Program.
On January 18, 2007, Judge Victoria Chaney declared a
mistrial in a consolidated trial of two cases, Appell v.
Merck and Arrigale v. Merck, which had commenced on
October 31, 2006 in California state court in Los Angeles,
after the jury indicated that it could not reach a verdict.
Judge Chaney had rescheduled the re-trial of the combined trial
of Appell and Arrigale for January 8, 2008, but both of
these cases are now stayed.
In April 2006, in a trial involving two plaintiffs, Thomas Cona
and John McDarby, in Superior Court of New Jersey, Law Division,
Atlantic County, the jury returned a split verdict. The jury
determined that Vioxx did not substantially contribute to
the heart attack of Mr. Cona, but did substantially
contribute to the heart attack of Mr. McDarby. The jury
also concluded that, in each case, Merck violated New
Jerseys consumer fraud statute, which allows plaintiffs to
receive their expenses for purchasing the drug, trebled, as well
as reasonable attorneys fees. The jury awarded
$4.5 million in compensatory damages to Mr. McDarby
and his wife, who also was a plaintiff in that case, as well as
punitive damages of $9 million. On June 8, 2007, Judge
Higbee denied Mercks motion for a new trial. On
June 15, 2007, Judge Higbee awarded approximately
$4 million in the aggregate in attorneys fees and
costs. The Company has appealed the judgments in both cases and
the Appellate Division held oral argument on both cases on
January 16, 2008.
On March 27, 2007, a jury found for Merck on all counts in
Schwaller v. Merck, which was tried in state court in
Madison County, Illinois. The plaintiff moved for a new trial on
May 25, 2007. The plaintiff filed a supplemental motion for
a new trial on September 5, 2007. On December 11,
2007, Judge Stack signed a consent order staying all post-trial
activity in the case until March 2008.
On December 15, 2006, the jury in Albright v. Merck, a case
tried in state court in Birmingham, Alabama, returned a verdict
for Merck on all counts. Plaintiff appealed in July 2007 to the
Alabama Supreme Court, but in December 2007, plaintiff agreed to
stay his appeal pending his entry into the Settlement Program.
On April 19, 2007, Judge Randy Wilson, who presides over
the Texas Vioxx coordinated proceeding, dismissed the
failure to warn claim of plaintiff Ruby Ledbetter, whose case
was scheduled to be tried on May 14, 2007. Judge Wilson
relied on a Texas statute enacted in 2003 that provides that
there can be no failure to warn regarding a prescription
medicine if the medicine is distributed with FDA-approved
labeling. There is an exception in the statute if required,
material, and relevant information was withheld from the FDA
that would have led to a different decision regarding the
approved labeling, but Judge Wilson found that the exception is
preempted by federal law unless the FDA finds that such
information was withheld. Judge Wilson is currently presiding
over approximately 1,000 Vioxx suits in Texas in which a
principal allegation is failure to warn. Judge Wilson certified
the decision for an expedited appeal to the Texas Court of Civil
Appeals. Plaintiffs have appealed the decision. On
October 11, 2007, Merck filed a motion to abate the hearing
of the appeal until after the U.S. Supreme Courts
decision in Warner Lambert v. Kent, which is to be decided
in 2008. On October 25, 2007, the Texas Court of
26
Appeals denied Mercks motion to abate. The parties are
currently briefing the appeal. The Company expects oral argument
to be set sometime in the spring of 2008.
In July 2006, in Doherty v. Merck, in Superior Court of New
Jersey, Law Division, Atlantic County, a jury returned a verdict
in favor of the Company on all counts. The jury rejected a claim
by the plaintiff that her nearly three years of Vioxx use
caused her heart attack. The jury also found in Mercks
favor on the plaintiffs consumer fraud claim. Plaintiff
filed a motion for a new trial in August 2006. On
December 21, 2007, Judge Higbee denied plaintiffs
motion for a new trial without prejudice in light of
plaintiffs expressed intention to participate in the
Settlement Program.
A consolidated trial, Hermans v. Merck and the retrial of
Humeston v. Merck, began on January 17, 2007, in the
coordinated proceeding in New Jersey Superior Court before Judge
Higbee. Humeston v. Merck was first tried in 2005,
resulting in a jury verdict in favor of Merck on
November 3, 2005. However, on August 17, 2006, Judge
Higbee set aside the November 2005 jury verdict and ordered a
new trial on the grounds of newly discovered evidence.
The Hermans/Humeston trial was separated into two phases: a
general phase regarding Mercks conduct and a
plaintiff-specific phase. On March 2, 2007, the jury found
for Merck in the general phase on the Hermans failure to warn
claim, and the consumer fraud claim was subsequently submitted
to Judge Higbee for decision. On March 12, 2007, the jury
found for plaintiffs in the Humeston case, awarding compensatory
damages to Mr. Humeston in the amount of $18 million
and to Mrs. Humeston in the amount of $2 million. The
jury also awarded $27.5 million in punitive damages. Merck
has moved for a judgment notwithstanding the verdict, a new
trial, or reduction of the award. These and other post-trial
motions are currently pending. On December 11, 2007, the
Court dismissed the motion for new trial without prejudice in
Hermans.
On July 31, 2007, the New Jersey Appellate Division
unanimously upheld Judge Higbees dismissal of Vioxx
Product Liability Lawsuits brought by residents of the
United Kingdom. Plaintiffs had asked the New Jersey Supreme
Court to review the decision. On November 15, 2007, the New
Jersey Supreme Court declined to review the decision.
Merck voluntarily withdrew Vioxx from the market on
September 30, 2004. Most states have statutes of
limitations for product liability claims of no more than three
years, which require that claims must be filed within no more
than three years after the plaintiffs learned or could have
learned of their potential cause of action. As a result, some
may view September 30, 2007 as a significant deadline for
filing Vioxx cases. It is important to note, however,
that the law regarding statutes of limitations can be complex
and variable, depending on the facts and applicable law. Some
states have longer statutes of limitations. There are also
arguments that the statutes of limitations began running before
September 30, 2004. New Jersey Superior Court Judge Higbee
and Federal District Court Judge Fallon have issued orders in
cases from New Jersey and eight other jurisdictions ruling that
the statutory period for making Vioxx personal injury
claims has passed. Judge Higbees order was issued on
October 15, 2007 and Judge Fallons was issued on
November 8, 2007.
27
The following chart sets forth the results of all
U.S. Vioxx Product Liability trials to date. Juries
have now decided in favor of the Company 12 times and in
plaintiffs favor five times. One Merck verdict was set
aside by the court and has not been retried. Another Merck
verdict was set aside and retried, leading to one of the five
plaintiff verdicts. There have been two unresolved mistrials.
With respect to the five plaintiffs verdicts, Merck has
filed an appeal or sought judicial review in each of those
cases, and in one of those five, a federal judge reduced the
damage award after trial. Certain of the plaintiffs in the
trials listed below may be eligible for the Settlement Program.
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State or
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Federal
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Verdict Date
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Plaintiff
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Court
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Result
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Comments
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Aug. 19, 2005
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Ernst
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Texas
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Verdict for Plaintiff
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Jury awarded Plaintiff $253.4 million; the Court reduced amount
to approximately $26.1 million plus interest. The judgment is
now on appeal.
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Nov. 3, 2005 and March 12, 2007
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Humeston
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New Jersey
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Verdict for Merck, then judge set aside the verdict, ordering a
new trial, which resulted in a verdict for Plaintiff.
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In the 2005 trial, the jury found for Merck. In August 2006, the Court set aside the verdict, and ordered a new trial for January 2007.
At the conclusion of the 2007 trial, the jury awarded Plaintiff a total of $47.5 million in damages. The jury also awarded Plaintiff the nominal sum of $36.00 on their Consumer Fraud Act claim. Merck has moved for a judgment notwithstanding the verdict, a reduced
verdict amount, and for a new trial. These motions are still pending.
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Dec. 12, 2005 and Feb. 17, 2006
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Plunkett
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Federal
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Verdict for Merck, judge then set aside the verdict
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Merck prevailed in the February 2006 retrial. The Court set
aside the February 2006 verdict in May 2007. No date has been
set for a new trial.
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April 5, 2006
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McDarby
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N.J.
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Verdict for Plaintiff
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Plaintiff was awarded $13.5 million in damages. In June 2007,
the Court awarded Plaintiffs in this and the Cona claim
tried with it approximately $4 million in attorneys fees
and costs. Merck has appealed the judgment including the award
of attorneys fees and costs.
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April 5, 2006
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Cona
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N.J.
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Verdict for Merck on failure to warn claim
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The jury found for Merck on the failure to warn claim. The jury
awarded Plaintiff the nominal sum of $135.00 for his Consumer
Fraud Act claim. In June 2007, the Court awarded Plaintiffs in
this and the McDarby claim tried with it approximately $4
million in attorneys fees and costs. Merck has appealed
the judgment including the award of attorneys fees and
costs.
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April 21, 2006
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Garza
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Texas
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Verdict for Plaintiff
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Judge reduced $32 million jury award to $8.7 million plus
interest. Merck filed an appeal on March 20, 2007.
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28
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State or
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Federal
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Verdict Date
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Plaintiff
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Court
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Result
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Comments
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July 13, 2006
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Doherty
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N.J.
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Verdict for Merck
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The Court denied the motion for new trial without prejudice
pending Plaintiffs entry into the Settlement Program.
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Aug. 2, 2006
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Grossberg
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California
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Verdict for Merck
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Plaintiffs motion for a new trial was denied, and his
subsequent appeal was dismissed.
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Aug. 17, 2006
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Barnett
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Federal
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Verdict for Plaintiff
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Jury awarded Plaintiff $51 million in damages. The judge ruled
the award was grossly excessive, and reduced the
award to $1.6 million. Merck has appealed the Judgment to the
Court of Appeals.
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Sept. 26, 2006
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Smith
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Federal
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Verdict for Merck
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Nov. 15, 2006
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Mason
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Federal
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Verdict for Merck
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Dec. 13, 2006
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Dedrick
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Federal
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Verdict for Merck
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Plaintiffs motion for a new trial was denied in May 2007.
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Dec. 15, 2006
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Albright
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Alabama
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Verdict for Merck
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Plaintiff appealed in July 2007 to the Alabama Supreme Court,
but in December 2007, Plaintiff agreed to stay his appeal
pending his entry into the Settlement Program.
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Jan. 18, 2007
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Arrigale/Appell
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California
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Mistrial declared after the jury deadlocked
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Jury failed to return verdicts in cases filed by two Plaintiffs
who alleged Vioxx contributed to their heart attacks.
These cases are now stayed.
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March 2, 2007
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Hermans
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New Jersey
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Verdict for Merck on the failure to warn claim
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The jury found for Merck on the failure to warn claim. The
parties submitted the Consumer Fraud Act claim to the Court for
resolution. This remains pending but subject to the stay.
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March 27, 2007
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Schwaller
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Illinois
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Verdict for Merck
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Plaintiff moved for a new trial. On December 11, 2007, Judge
Stack signed a consent order staying all post-trial activity in
the case until March 2008.
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Oct. 5, 2007
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Kozic
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Florida
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Verdict for Merck
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In December 2007, Plaintiff filed an appeal but agreed to an
order staying all other post-trial activity pending his entry
into the Settlement Program.
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Other
Lawsuits
As previously disclosed, on July 29, 2005, a New Jersey
state trial court certified a nationwide class of third-party
payors (such as unions and health insurance plans) that paid in
whole or in part for the Vioxx used by their plan members
or insureds. The named plaintiff in that case sought recovery of
certain Vioxx purchase costs (plus penalties) based on
allegations that the purported class members paid more for
Vioxx than they would have had they known of the
products alleged risks. On March 31, 2006, the New
Jersey Superior Court, Appellate Division, affirmed the class
certification order. On September 6, 2007, the New Jersey
Supreme Court reversed the certification of a nationwide class
action of third-party payors, finding that the suit does not
meet the requirements for a class action. Claims of certain
individual third-party payors remain pending in the New Jersey
court, and
29
counsel purporting to represent a large number of third-party
payors has threatened to file numerous additional such actions.
Activity in the pending cases is currently stayed.
There are also pending in various U.S. courts putative
class actions purportedly brought on behalf of individual
purchasers or users of Vioxx and claiming either
reimbursement of alleged economic loss or an entitlement to
medical monitoring. All of these cases are at early procedural
stages, and no class has been certified. In New Jersey, the
trial court dismissed the complaint in the case of Sinclair, a
purported statewide medical monitoring class. The Appellate
Division reversed the dismissal, and the issue is now on appeal
to the New Jersey Supreme Court. That court heard argument on
October 22, 2007.
As previously reported, the Company has also been named as a
defendant in separate lawsuits brought by the Attorneys General
of seven states, and the City of New York. A Colorado taxpayer
has also filed a derivative suit, on behalf of the State of
Colorado, naming the Company. These actions allege that the
Company misrepresented the safety of Vioxx and seek
(i) recovery of the cost of Vioxx purchased or
reimbursed by the state and its agencies;
(ii) reimbursement of all sums paid by the state 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. In addition, the Company has been named in two other
lawsuits containing similar allegations filed by governmental
entities seeking the reimbursement of alleged Medicaid
expenditures for Vioxx. Those lawsuits are (1) a
class action filed by Santa Clara County, California on
behalf of all similarly situated California counties, and
(2) an action filed by Erie County, New York. With the
exception of the case filed by Texas (which remains in Texas
state court and is currently scheduled for trial in September
2008) and the New York Attorney General and Erie County
cases (which are pending transfer), the rest of the actions
described in this paragraph have been transferred to the federal
MDL and have not experienced significant activity to date.
Shareholder
Lawsuits
As previously disclosed, in addition to the Vioxx Product
Liability Lawsuits, the Company 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 United States 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
Company 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 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 Merck Stock Investment Plan, a
dividend reinvestment plan. On April 12, 2007, Judge
Chesler granted defendants motion to dismiss the complaint
with prejudice. Plaintiffs have appealed Judge Cheslers
decision to the United States Court of Appeals for the Third
Circuit.
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 the Company 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 the Company and certain
officers. Defendants are not required to respond to these
complaints until after the Third Circuit issues a decision on
the securities lawsuit currently on appeal.
30
As previously disclosed, on August 15, 2005, a complaint
was filed in Oregon state court by the State of Oregon through
the Oregon state treasurer on behalf of the Oregon Public
Employee Retirement Fund against the Company and certain current
and former officers and directors under Oregon securities law. A
trial date has been set for October 2008.
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
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
materials acquired during discovery. 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 make use of the
discovery material to try to establish demand futility, and
remanded the case for the District Courts consideration of
whether, even with the additional materials, plaintiffs
request to amend their complaint would still be futile.
Plaintiffs filed their brief in support of their request for
leave to amend their complaint in November 2007. That motion is
pending.
In addition, as previously disclosed, various putative class
actions filed in federal court under the Employee Retirement
Income Security Act (ERISA) against the Company and
certain current and former officers and directors (the
Vioxx ERISA Lawsuits and, together with the
Vioxx Securities Lawsuits and the Vioxx Derivative
Lawsuits, the Vioxx Shareholder Lawsuits)
have been transferred to the Shareholder MDL and consolidated
for all purposes. The consolidated complaint asserts claims on
behalf of certain of the Companys current and former
employees who are participants in certain of the Companys
retirement plans for breach of fiduciary duty. The lawsuits make
similar allegations 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. In October 2007, plaintiffs moved
for certification of a class of individuals who were
participants in and beneficiaries of the Companys
retirement savings plans at any time between October 1,
1998 and September 30, 2004 and whose plan accounts
included investments in the Merck Common Stock Fund
and/or Merck
common stock. That motion is pending.
As previously disclosed, on October 29, 2004, two
individual shareholders made a demand on the Companys
Board to take legal action against Mr. Raymond Gilmartin,
former Chairman, President and Chief Executive Officer and other
individuals for allegedly causing damage to the Company 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
the Company, the Board rejected the demand. On October 11,
2007, the shareholders filed a lawsuit in state court in
Atlantic County, NJ against current and former executives and
directors of the Company alleging that the Boards
rejection of their demand was unreasonable and improper, and
that the defendants breached various duties to the Company in
allowing Vioxx to be marketed.
International
Lawsuits
As previously disclosed, in addition to the lawsuits discussed
above, the Company 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, and Israel.
Additional
Lawsuits
Based on media reports and other sources, the Company
anticipates that additional Vioxx Product Liability
Lawsuits, Vioxx Shareholder Lawsuits and Vioxx
Foreign Lawsuits (collectively, the Vioxx
Lawsuits) will be filed against it
and/or
certain of its current and former officers and directors in the
future.
Insurance
As previously disclosed, the Company has product liability
insurance for claims brought in the Vioxx Product
Liability Lawsuits with stated upper limits of approximately
$630 million after deductibles and co-
31
insurance. This insurance provides coverage for legal defense
costs and potential damage amounts in connection with the
Vioxx Product Liability Lawsuits. The Companys
insurance coverage with respect to the Vioxx Lawsuits
will not be adequate to cover its defense costs and losses.
As previously disclosed, the Companys upper level excess
insurers (which provide excess insurance potentially applicable
to all of the Vioxx Lawsuits) had commenced an
arbitration seeking, among other things, to cancel those
policies, to void all of their obligations under those policies
and to raise other coverage issues with respect to the Vioxx
Lawsuits. As previously disclosed, in November 2007, the
tribunal in the arbitration ruled in the Companys favor
ordering the upper level excess insurers to comply with their
obligations under the policies. The Company recorded a
$455 million gain in the fourth quarter as a result of
certain other settlements and the tribunals decision. In
addition, prior to recording the gain in the fourth quarter of
2007, as a result of settlements with, and payments made by,
certain of its insurers, the Company had previously received
insurance proceeds of approximately $145 million. The
Company still has claims that have not yet been resolved against
lower level excess insurers to obtain reimbursement for amounts
paid in connection with Vioxx Product Liability Lawsuits.
As a result of settlements that have already been made, the
Company will not recover the full amount of the limits discussed
in the first paragraph of this section. The resolution of claims
against lower level insurers will also affect the total amount
of insurance that is recovered for these claims. Other than the
remaining coverage of approximately $15 million from the
lower level excess insurers, the Company has no additional
insurance for the Vioxx Product Liability Lawsuits.
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 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, in November 2004, the Company was
advised by the staff of the SEC that it was commencing an
informal inquiry concerning Vioxx. On January 28,
2005, the Company announced that it received notice that the SEC
issued a formal notice of investigation. Also, the Company has
received subpoenas from the U.S. Department of Justice (the
DOJ) requesting information related to the
Companys research, marketing and selling activities with
respect to Vioxx in a federal health care investigation
under criminal statutes. In addition, 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 dispositions.
As previously disclosed, the Company has received a number of
Civil Investigative Demands (CID) from a group of
Attorneys General from 31 states and the District of
Columbia who are investigating whether the Company violated
state consumer protection laws when marketing Vioxx. The
Company is cooperating with the Attorneys General in responding
to the CIDs.
In addition, the Company 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, 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. The Settlement Agreement, which also
applies to tolled claims, was signed by the parties after
several meetings with three of the four judges overseeing the
coordination of
32
more than 95 percent of the current claims in the
Vioxx Litigation. The Settlement Agreement applies only
to U.S. legal residents and those who allege that their MI
or IS occurred in the United States. As a result of entering
into the Settlement Agreement, the Company 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.
The Company currently anticipates that a number of Vioxx
Product Liability Lawsuits will be tried throughout 2008. A
trial in the Oregon securities case is scheduled for 2008, but
the Company cannot predict whether this trial will proceed on
schedule or the timing of any of the other Vioxx
Shareholder Lawsuit trials. 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 or the Vioxx Investigations,
including for those cases in which verdicts or judgments have
been entered against the Company, and are now in post-verdict
proceedings or on appeal. In each of those cases the Company
believes it has strong points to raise on appeal and therefore
that unfavorable outcomes in such cases are not probable.
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, 2005, the Company had a
reserve of $685 million solely for its future legal defense
costs related to the Vioxx Litigation. During 2006, the
Company spent $500 million in the aggregate in legal
defense costs related to the Vioxx Litigation and
recorded additional charges of $673 million. Thus, as of
December 31, 2006, the Company had a reserve of
$858 million solely for its future legal defense costs
related to the Vioxx Litigation.
During 2007, the Company spent approximately $616 million
in the aggregate, in 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). In the second quarter and third quarter of
2007, the Company recorded charges of $210 million and
$70 million, respectively, to increase the reserve solely
for its future legal defense costs related to the Vioxx
Litigation. In increasing the reserve, the Company considered
the same factors that it considered when it previously
established reserves for the Vioxx Litigation. In the
fourth quarter, the Company spent approximately
$200 million in Vioxx legal defense costs which
resulted in a reserve of $522 million at December 31,
2007 for its future legal defense costs related to the Vioxx
Litigation. After entering into the Settlement Agreement,
the Company reviewed its reserve for the Vioxx legal
defense costs and allocated approximately $80 million of
its reserve to Mercks anticipated future costs to
administer the Settlement Program. Some of the significant
factors considered in the review of the 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 the Settlement
Agreement will be consummated, but 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 Product Liability Lawsuits. Events
such as scheduled trials, that are expected to occur throughout
2008 and 2009, and the inherent inability to predict the
ultimate outcomes of such trials and the disposition of Vioxx
Product Liability Lawsuits not participating in or not
eligible for the Settlement Program, limit the Companys
ability to reasonably estimate its legal costs beyond 2009.
Together with the $4.85 billion reserved for the Settlement
Program, the aggregate amount of the reserve established for the
Vioxx Litigation as of December 31, 2007 is
approximately $5.372 billion (the Vioxx
Reserve).
While the Company does not anticipate that it will need to
increase the reserve every quarter, it will continue to monitor
its legal defense costs and review the adequacy of the
associated reserves and may determine to increase its reserves
for legal defense costs at any time in the future if, based upon
the factors set forth, it believes it would be appropriate to do
so.
33
Other
Product Liability Litigation
As previously disclosed, the Company is a defendant in product
liability lawsuits in the United States involving Fosamax
(the Fosamax Litigation). As of
December 31, 2007, approximately 403 cases, which include
approximately 911 plaintiff groups had been filed and were
pending against Merck in either federal or state court,
including 7 cases which seek class action certification, as well
as damages and 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.
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 United States District
Court for the Southern District of New York. As a result of the
JPML order, approximately 350 of the cases are before Judge
Keenan. Judge Keenan has issued a Case Management Order setting
forth a schedule governing the proceedings which focuses
primarily upon resolving the class action certification motions
in 2007 and completing fact discovery in an initial group of 25
cases by August 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 Merck that sought personal injury
damages
and/or
medical monitoring relief on a class wide basis. Discovery is
ongoing in both the Fosamax MDL litigation as well as in
various state court cases. The Company intends to defend against
these lawsuits.
As of December 31, 2007, the Company had a remaining
reserve of approximately $27 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 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 estimate its costs beyond 2009. 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.
Commercial
Litigation
As previously disclosed, the Company 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. 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 the Company, had not been defendants in any prior pending
case. In May 2003, the court granted the Companys motion
to dismiss the consolidated class action and dismissed the
Company from the class action case. Subsequent to the
Companys dismissal, the plaintiffs filed an amended
consolidated class action complaint, which did not name the
Company as a defendant. The Company and many other
pharmaceutical manufacturers are defendants in similar
complaints pending in federal and state court brought
individually by a number of counties in the State of New York.
Forty of the county cases have been consolidated. The Company
was dismissed from the Suffolk County case, which was the first
of the New York county cases to be filed. In addition, as of
December 31, 2007, the Company was a defendant in state
cases brought by the Attorneys General of eleven states, all of
which are being defended.
As previously disclosed, in January 2003, the DOJ notified the
federal court in New Orleans, Louisiana that it was not going to
intervene at that time in a pending Federal False Claims Act
case that was filed under seal in December 1999 against the
Company. The court issued an order unsealing the complaint,
which was filed by a physician in Louisiana, and ordered that
the complaint be served. The complaint, which alleged that the
Companys discounting of Pepcid in certain Louisiana
hospitals led to increases in costs to Medicaid, was dismissed.
An
34
amended complaint was filed under seal and the case has been
administratively closed by the Court until the seal is lifted.
The State of Louisiana has filed its own amended complaint,
incorporating the allegations contained in the sealed amended
complaint. As part of the resolution of the government
investigations discussed below, the seal in this case was lifted
and the cases were dismissed.
In April 2005, the Company was named in a qui tam lawsuit under
the Nevada False Claims Act. The suit, in which the Nevada
Attorney General has intervened, alleges that the Company
inappropriately offered nominal pricing and other marketing and
pricing inducements to certain customers and also failed to
comply with its obligations under the Medicaid Best Price scheme
related to such arrangements. In May 2006, the Companys
motion to dismiss this action was denied by the district court.
This matter has also been dismissed as part of the resolution of
the government investigations.
During December 2007 and through February 26, 2008, the
Company and its joint-venture partner, Schering-Plough, received
several joint letters from the House Committee on Energy and
Commerce and the House Subcommittee on Oversight and
Investigations, and one letter from 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.
On January 25, 2008, the companies and the MSP Partnership
each received two subpoenas from the New York State Attorney
Generals Office seeking similar information and documents.
Merck and Schering-Plough have also each received a letter from
the Office of the Connecticut Attorney General dated
February 1, 2008 requesting documents related to the
marketing and sale of Vytorin and Zetia and the
timing of disclosures of the results of ENHANCE. The Company is
cooperating with these investigations and working with
Schering-Plough to respond to the inquiries. In addition, since
mid-January 2008, the Company has become aware of or been served
with approximately 85 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. Unfavorable outcomes resulting from the
government investigations or the consumer fraud litigation could
have a material adverse effect on the Companys financial
position, liquidity and results of operations.
Governmental
Proceedings
As previously disclosed, the Company had received a subpoena
from the DOJ in connection with its investigation of the
Companys marketing and selling activities, including
nominal pricing programs and samples. The Company had also
reported that it has received a CID from the Attorney General of
Texas regarding the Companys marketing and selling
activities relating to Texas. As previously disclosed, the
Company received another CID from the Attorney General of Texas
asking for additional information regarding the Companys
marketing and selling activities related to Texas, including
with respect to certain of its nominal pricing programs and
samples. In April 2004, the Company received a subpoena from the
office of the Inspector General for the District of Columbia in
connection with an investigation of the Companys
interactions with physicians in the District of Columbia,
Maryland, and Virginia. In November 2004, the Company received a
letter request from the DOJ in connection with its investigation
of the Companys pricing of Pepcid.
On February 7, 2008, the Company announced that it entered
into agreements with the government to settle federal and state
civil cases alleging violations of the Medicaid Rebate Statute,
as well as federal and state False Claims Acts in connection
with certain nominal pricing programs and sales and marketing
activities between 1994 and 2001. To resolve these matters, the
Company agreed to pay approximately $649 million, plus
interest and reasonable fees and expenses to the federal
government, 49 states participating in the Medicaid program
and the District of Columbia. In the fourth quarter of 2007, the
Company recorded a pretax charge of $671 million in
connection with the anticipated resolution of these
investigations. Each of the investigations described in the
preceding paragraph has been resolved as part of these
settlement agreements.
The settlements described above arose out of civil actions filed
under seal in the U.S. District Courts located in Philadelphia
and New Orleans. Both actions contained allegations involving
past pricing programs. The Philadelphia settlement relates to
past programs in which the Company offered hospitals
significantly discounted prices on certain medications,
including Mevacor, Vioxx and Zocor. In the
Philadelphia matter, the government alleged that the Company
improperly excluded certain discounts those which
were nominal in amount from
35
its best price reported to Medicaid under the Medicaid Rebate
Agreement. The Philadelphia action also related to certain
marketing and sales programs conducted between 1997 and 2001.
The Philadelphia settlement accounts for $399 million plus
interest of the total settlement amount.
The New Orleans settlement resolves a civil action containing
allegations involving pricing discounts offered to hospitals for
Pepcid. The original pricing program, known as the Flex
Program, was launched in 1994 and continued to operate as the
Flex-NP Program until its termination in April 2001. The New
Orleans settlement accounts for $250 million plus interest
of the total settlement amount.
In connection with these settlements, the Company entered into a
corporate integrity agreement with the Department of Health and
Human Services, which incorporates the Companys existing,
comprehensive compliance program governing its pharmaceutical
sales and marketing activities in the United States.
As previously disclosed, the Company had received a letter from
DOJ advising it of the existence of a civil complaint brought
under the qui tam provisions of the False Claims Act alleging
that the Company violated certain rules related to its
calculations of best price and other federal pricing benchmark
calculations, certain of which may affect the Companys
Medicaid rebate obligation. DOJ has informed the Company that it
does not intend to intervene in this action and has closed its
investigation. The lawsuit has now been dismissed.
The Company has cooperated with all of these investigations. In
addition to these investigations, from time to time, other
federal, state or foreign regulators or authorities may seek
information about practices in the pharmaceutical industry or
the Companys business practices in inquiries other than
the investigations discussed in this section. It is not feasible
to predict the outcome of any such inquiries.
Vaccine
Litigation
As previously disclosed, the Company was a party in claims
brought under the Consumer Protection Act of 1987 in the United
Kingdom, which allege that certain children suffer from a
variety of conditions as a result of being vaccinated with
various bivalent vaccines for measles and rubella
and/or
trivalent vaccines for measles, mumps and rubella, including the
Companys M-M-R II. The conditions include autism,
with or without inflammatory bowel disease, epilepsy,
encephalitis, encephalopathy, Guillain-Barre syndrome and
transverse myelitis. All of the remaining cases have been
discontinued or struck out by the Court and the group litigation
has concluded. There are no claims outstanding against Merck. As
previously disclosed, the Company is also 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. Merck has not distributed thimerosal-containing
pediatric vaccines in the United States since the fall of 2001.
As of December 31, 2007, there were approximately 234
active thimerosal related lawsuits with approximately 425
plaintiffs. 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.
The Company 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. The
Company 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 900 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
36
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. In
June 2007, the Special Masters presiding over the Vaccine Court
proceedings held a two and a half week hearing in which both
petitioners and the government presented evidence on the issue
of whether the combination of M-M-R II vaccine and
thimerosal in vaccines can cause autism spectrum disorders and
whether it did cause autism spectrum disorder in the petitioner
in that case. Two shorter additional evidentiary hearings of
that type addressing that issue were held in the fall of 2007.
Rulings in these three cases are expected in 2008. According to
the Vaccine Court, it expects to hold evidentiary hearings in
six additional so-called test cases by September
2008, addressing the issue of whether thimerosal in vaccines, or
the M-M-R- II vaccine alone, can cause autism spectrum
disorders, and did cause such disorders in those six
petitioners. 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 a generic form of Fosamax,
Propecia, Prilosec, Nexium, Singulair, Trusopt, Cosopt and
Primaxin prior to the expiration of the Companys
(and AstraZenecas in the case of Prilosec and
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 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. Generic manufacturers have
received FDA approval to market a generic form of Prilosec.
The Company has filed patent infringement suits in federal
court against companies filing ANDAs for generic
alendronate (Fosamax), finasteride (Propecia),
dorzolamide (Trusopt), montelukast (Singulair),
dorzolamide/timolol (Cosopt), imipenem/cilastatin
(Primaxin) and AstraZeneca and the Company have filed
patent infringement suits in federal court against companies
filing ANDAs for generic omeprazole (Prilosec) and
esomeprazole (Nexium). Also, the Company and
Schering-Plough have filed a patent infringement suit in federal
court against companies filing ANDAs for generic ezetimibe
(Zetia). 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. Merck and Schering Plough
market 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 for 30 months or until an
adverse court decision, if any, whichever may occur earlier.
As previously disclosed, in January 2007, the Company received a
letter from Ranbaxy Laboratories Ltd. (Ranbaxy)
stating that it had filed an ANDA seeking approval of a generic
version of Mercks Primaxin. In April 2007, the
Company filed a patent infringement suit against Ranbaxy.
As previously disclosed, in February 2007, the Company received
a notice from Teva Pharmaceuticals (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, the Company filed a
patent infringement action against Teva. The lawsuit
automatically stays FDA approval of Tevas ANDA for
30 months or until an adverse court decision, if any,
whichever may occur earlier.
As previously disclosed, on January 28, 2005, the
U.S. Court of Appeals for the Federal Circuit in
Washington, D.C. found the Companys patent claims for
once-weekly administration of Fosamax to be invalid. The
Company exhausted all options to appeal this decision in 2005.
Based on the Court of Appeals decision, Fosamax
lost market exclusivity in the United States in February
2008. Fosamax Plus D will lose marketing exclusivity in
the
37
United States in April 2008. As a result of these events, the
Company expects significant declines in U.S. Fosamax
and Fosamax Plus D sales.
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 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,
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.
As previously disclosed, in September 2004, the Company 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 the Company that covers the once-weekly administration
of alendronate. Under its terms, this new patent is effective
until July 2018. Oppositions have been filed in the EPO against
this patent. Additionally, Merck has brought patent infringement
suits in various European jurisdictions based upon this patent.
Mercks basic patent covering the use of alendronate has
been challenged in several European countries. The Company has
received adverse decisions in Germany, Holland and the United
Kingdom. The decision in the United Kingdom was upheld on
appeal. The Company has appealed the decisions in Germany and
Holland.
In addition, as previously disclosed, in Japan after a
proceeding was filed challenging the validity of the
Companys Japanese patent for the once-weekly
administration of alendronate, the patent office invalidated the
patent. The decision is under appeal.
On January 18, 2006, the Company sued Hi-Tech Pharmacal
Co., Inc. (Hi-Tech) of Amityville, New York for
patent infringement in response to Hi-Techs application to
the FDA seeking approval of a generic version of Mercks
ophthalmic drugs Trusopt and Cosopt, which are
used to treat elevated intraocular pressure in patients with
open-angle glaucoma or ocular hypertension. In the lawsuit,
Merck sued to enforce a patent covering an active ingredient
dorzolamide, which is present in both Trusopt and
Cosopt, and the District Court entered judgment in
Mercks favor which was upheld on appeal. The patent
covering dorzolamide provides exclusivity for Trusopt and
Cosopt until October 2008 (including six months of
pediatric exclusivity). After such time, the Company expects
significant declines in U.S. sales of these products. Merck
has elected not to enforce two other U.S. patents listed
with the FDA which cover the combination of dorzolamide and
timolol, the two active ingredients in Cosopt.
In the case of omeprazole, on May 31, 2007, the trial court
issued a decision with respect to four generic companies selling
generic omeprazole. The court found that the Impax Laboratories
Inc. and Apotex products infringed AstraZenecas
formulation patents, while products made by Mylan Laboratories
and Lek Pharmaceutical and Chemical Co., d.d. did not infringe.
The companies found to have infringed were ordered off the
market until October 20, 2007, which was the expiration of
the pediatric exclusivity period.
The Company 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. On November 21, 2005, the Company and
AstraZeneca sued Ranbaxy in the United States District Court in
New Jersey. Accordingly, FDA approval of Ranbaxys ANDA is
stayed for 30 months until April 2008 or until an adverse
court decision, if any, whichever may occur earlier. The Company
and AstraZeneca received notice in January 2006 that IVAX
Pharmaceuticals, Inc., subsequently acquired by Teva, had filed
an ANDA for esomeprazole magnesium. The ANDA contains
Paragraph IV challenges to patents on Nexium. On
March 8, 2006, the Company and AstraZeneca sued Teva in the
United States District Court in New Jersey. Accordingly, FDA
approval of Tevas ANDA is stayed for 30 months until
September 2008 or until an adverse court decision, if any,
whichever may occur earlier. In January 2008, the Company and
AstraZeneca sued Dr. Reddys in the District Court in
New Jersey based on Dr. Reddys filing of an ANDA for
esomeprazole magnesium. Accordingly, FDA approval of
Dr. Reddys ANDA is stayed for 30 months until
July 2010 or until an adverse court decision, if any, whichever
may occur earlier.
In Europe, the Company is aware of various companies seeking
registration for generic losartan (the active ingredient for
Cozaar). The Company has patent rights to losartan via
license from E.I. du Pont de Nemours
38
and Company (du Pont). The Company and du Pont have
filed patent infringement proceedings against various companies
in Portugal, Spain, Norway and Austria.
As previously disclosed, in the third quarter of 2007, the
Company resolved certain patent disputes which resulted in a net
gain to the Company.
Other
Litigation
In November 2005, an individual shareholder delivered a letter
to the Companys Board alleging that the Company had
sustained damages through the Companys adoption of its
Change in Control Separation Benefits Plan (the CIC
Plan) in November 2004. The shareholder made a demand on
the Board to take legal action against the Boards current
or former members for allegedly causing damage to the Company
with respect to the adoption of the CIC Plan. In response to
that demand letter, the independent members of the Board
determined at the November 22, 2005 Board meeting that the
Board would take the shareholders request under
consideration. After careful consideration by the Board, the
shareholder was advised that the Board had determined not to
take legal action.
In February 2008, an individual shareholder delivered a letter
to the Companys Board of Directors demanding that the
Board take legal action against the responsible individuals to
recover the amounts paid by the Company to resolve the
governmental investigations referred to above.
As previously disclosed, on August 20, 2004, the United
States District Court for the District of New Jersey granted a
motion by the Company, Medco Health Solutions, Inc. (Medco
Health) and certain officers and directors to dismiss a
shareholder derivative action involving claims related to the
Companys revenue recognition practice for retail
co-payments paid by individuals to whom Medco Health provides
pharmaceutical benefits as well as other allegations. The
complaint was dismissed with prejudice. Plaintiffs appealed the
decision. On December 15, 2005, the U.S. Court of
Appeals for the Third Circuit upheld most of the District
Courts decision dismissing the suit, and sent the issue of
whether the Companys Board of Directors properly refused
the shareholder demand relating to the Companys treatment
of retail co-payments back to the District Court for
reconsideration under a different legal standard. Plaintiffs
moved to remand their action to state court on August 18,
2006, and the District Court granted that motion on
February 1, 2007. The shareholder derivative suit was
pending before the Superior Court of New Jersey, Chancery
Division, Hunterdon County. All of the remaining issues were
dismissed with prejudice in favor of Medco Health, Merck and the
individual defendants on July 31, 2007.
As previously disclosed, prior to the spin-off of Medco Health,
the Company and Medco Health agreed to settle, on a class action
basis, a series of lawsuits asserting violations of ERISA (the
Gruer Cases). The Company, Medco Health and certain
plaintiffs counsel filed the settlement agreement with the
federal District Court in New York, where cases commenced by a
number of plaintiffs, including participants in a number of
pharmaceutical benefit plans for which Medco Health is the
pharmacy benefit manager, as well as trustees of such plans,
have been consolidated. Medco Health and the Company agreed to
the proposed settlement in order to avoid the significant cost
and distraction of prolonged litigation. The proposed class
settlement has been agreed to by plaintiffs in five of the cases
filed against Medco Health and the Company. Under the proposed
settlement, the Company and Medco Health have agreed to pay a
total of $42.5 million, and Medco Health has agreed to
modify certain business practices or to continue certain
specified business practices for a period of five years. The
financial compensation is intended to benefit members of the
settlement class, which includes ERISA plans for which Medco
Health administered a pharmacy benefit at any time since
December 17, 1994. The District Court held hearings to hear
objections to the fairness of the proposed settlement and
approved the settlement in 2004, but has not yet determined the
number of class member plans that have properly elected not to
participate in the settlement. The settlement becomes final only
if and when all appeals have been resolved. Certain class member
plans have indicated that they will not participate in the
settlement. Cases initiated by three such plans and two
individuals remain pending in the Southern District of New York.
Plaintiffs in these cases have asserted claims based on ERISA as
well as other federal and state laws that are the same as or
similar to the claims that had been asserted by settling class
members in the Gruer Cases. The Company and Medco Health are
named as defendants in these cases.
Three notices of appeal were filed and the appellate court heard
oral argument in May 2005. On December 8, 2005, the
appellate court issued a decision vacating the District
Courts judgment and remanding the
39
cases to the District Court to allow the District Court to
resolve certain jurisdictional issues. A hearing was held to
address such issues on February 24, 2006. The District
Court issued a ruling on August 10, 2006 resolving such
jurisdictional issues in favor of the settling plaintiffs. The
class members and the other party that had previously appealed
the District Courts judgment renewed their appeals. On
October 4, 2007, the renewed appeals were affirmed in part
and vacated in part by the federal court of appeals. The appeals
court remanded the class settlement for further proceedings in
the District Court.
After the spin-off of Medco Health, Medco Health assumed
substantially all of the liability exposure for the matters
discussed in the foregoing two paragraphs. These cases are being
defended by Medco Health.
There are various other legal proceedings, principally product
liability and intellectual property suits involving the Company,
which 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 is a party 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 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.
Merck has entered into a Consent Decree (the Decree)
with the United States of America, the Pennsylvania Department
of Environmental Protection and the Pennsylvania Fish and Boat
Commission resolving the governments claims asserted in an
enforcement action, United States of America and Commonwealth of
Pennsylvania v. Merck & Co., Inc., in response to
the previously disclosed accidental release of 25 gallons of
potassium thiocyanate from the site in June 2006 that resulted
in a fish kill in the Wissahickon Creek as well as the discharge
of materials on August 8, 9, and 16, 2006 that caused
foaming in the creek. Pursuant to the terms of the Decree, Merck
will pay civil penalties in the amount of $1.575 million;
fund supplemental environmental projects in the amount of
$9 million; and implement
on-site
remedial measures in the amount of $10 million. A motion to
enter the Decree is pending with the court.
As previously disclosed on September 13, 2007,
approximately 1,400 plaintiffs filed an amended complaint
against Merck and 12 other defendants in United States 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
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
Merck subsidiary in Merced, California. The Company intends to
defend itself against these claims.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
Not applicable.
40
Executive
Officers of the Registrant (ages as of February 1,
2008)
RICHARD T. CLARK Age 61
April, 2007 Chairman, President and Chief Executive
Officer
May, 2005 Chief Executive Officer and President
June, 2003 President, Merck Manufacturing
Division responsible for the Companys
manufacturing, information services and operational excellence
organizations worldwide
January, 2003 Chairman, President and Chief
Executive Officer, Medco Health Solutions, Inc., formerly a
wholly-owned subsidiary of the Company
ADELE D. AMBROSE Age 51
December, 2007 Vice President and Chief
Communications Officer 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)
DAVID W. ANSTICE Age 59
September, 2006 Executive Vice President, Strategy
Initiatives responsible for the End-to-End and
global support function initiatives and for providing strategic
direction in key pharmaceutical emerging markets (China and
India)
August, 2005 President, Human Health-Asia
Pacific responsible for the Companys
prescription drug business in the Asia Pacific region, Japan,
Australia, New Zealand and the Companys joint venture
relationship with Schering-Plough
January, 2003 President, Human Health
responsible for the Companys prescription drug business in
Japan, Latin America, Canada, Australia, New Zealand and the
Companys joint venture relationship with Schering-Plough
JOHN CANAN Age 51
January, 2008 Senior Vice President and
Controller responsible for the Corporate
Controllers Group
September, 2006 Vice President,
Controller responsible for the Corporate
Controllers Group
June, 2003 Vice President, Corporate
Audit & Assurance Services
September, 2002 Vice President and Controller, Asia
and Joint Ventures responsible for financial and
operational oversight of Asia Human Health and several of the
Companys joint ventures
CELIA A. COLBERT Age 51
January, 2008 Senior Vice President, Secretary
(since September, 1993) and Assistant General Counsel
(since November, 1993) Responsible for Corporate
Secretary function and Corporate Staff Group.
WILLIE A. DEESE Age 52
January, 2008 Executive Vice President and
President, Merck Manufacturing Division
(MMD) responsible for the Companys
global manufacturing, procurement, and operational excellence
functions
41
May, 2005 President, MMD responsible for
the Companys global manufacturing, procurement, and
operational excellence functions
January, 2004 Senior Vice President, Global
Procurement
Prior to January 2004, Mr. Deese was Senior Vice President,
Global Procurement and Logistics (2001 to 2003) for
GlaxoSmithKline plc.
KENNETH C. FRAZIER Age 53
August, 2007 Executive Vice President and President,
Global Human Health responsible for the
Companys marketing and sales organizations worldwide,
including the global pharmaceutical and vaccine franchises
November, 2006 Executive Vice President and General
Counsel 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 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 53
January, 2008 Executive Vice President, Human
Resources responsible for the Global Human Resources
organization
September, 2006 Senior Vice President, Human
Resources
Prior to September 2006, Dr. Graddick-Weir was Executive
Vice President of Human Resources and Employee Communications at
AT&T (communications services provider), and has held
several other senior Human Resources leadership positions at
AT&T for more than 20 years.
PETER N. KELLOGG Age 51
August, 2007 Executive Vice President and Chief
Financial Officer 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.
Mr. Kellogg was formerly Executive Vice President, Finance
and Chief Financial Officer of Biogen, Inc. after serving as
Vice President, Finance and Chief Financial Officer since July
2000
PETER S. KIM Age 49
January, 2008 Executive Vice President and
President, Merck Research Laboratories
(MRL) responsible for the Companys
research and development efforts worldwide
January, 2003 President, MRL
BRUCE N. KUHLIK Age 51
January, 2008 Executive Vice President and General
Counsel 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 primary responsibility for the
Companys Vioxx litigation defense
42
Prior to May 2005, Mr. Kuhlik was Senior Vice President and
General Counsel for the Pharmaceutical Research and
Manufacturers of America since October, 2002
MARK E. MCDONOUGH Age 43
February, 2007 Vice President and
Treasurer responsible for the Companys
treasury function, and for providing financial support for Human
Resources
January, 2004 Assistant Treasurer, Global Capital
Markets responsible for managing the Companys
investment and financing portfolios and the treasury share
repurchase program
September, 2000 Senior Director, Human Health
Finance responsible for providing global
franchise-based financial reporting and analytics to Executive
Committee and franchise and divisional stakeholders
MARGARET G. MCGLYNN Age 48
August, 2007 President, Merck Vaccines and
Infectious Diseases global responsibilities for the
vaccines business and infectious diseases franchise including
the Companys Sanofi-Pasteur joint venture
August, 2005 President, Merck Vaccines
global responsibilities for the vaccines business including the
Companys Sanofi-Pasteur joint venture
January, 2003 President, U.S. Human
Health responsible for one of the two prescription
drug divisions (hospital and specialty product franchises)
comprising U.S. Human Health (USHH), and the
Managed Care Group of USHH
STEFAN OSCHMANN Age 50
September, 2006 President, Europe, Middle East,
Africa & Canada responsible for the
Companys business operations in Europe, Middle East,
Africa and Canada
October, 2005 Senior Vice President, Worldwide Human
Health Marketing
January, 2001 Managing Director, MSD Germany, a
subsidiary of the Company
J. CHRIS SCALET Age 49
January, 2008 Executive Vice President, Global
Services, and Chief Information Officer
(CIO) 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 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 responsible for all areas of
information technology and services including application
development, technical support, voice and data communications,
and computer operations worldwide
Prior to March 2003, Mr. Scalet was Senior Vice President,
Information Technology & CIO (1997 to 2003) for
International Paper Company (global forest products, paper and
packaging company).
ADAM H. SCHECHTER Age 43
August, 2007 President, Global
Pharmaceuticals global responsibilities for the
Companys atherosclerosis/cardiovascular, diabetes/obesity,
oncology, specialty/neuroscience, respiratory, bone, arthritis
and analgesia franchises as well as commercial responsibility in
the United States for the Companys portfolio of
prescription medicines
43
July, 2006 President, U.S. Human
Health commercial responsibility in the United
States for the Companys portfolio of prescription medicines
October, 2005 General Manager, U.S. Human
Health Division responsible for the
Neuro-Psychiatry, Osteoporosis, Migraine, Respiratory, and New
Products franchises
February, 2004 Vice President/General Manager,
Merck/Schering-Plough Pharmaceuticals U.S. Joint Venture
August, 2002 Vice President, Merck Human Health
Division, Arthritis & Analgesia Franchise Business
Group
WENDY L. YARNO Age 53
August, 2007 Chief Marketing Officer
responsible for the global human health commercial operations
support organization, including the Companys Global Human
Health Business Process and Program Management, Global Marketing
Support, Global Medical Affairs, Global Product Access and
Outcomes Research, and Global Alliance Management and New
Product Licensing
September, 2006 Chief Marketing Officer
responsible for Global Marketing Services, Global Alliance
Management and Global Pricing, Global Human Health Business
Practices & Compliance and three franchises: Oncology,
Specialty and Neuroscience; Respiratory, Bone and Arthritis and
Analgesia; and Infectious Diseases and Hospital Products
November, 2005 General Manager, Business Unit 3,
U.S. Human Health
January, 2003 Executive Vice President, Worldwide
Human Health Marketing
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.
44
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 MRK. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
4th Q
|
|
|
3rd Q
|
|
|
2nd Q
|
|
|
1st Q
|
|
|
|
|
2007
|
|
$
|
1.52
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
2006
|
|
$
|
1.52
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
Common
Stock Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
4th Q
|
|
|
3rd Q
|
|
|
2nd Q
|
|
|
1st Q
|
|
|
|
|
High
|
|
$
|
61.62
|
|
|
$
|
53.81
|
|
|
$
|
55.14
|
|
|
$
|
46.55
|
|
Low
|
|
$
|
51.44
|
|
|
$
|
48.11
|
|
|
$
|
44.52
|
|
|
$
|
42.35
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
46.37
|
|
|
$
|
42.51
|
|
|
$
|
36.84
|
|
|
$
|
36.65
|
|
Low
|
|
$
|
41.24
|
|
|
$
|
35.00
|
|
|
$
|
32.75
|
|
|
$
|
31.81
|
|
|
As of January 31, 2008, there were approximately 172,077
stockholders of record.
Equity
Compensation Plan Information
The following table summarizes information about the options,
warrants and rights and other equity compensation under the
Companys equity plans as of the close of business on
December 31, 2007. The table does not include information
about tax qualified plans such as the Merck & Co.,
Inc. Employee Savings and Security 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)
|
|
|
242,047,383
|
(2)
|
|
$
|
53.60
|
|
|
|
149,753,161
|
|
Equity compensation plans not approved by security
holders(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
242,047,383
|
|
|
$
|
53.60
|
|
|
|
149,753,161
|
|
|
|
(1)
|
Includes options to purchase shares of Company Common Stock
and other rights under the following stockholder-approved plans:
the 1996 Incentive Stock Plan, the 2001 Incentive Stock Plan,
the 2004 Incentive Stock Plan, the 2007 Incentive Stock Plan,
the 1996 Non-Employee Directors Stock Option Plan, the 2001
Non-Employee Directors Stock Option Plan and the 2006
Non-Employee Directors Stock Option Plan.
|
|
(2)
|
Excludes approximately 5,423,259 shares of restricted
stock units and 2,813,690 performance share units (assuming
maximum payouts) under the 2004 and 2007 Incentive Stock Plans.
Also excludes 228,987 shares of phantom stock deferred
under the Merck & Co., Inc. Deferral
|
45
|
|
|
Program. As of December 31,
2006, no additional shares were reserved under the Deferral
Program. Beginning January 1, 2007, one-tenth of
1 percent of the outstanding shares of Merck Common Stock
on the last business day of the preceding calendar year plus any
shares authorized under the Deferral Program but not issued are
reserved for future issuance (2,679,958 as of December 31,
2007). The actual amount of shares to be issued prospectively
equals the amount participants elect to defer from payouts under
the Companys various incentive programs, such as the
Executive Incentive Plan, into phantom stock, increased by the
amount of dividends that would be paid on an equivalent number
of shares of Merck Common Stock, divided by the market price of
Merck Common Stock.
|
|
|
(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 following: Medco Containment
Services, Inc. 1991 Class C Non-Qualified Stock Option
Plan; SIBIA Neurosciences, Inc. 1996 Equity and Incentive Stock
Option Plan; Provantage Health Services, Inc. 1999 Stock
Incentive Plan; Rosetta Inpharmatics, Inc. 1997 and 2000
Employee Stock Option Plans. A total of 966,738 shares of
Merck Common Stock may be purchased under the Assumed Plans, at
a weighted average exercise price of $19.99. No further grants
may be made under any Assumed Plans.
|
46
Performance
Graph
The following graph compares the cumulative total stockholder
return (stock price appreciation plus reinvested dividends) on
the Companys Common Stock with the cumulative total return
(including reinvested dividends) of the Dow Jones US
Pharmaceutical Index (DJUSPR), formerly referred to
as the Dow Jones Pharmaceutical Index United States
Owned Companies, and the Standard & Poors 500
Index (S&P 500 Index) for the five years ended
December 31, 2007. Amounts below have been rounded to the
nearest dollar or percent.
Comparison
of Five-Year Cumulative Total
Return*
Merck &
Co., Inc., Dow Jones US Pharmaceutical Index and S&P 500
Index
|
|
|
|
|
|
|
|
|
|
|
End of
|
|
2007/2002
|
|
|
Period Value
|
|
CAGR**
|
|
MERCK
|
|
$
|
131
|
|
|
|
6
|
%
|
DJUSPR
|
|
|
118
|
|
|
|
3
|
|
S&P 500
|
|
|
183
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
MERCK
|
|
|
|
100.00
|
|
|
|
|
88.65
|
|
|
|
|
64.15
|
|
|
|
|
66.75
|
|
|
|
|
95.24
|
|
|
|
|
130.80
|
|
DJUSPR
|
|
|
|
100.00
|
|
|
|
|
109.45
|
|
|
|
|
100.39
|
|
|
|
|
98.73
|
|
|
|
|
112.93
|
|
|
|
|
117.98
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
128.67
|
|
|
|
|
142.65
|
|
|
|
|
149.65
|
|
|
|
|
173.27
|
|
|
|
|
182.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Assumes that the value of the
investment in Company Common Stock and each index was $100 on
December 31, 2002 and that all dividends were
reinvested. |
|
|
|
** |
|
Compound Annual Growth
Rate |
47
Issuer purchases of equity securities for the three month period
ended December 31, 2007 are as follows:
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
($ in millions)
|
|
|
|
Total
|
|
|
|
Shares Purchased
|
|
Approx. Dollar Value
|
|
|
|
Number
|
|
Average
|
|
as Part of
|
|
of Shares That May Yet
|
|
|
|
of Shares
|
|
Price Paid
|
|
Publicly Announced
|
|
Be Purchased Under the
|
|
Period
|
|
Purchased
|
|
Per Share
|
|
Plans or
Programs(1)
|
|
Plans or
Programs(1)
|
|
|
October 1
October 31, 2007
|
|
0
|
|
$N/A
|
|
0
|
|
$
|
5,952.8
|
|
November 1
November 30, 2007
|
|
4,407,000
|
|
$57.74
|
|
4,407,000
|
|
$
|
5,698.4
|
|
December 1
December 31, 2007
|
|
10,099,600
|
|
$59.47
|
|
10,099,600
|
|
$
|
5,097.7
|
|
Total
|
|
14,506,600
|
|
$58.95
|
|
14,506,600
|
|
$
|
5,097.7
|
|
|
|
|
(1) |
|
These share repurchases were
made as part of a plan announced in July 2002 to purchase
$10 billion in Merck shares. |
48
|
|
Item 6.
|
Selected
Financial Data.
|
The following selected financial data should be read in
conjunction with Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations and consolidated financial statements and notes
thereto contained in Item 8. Financial Statements and
Supplementary Data of this report.
Merck &
Co., Inc. and Subsidiaries
($ in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007(1)
|
|
|
2006(2)
|
|
|
2005(3)
|
|
|
2004(4)
|
|
|
2003(5)
|
|
|
|
|
Results for Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
24,197.7
|
|
|
$
|
22,636.0
|
|
|
$
|
22,011.9
|
|
|
$
|
22,972.8
|
|
|
$
|
22,567.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production costs
|
|
|
6,140.7
|
|
|
|
6,001.1
|
|
|
|
5,149.6
|
|
|
|
4,965.7
|
|
|
|
4,443.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and administrative expenses
|
|
|
7,556.7
|
|
|
|
8,165.4
|
|
|
|
7,155.5
|
|
|
|
7,238.7
|
|
|
|
6,200.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
4,882.8
|
|
|
|
4,782.9
|
|
|
|
3,848.0
|
|
|
|
4,010.2
|
|
|
|
3,279.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
327.1
|
|
|
|
142.3
|
|
|
|
322.2
|
|
|
|
107.6
|
|
|
|
194.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
|
)
|
|
|
(1,717.1
|
)
|
|
|
(1,008.2
|
)
|
|
|
(474.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Vioxx Settlement Agreement charge
|
|
|
4,850.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
|
46.2
|
|
|
|
(382.7
|
)
|
|
|
(110.2
|
)
|
|
|
(344.0
|
)
|
|
|
(203.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
3,370.7
|
|
|
|
6,221.4
|
|
|
|
7,363.9
|
|
|
|
8,002.8
|
|
|
|
9,126.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
|
95.3
|
|
|
|
1,787.6
|
|
|
|
2,732.6
|
|
|
|
2,172.7
|
|
|
|
2,492.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
3,275.4
|
|
|
|
4,433.8
|
|
|
|
4,631.3
|
|
|
|
5,830.1
|
|
|
|
6,634.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,275.4
|
|
|
|
4,433.8
|
|
|
|
4,631.3
|
|
|
|
5,830.1
|
|
|
|
6,875.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$1.51
|
|
|
|
$2.04
|
|
|
|
$2.11
|
|
|
|
$2.63
|
|
|
|
$2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$1.51
|
|
|
|
$2.04
|
|
|
|
$2.11
|
|
|
|
$2.63
|
|
|
|
$3.07
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share assuming dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
$1.49
|
|
|
|
$2.03
|
|
|
|
$2.10
|
|
|
|
$2.62
|
|
|
|
$2.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$1.49
|
|
|
|
$2.03
|
|
|
|
$2.10
|
|
|
|
$2.62
|
|
|
|
$3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
3,310.7
|
|
|
|
3,318.7
|
|
|
|
3,338.7
|
|
|
|
3,329.1
|
|
|
|
3,264.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per common share
|
|
|
$1.52
|
|
|
|
$1.52
|
|
|
|
$1.52
|
|
|
|
$1.49
|
|
|
|
$1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
1,011.0
|
|
|
|
980.2
|
|
|
|
1,402.7
|
|
|
|
1,726.1
|
|
|
|
1,915.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,752.4
|
|
|
|
2,098.1
|
|
|
|
1,544.2
|
|
|
|
1,258.7
|
|
|
|
1,129.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
2,787.2
|
|
|
$
|
2,507.5
|
|
|
$
|
7,806.9
|
|
|
$
|
1,688.8
|
|
|
$
|
1,926.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
12,346.0
|
|
|
|
13,194.1
|
|
|
|
14,398.2
|
|
|
|
14,713.7
|
|
|
|
14,169.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
48,350.7
|
|
|
|
44,569.8
|
|
|
|
44,845.8
|
|
|
|
42,572.8
|
|
|
|
40,587.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,915.8
|
|
|
|
5,551.0
|
|
|
|
5,125.6
|
|
|
|
4,691.5
|
|
|
|
5,096.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
18,184.7
|
|
|
|
17,559.7
|
|
|
|
17,977.7
|
|
|
|
17,349.3
|
|
|
|
15,620.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations as a % of sales
|
|
|
13.5
|
%
|
|
|
19.6
|
%
|
|
|
21.0
|
%
|
|
|
25.4
|
%
|
|
|
29.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as a % of average total assets
|
|
|
7.0
|
%
|
|
|
9.9
|
%
|
|
|
10.6
|
%
|
|
|
14.0
|
%
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding (millions)
|
|
|
2,170.5
|
|
|
|
2,177.6
|
|
|
|
2,197.0
|
|
|
|
2,219.0
|
|
|
|
2,236.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding assuming dilution (millions)
|
|
|
2,192.9
|
|
|
|
2,187.7
|
|
|
|
2,200.4
|
|
|
|
2,226.4
|
|
|
|
2,253.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stockholders of record
|
|
|
173,000
|
|
|
|
184,200
|
|
|
|
198,200
|
|
|
|
216,100
|
|
|
|
233,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees
|
|
|
59,800
|
|
|
|
60,000
|
|
|
|
61,500
|
|
|
|
62,600
|
|
|
|
63,200
|
|
|
|
|
(1)
|
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, acquired research 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.
|
(2)
|
Amounts for 2006 include the
impact of restructuring actions, acquired research expenses
resulting from acquisitions, additional
Vioxx legal defense
costs and the adoption of a new accounting standard requiring
the expensing of stock options.
|
(3)
|
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.
|
(4)
|
Amounts for 2004 include the
impact of the withdrawal of
Vioxx, Vioxx legal
defense costs and restructuring actions.
|
(5)
|
Amounts for 2003 include the
impact of the implementation of a new distribution program for
U.S. wholesalers and restructuring actions.
|
(6)
|
Amount does not add as a result
of rounding.
|
49
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Description
of Mercks Business
Merck is a global research-driven pharmaceutical company that
discovers, develops, manufactures and markets a broad range of
innovative products to improve human and animal health. The
Companys operations are principally managed on a products
basis and are comprised of two reportable segments: the
Pharmaceutical segment and the Vaccines segment. The
Pharmaceutical segment includes human health pharmaceutical
products marketed either directly or through joint ventures.
These products consist of therapeutic and preventive agents,
sold by prescription, for the treatment of human disorders.
Merck 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. The Vaccines segment includes human health vaccine
products marketed either directly or through a joint venture.
These products consist of preventative pediatric, adolescent and
adult vaccines, primarily administered at physician offices.
Merck 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.
Overview
During 2007, Merck began realizing benefits from its multi-year
strategic plan designed to reengineer the way the Company
develops and distributes medicines and vaccines worldwide. The
Company is benefiting from the evolution of a new commercial
model designed to align the Companys product research,
development and marketing efforts utilizing the latest
technologies and broadening its engagement with customers,
physicians and scientific leaders to get needed medicines and
vaccines through the development pipeline and to patients
sooner. The Company is also working to build a sustainable
research and development advantage by leveraging technologies to
facilitate drug discovery and development and has successfully
reduced clinical development cycle-time.
The progress of these efforts is demonstrated in part by the
Companys revenue growth in 2007, which reflected the
continued market penetration and global rollout of Gardasil,
a vaccine to help prevent cervical cancer, pre-cancerous and
low-grade lesions, vulvar and vaginal pre-cancers, and genital
warts caused by human papillomavirus (HPV) types 6,
11, 16 and 18; Januvia, a medicine that enhances a
natural body system to improve blood sugar control in patients
with type 2 diabetes; and RotaTeq, a pediatric vaccine to
help prevent rotavirus gastroenteritis in infants and children,
coupled with the strong performance of several in-line products.
This growth has more than offset 2007 revenue declines
associated with the 2006 loss of U.S. market exclusivity
for Zocor and Proscar.
Additionally, the Company continued the advancement of drug
candidates through its pipeline. During 2007, the U.S. Food
and Drug Administration (the FDA) approved both
Janumet, an oral antihyperglycemic agent that combines
sitagliptin (Januvia) with metformin in a single tablet
to address all three key defects of type 2 diabetes, and
Isentress, a
first-in-class
integrase inhibitor for the treatment of HIV-1 infection in
treatment-experienced patients. In addition, on January 25,
2008, the FDA approved Emend for Injection, an
intravenous therapy for the prevention of chemotherapy-induced
nausea and vomiting (CINV). Also, the Company
anticipates the FDA will take action in 2008 on the New Drug
Application (NDA) for Cordaptive, the
proposed trademark for MK-0524A, an extended-release
(ER) niacin combined with laropiprant, a novel
flushing pathway inhibitor, for cholesterol management. Further,
the Company made a supplemental filing with the FDA in January
2008 for Gardasil, for an expanded indication for women
through age 45, and anticipates making a supplemental
filing for Isentress later in 2008, for an expanded
indication for use in treatment-naïve patients. The Company
currently has seven candidates in Phase III development and
anticipates making NDA filings with respect to two of the
candidates in 2008: MK-0524B, simvastatin combined with
laropiprant and ER niacin, and MK-0364, taranabant, an
investigational medication for the treatment of obesity.
As part of implementing the new commercial model, the Company is
reengineering its core business to be more efficient with the
goal of reducing aspects of its cost base and realizing gross
margin improvement. The reengineering includes the
implementation of manufacturing and marketing cost savings
initiatives. The initial
50
phase of the global restructuring program announced in 2005 was
designed to reduce the Companys cost structure, increase
efficiency and enhance competitiveness. The scope of this
initial phase included the implementation of a new supply
strategy by the Merck Manufacturing Division over a three-year
period, focusing on establishing lean supply chains, leveraging
low-cost external manufacturing and consolidating our
manufacturing plant network. As part of this program, through
January 2008, Merck had closed, sold or ceased operations at
five manufacturing sites and two preclinical sites and
eliminated approximately 7,200 positions company-wide (comprised
of actual headcount reductions and the elimination of
contractors and vacant positions). The Company, however,
continues to hire new employees as the business requires. The
pretax costs of this restructuring program since inception
through the end of 2007 were $2.1 billion, of which
approximately 70% are non-cash, relating primarily to
accelerated depreciation for those facilities scheduled for
closure and approximately 30% represent separation and other
restructuring related costs. These costs were
$810.1 million in 2007 and are expected to be approximately
$100 million to $300 million in 2008, at which time
the initial phase of the restructuring program relating to the
manufacturing strategy is expected to be substantially complete.
Merck continues to expect the initial phase of its cost
reduction program, combined with cost savings the Company
expects to achieve in its marketing and administrative and
research and development expenses, will yield cumulative pretax
savings of $4.5 to $5.0 billion from 2006 through 2010.
On November 9, 2007, 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 already filed against the Company
in the United States. If certain participation conditions under
the Settlement Agreement are met (or waived), the Company will
pay 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 enter into the resolution process (the
Settlement Program). As a consequence of the
Settlement Agreement, the Company recorded a pretax charge of
$4.85 billion in the fourth quarter of 2007. In addition,
the Company recorded a pretax gain of $455 million relating
to insurance proceeds which the Company was awarded (or agreed
to receive pursuant to negotiated settlements) in the previously
disclosed arbitration with the Companys upper level excess
product liability insurance carriers relating to coverage for
costs incurred in the Vioxx product liability litigation.
See Note 10 to the consolidated financial statements for
further information.
Also in the fourth quarter of 2007, the Company recorded a
pretax charge of $671 million in connection with the
anticipated resolution of investigations of civil claims by
federal and state authorities relating to certain past marketing
and selling activities, including nominal pricing programs and
samples. On February 7, 2008, the Company entered into
definitive agreements resolving the investigations. See
Note 10 to the consolidated financial statements for
further information.
Earnings per common share (EPS) assuming dilution
for 2007 were $1.49 per share including the impact of the
U.S. Vioxx Settlement Agreement charge, costs
associated with the global restructuring program, the charge
related to the resolution of certain civil governmental
investigations and the gain from an insurance arbitration award
related to Vioxx product liability litigation coverage,
which collectively reduced EPS by $1.71 per share. In addition,
EPS in 2007 reflects an acquired research charge related to the
acquisition of NovaCardia, Inc. (NovaCardia),
additional reserves established solely for future legal defense
costs for Vioxx litigation and the favorable impact of
gains on sales of assets and product divestitures, as well as a
net gain on the settlements of certain patent disputes. All of
these items are discussed more fully in the notes to the
consolidated financial statements.
Competition
and the Health Care Environment
The markets in which the Company conducts its business are
highly competitive and often highly regulated. Global efforts
toward health care cost containment continue to exert pressure
on product pricing and access.
In the United States, the government expanded health care access
by enacting the Medicare Prescription Drug Improvement and
Modernization Act of 2003, which was signed into law in December
2003. Prescription
51
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 will ensure that prescription drug
costs will be controlled by competitive pressures and by
encouraging the appropriate use of medicines. The
U.S. Congress has considered, and may consider again,
proposals to increase the governments role in
pharmaceutical pricing in the Medicare program.
In addressing cost-containment pressure, the Company has made a
continuing effort to demonstrate that its medicines can help
save costs in overall patient 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.
Outside the United States, in difficult environments encumbered
by government cost-containment actions, the Company has worked
in partnership with payers to encourage them to allocate scarce
resources to optimize health care 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.
Within Europe, European institutions such as the European
Commission (EC) have recognized the economic
importance of the research-based pharmaceutical industry and the
value of innovative medicines to society. As a result, they are
working with industry representatives to improve the competitive
climate through a variety of means including market deregulation.
In order to advance the related policy debate, the EC launched
the High Level Pharmaceutical Forum (HLPF) at
the end of 2005. This initiative aims at improving the prospects
of the research-based pharmaceutical industry in Europe and thus
the health prospects of all patients who will benefit from
innovative therapies. Through an active dialogue among all
stakeholders in the health care system (from payers to
patients), this initiative is an attempt to tackle key policy
issues in Europe: (i) promoting greater pricing flexibility
for medicines; (ii) ensuring that health authorities apply
best practices for the evaluation of the relative effectiveness
of medicines; and (iii) improving greater access to
information on medicines for patients in Europe. The Company has
been actively engaged with the EC and other stakeholders in
order to achieve a successful outcome for the HLPF that would
help European patients gain greater and quicker access to its
medicines.
The Company is committed to improving access to medicines and
enhancing the quality of life for people around the world. 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. In May 2005, the Company initiated a partnership with
the Peoples Republic of China (focused initially in
Sichuan Province) to help strengthen Chinas response to
the HIV epidemic.
To further catalyze access to HIV medicines in developing
countries, under price reduction guidelines that the Company
announced in 2001, Merck 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, 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. By
the end of 2007, more than 720,000 people living with HIV
and AIDS in 81 developing countries and territories were
estimated to be on treatment with antiretroviral regimens
containing Crixivan, Stocrin or Atripla. Through these
and other actions, Merck is working independently and with
partners in the public and private sectors alike to focus on the
most critical barriers to access to medicines in the developing
world: the need for sustainable financing, increased
international assistance and additional investments in
education, training and health infrastructure and capacity in
developing countries.
As previously disclosed, in May 2007 the government of Brazil
issued a compulsory license for Stocrin, which makes it
possible for Stocrin to be produced by a generic
manufacturer despite the Companys patent protection on
Stocrin. In November 2006, the government of Thailand
stated that it had issued a compulsory license for
Stocrin, despite the Companys patent protection on
Stocrin, which the government of Thailand contends makes
it possible for Stocrin to be produced by a generic
manufacturer. The Company remains committed to exploring
mutually acceptable agreements with the governments of Brazil
and Thailand.
52
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 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 U.S. states requiring security breach
notification.
Although no one can predict the outcome of these and other
legislative, regulatory and advocacy initiatives, the Company is
well positioned to respond to the evolving health care
environment and market forces.
As patents on certain of the Companys products expire,
Merck has entered into, and may continue to enter into,
authorized generic agreements which reduce on a short-term
limited basis, the impact of post-patent expiry sales erosion
when these medicines become available in generic form.
The Company anticipates that the worldwide trend toward
cost-containment will continue, resulting in ongoing pressures
on health care budgets. 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.
Acquisitions
In September 2007, Merck completed the acquisition of NovaCardia
for $366.4 million which was paid through the issuance of
Merck common stock. NovaCardia is a clinical-stage
pharmaceutical company focused on cardiovascular disease. This
acquisition added rolofylline (MK-7418), NovaCardias
investigational Phase III compound for acute heart failure,
to Mercks pipeline. In connection with the acquisition,
the Company recorded a charge of $325.1 million for
acquired research associated with rolofylline as at the
acquisition date, technological feasibility had not been
established and no alternative future use existed. The charge
was not deductible for tax purposes. The ongoing activity with
respect to the future development of rolofylline is not expected
to be material to the Companys research and development
expenses.
In December 2006, Merck completed the acquisition of Sirna
Therapeutics, Inc. (Sirna) for approximately
$1.1 billion. Sirna is a biotechnology company that is a
leader in developing a new class of medicines based on RNA
interference (RNAi) technology, which could
significantly alter the treatment of disease. In connection with
the acquisition, the Company recorded a charge of
$466.2 million for acquired research associated with
Sirnas compounds currently under development, which
related to the development of treatments for both the hepatitis
B and hepatitis C viruses, which are in preclinical
development, as well as licensing agreements held by Sirna. The
charge was not deductible for tax purposes. The ongoing activity
with respect to each of these compounds under development is not
expected to be material to the Companys research and
development expenses. The acquisition of Sirna is expected to
increase Mercks ability to use RNAi technology to turn off
a targeted gene in a human cell, potentially rendering
inoperative a gene responsible for triggering a specific disease.
In June 2006, Merck acquired GlycoFi, Inc.
(GlycoFi), a privately-held biotechnology company
that is a leader in the field of yeast glycoengineering, which
is the addition of specific carbohydrate modifications to the
proteins in yeast, and optimization of biologic drug molecules,
for $373 million in cash ($400 million purchase price
net of $25 million of shares already owned and net
transaction costs). The Company recorded a $296.3 million
charge for acquired research in connection with the acquisition
which was not deductible for tax purposes. In May 2006, Merck
acquired Abmaxis, Inc. (Abmaxis), a privately-held
biopharmaceutical company dedicated to the discovery and
optimization of monoclonal antibody products for human
therapeutics and diagnostics, for $80 million in cash.
Substantially all of the purchase price was allocated to an
intangible asset relating to Abmaxis technology platform.
While each of the acquisitions has independent scientific
merits, the combination of the GlycoFi and Abmaxis platforms is
potentially synergistic, giving Merck the ability to operate
across the entire spectrum of therapeutic antibody discovery,
development and commercialization.
See Note 4 to the consolidated financial statements for
further discussion of these acquisitions.
53
Operating
Results
Sales
Worldwide sales totaled $24.2 billion for 2007, an increase
of 7%, primarily attributable to a 4% volume increase, a 2%
favorable effect from foreign exchange and a less than 1%
favorable effect from price changes. Sales performance over 2006
reflects strong growth of the Companys vaccines, including
Gardasil, a vaccine to help prevent cervical cancer,
pre-cancerous and low-grade lesions, vulvar and vaginal
pre-cancers, and genital warts caused by HPV types 6, 11, 16 and
18, Varivax, a vaccine to help prevent chickenpox,
RotaTeq, a vaccine to help protect against rotavirus
gastroenteritis in infants and children, and Zostavax, a
vaccine to help prevent shingles (herpes zoster). Also
contributing to sales growth was strong performance of
Singulair, a medicine indicated for the chronic treatment
of asthma and the relief of symptoms of allergic rhinitis,
higher sales of Januvia and sales of Janumet for
the treatment of type 2 diabetes, as well as increased sales of
Cozaar/Hyzaar for hypertension
and/or heart
failure. Sales growth was partially offset by lower sales of
Zocor, the Companys statin for modifying
cholesterol, and Proscar, a urology product for the
treatment of symptomatic benign prostate enlargement.
Mercks U.S. market exclusivity for Zocor and
Proscar both expired in June 2006. Also offsetting sales
growth in 2007 were lower revenues from the Companys
relationship with AstraZeneca LP (AZLP) and lower
sales of Fosamax and Fosamax Plus D for the
treatment and, in the case of Fosamax, prevention of
osteoporosis.
Domestic sales increased 7% over 2006, while foreign sales also
grew 7%. Foreign sales represented 39% of total sales in 2007.
Domestic and foreign sales growth reflects the strong
performance of the Companys vaccines and growth in
Singulair. In addition, domestic sales in particular
benefited from higher sales of Januvia. These increases
were partially offset by the loss of Zocor and Proscar
market exclusivity. Foreign sales were also negatively
affected by continued generic erosion related to Fosamax
products.
Worldwide sales for 2006 increased 3% in total over 2005
primarily driven by strong growth of Singulair and
vaccines, as well as higher revenues from the Companys
relationship with AZLP and increased sales of
Cozaar/Hyzaar. In addition, sales in 2006 reflected
certain supply sales, including the Companys arrangement
with Dr. Reddys Laboratories
(Dr. Reddys) for the sale of generic
simvastatin. These increases were partially offset by lower
sales of Zocor and Proscar. Foreign exchange and
price changes had virtually no impact on sales growth in 2006.
Foreign sales represented 39% of total sales for 2006.
54
Sales(1)
of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Singulair
|
|
$
|
4,266.3
|
|
|
$
|
3,579.0
|
|
|
$
|
2,975.6
|
|
Cozaar/Hyzaar
|
|
|
3,350.1
|
|
|
|
3,163.1
|
|
|
|
3,037.2
|
|
Fosamax
|
|
|
3,049.0
|
|
|
|
3,134.4
|
|
|
|
3,191.2
|
|
Zocor
|
|
|
876.5
|
|
|
|
2,802.7
|
|
|
|
4,381.7
|
|
Cosopt/Trusopt
|
|
|
786.8
|
|
|
|
697.1
|
|
|
|
617.2
|
|
Primaxin
|
|
|
763.5
|
|
|
|
704.8
|
|
|
|
739.6
|
|
Januvia
|
|
|
667.5
|
|
|
|
42.9
|
|
|
|
-
|
|
Cancidas
|
|
|
536.9
|
|
|
|
529.8
|
|
|
|
570.0
|
|
Vasotec/Vaseretic
|
|
|
494.6
|
|
|
|
547.2
|
|
|
|
623.1
|
|
Maxalt
|
|
|
467.3
|
|
|
|
406.4
|
|
|
|
348.4
|
|
Proscar
|
|
|
411.0
|
|
|
|
618.5
|
|
|
|
741.4
|
|
Propecia
|
|
|
405.4
|
|
|
|
351.8
|
|
|
|
291.9
|
|
Arcoxia
|
|
|
329.1
|
|
|
|
265.4
|
|
|
|
218.2
|
|
Crixivan/Stocrin
|
|
|
310.2
|
|
|
|
327.3
|
|
|
|
348.4
|
|
Emend
|
|
|
204.2
|
|
|
|
130.8
|
|
|
|
87.0
|
|
Invanz
|
|
|
190.2
|
|
|
|
139.2
|
|
|
|
93.7
|
|
Janumet
|
|
|
86.4
|
|
|
|
-
|
|
|
|
-
|
|
Other pharmaceutical
(2)
|
|
|
2,465.9
|
|
|
|
2,780.5
|
|
|
|
2,295.1
|
|
|
|
|
|
|
19,660.9
|
|
|
|
20,220.9
|
|
|
|
20,559.7
|
|
|
|
Vaccines:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gardasil
|
|
|
1,480.6
|
|
|
|
234.8
|
|
|
|
-
|
|
RotaTeq
|
|
|
524.7
|
|
|
|
163.4
|
|
|
|
-
|
|
Zostavax
|
|
|
236.0
|
|
|
|
38.6
|
|
|
|
-
|
|
ProQuad/M-M-R II/Varivax
|
|
|
1,347.1
|
|
|
|
820.1
|
|
|
|
597.4
|
|
Hepatitis vaccines
|
|
|
279.9
|
|
|
|
248.5
|
|
|
|
194.5
|
|
Other vaccines
|
|
|
409.9
|
|
|
|
354.0
|
|
|
|
311.4
|
|
|
|
|
|
|
4,278.2
|
|
|
|
1,859.4
|
|
|
|
1,103.3
|
|
|
|
Other
(4)
|
|
|
258.6
|
|
|
|
555.7
|
|
|
|
348.9
|
|
|
|
|
|
$
|
24,197.7
|
|
|
$
|
22,636.0
|
|
|
$
|
22,011.9
|
|
|
|
|
(1)
|
Presented net of discounts and returns.
|
|
(2)
|
Other pharmaceutical primarily includes sales of other human
pharmaceutical products and revenue from the Companys
relationship with AZLP primarily relating to sales of
Nexium, as well as Prilosec. Revenue from AZLP was
$1.7 billion, $1.8 billion and $1.7 billion in
2007, 2006 and 2005, respectively. In 2006, other pharmaceutical
also reflected certain supply sales, including supply sales
associated with the Companys arrangement with
Dr. Reddys for the sale of generic simvastatin.
|
|
(3)
|
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.
|
|
(4)
|
Other primarily includes other human and animal health joint
venture supply sales and other miscellaneous revenues.
|
The Companys pharmaceutical products include therapeutic
and preventive agents, generally sold by prescription, for the
treatment of human disorders. Among these are Singulair,
a leukotriene receptor antagonist for the chronic treatment of
asthma and for the relief of symptoms of allergic rhinitis;
Cozaar, Hyzaar, Vasotec and Vaseretic, the
Companys most significant hypertension
and/or heart
failure products; Fosamax and Fosamax Plus D
(marketed as Fosavance throughout the European Union
(EU) and as Fosamac in Japan), for the
treatment and, in the case of Fosamax, prevention of
osteoporosis; Zocor, Mercks atherosclerosis
product; Cosopt and Trusopt,
55
Mercks largest-selling ophthalmological products;
Primaxin and Cancidas, anti-bacterial/anti-fungal
products; Januvia and Janumet, for the treatment
of type 2 diabetes; Maxalt, an acute migraine product;
Proscar, a urology product for the treatment of
symptomatic benign prostate enlargement; Propecia, a
product for the treatment of male pattern hair loss; Arcoxia,
for the treatment of arthritis and pain; Crixivan and
Stocrin, for the treatment of HIV infection; Emend,
for the prevention of chemotherapy-induced and
post-operative nausea and vomiting; and Invanz, for the
treatment of infection.
The Companys vaccine products include Gardasil, a
vaccine to help prevent cervical cancer, pre-cancerous and
low-grade lesions, vulvar and vaginal pre-cancers, and genital
warts caused by HPV types 6, 11, 16 and 18; RotaTeq, a
vaccine to help protect against rotavirus gastroenteritis in
infants and children; Zostavax, a vaccine to help prevent
shingles (herpes zoster); Varivax, a vaccine to help
prevent chickenpox; ProQuad, a pediatric combination
vaccine against measles, mumps, rubella and varicella; and
M-M-R II, a vaccine against measles, mumps and rubella.
Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Pharmaceutical segment revenues
|
|
$
|
20,101.5
|
|
|
$
|
20,374.8
|
|
|
$
|
20,678.8
|
|
Vaccines segment
revenues(1)
|
|
|
3,837.6
|
|
|
|
1,705.5
|
|
|
|
984.2
|
|
Other segment
revenues(2)
|
|
|
162.0
|
|
|
|
162.1
|
|
|
|
161.8
|
|
Other
revenues(3)
|
|
|
96.6
|
|
|
|
393.6
|
|
|
|
187.1
|
|
|
|
Total revenues
|
|
$
|
24,197.7
|
|
|
$
|
22,636.0
|
|
|
$
|
22,011.9
|
|
|
|
|
(1)
|
In accordance with segment reporting requirements, Vaccines
segment revenues exclude $440.6 million,
$153.9 million and $119.1 million in 2007, 2006 and
2005, respectively, of vaccines sales by certain
non-U.S.
subsidiaries managed by and included in the Pharmaceutical
segment.
|
|
(2)
|
Includes other non-reportable human and animal health
segments.
|
|
(3)
|
Other revenues are primarily comprised of miscellaneous
corporate revenues, sales related to divested products or
businesses and other supply sales not included in segment
results.
|
Pharmaceutical
Segment Revenues
Sales of the Pharmaceutical segment declined 1% in both 2007 and
2006 primarily due to declines in Zocor and Proscar
post patent expiration, partially offset by increases in
Singulair, Cozaar/Hyzaar and for 2007, higher sales of
Januvia and sales of Janumet.
Worldwide sales of Singulair, a medicine indicated for
the chronic treatment of asthma and the relief of symptoms of
allergic rhinitis, grew 19% reaching $4.3 billion in 2007
and rose 20% to $3.6 billion in 2006, reflecting the
continued demand for asthma and seasonal and perennial allergic
rhinitis medications. Singulair continues to be the
number one prescribed product in the U.S. respiratory
market. In April 2007, the FDA approved a new indication for
Singulair for the prevention of exercise-induced
bronchoconstriction in patients 15 years of age and older.
Singulair is the first and only oral tablet approved in
the United States for this use. In January 2008, Singulair
was approved in Japan for the treatment of allergic rhinitis.
Global sales of Cozaar, and its companion agent Hyzaar
(a combination of Cozaar and hydrochlorothiazide),
for the treatment of hypertension increased 6% to
$3.4 billion in 2007 and grew 4% to $3.2 billion in
2006. Cozaar and Hyzaar are among the leading
members of the growing angiotensin receptor blocker class of
medicines.
Worldwide sales of Fosamax and Fosamax Plus D, for
the treatment and, in the case of Fosamax, prevention of
osteoporosis, declined 3% in 2007 to $3.0 billion and
decreased 2% in 2006 to $3.1 billion. U.S. sales of
Fosamax and Fosamax Plus D were $2.0 billion
in 2007, essentially flat compared with 2006. Sales outside of
the United States were affected by the availability of generic
alendronate sodium products in several key markets. Fosamax
lost market exclusivity in the United States in February
2008. Fosamax Plus D will lose marketing exclusivity in
the United States in April 2008. As a result of these events,
the Company expects significant declines in U.S. Fosamax
and Fosamax Plus D sales.
56
Worldwide sales of Zocor, Mercks statin for
modifying cholesterol, declined 69% in 2007 and decreased 36% in
2006. Sales of Zocor in both periods were significantly
negatively affected by the continuing impact of the loss of
U.S. market exclusivity in June 2006.
In February 2006, the Company entered into an agreement with
Dr. Reddys that authorized the sale of generic
simvastatin. Under the terms of the agreement, the Company was
reimbursed on a cost-plus basis by Dr. Reddys for
supplying finished goods and received a share of the net profits
recorded by Dr. Reddys. In 2006, Merck recorded
$208.9 million of revenue associated with the
Dr. Reddys arrangement for simvastatin. Merck
continues to manufacture simvastatin for branded Zocor,
Vytorin and the Companys investigational compound
MK-0524B.
Global sales of Januvia, the first dipeptidyl peptidase-4
(DPP-4) inhibitor approved in the United States for
use in the treatment of type 2 diabetes, were
$667.5 million in 2007 compared with $42.9 million in
2006. Januvia was approved by the FDA in October 2006 and
by the EC in March 2007. DPP-4 inhibitors represent a new 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. By the end of 2007, Januvia
was approved in 69 countries and territories, had been
launched in more than 40 of those and was under review in more
than a dozen others. Since the October 2006 U.S. approval,
managed care formularies have made Januvia widely
available.
In October 2007, Merck announced that the FDA approved expanded
labeling for Januvia. The new regimens with Januvia
described in the updated labeling include, as an adjunct to
diet and exercise, initial therapy in combination with
metformin; add-on therapy to a sulfonylurea (glimepiride) when
the single agent alone does not provide adequate glycemic
control; and add-on therapy to the combination of a sulfonylurea
(glimepiride) and metformin when dual therapy does not provide
adequate glycemic control.
In March 2007, the FDA approved Janumet, Mercks
oral antihyperglycemic agent that combines Januvia with
metformin in a single tablet to address all three key defects of
type 2 diabetes. Janumet has been 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. By
the end of 2007, Janumet was approved in seven countries.
The Company is seeking the necessary approvals to make the
medicine available for use in many other countries around the
world. Global sales for Janumet were $86.4 million
in 2007.
In October 2007, the FDA granted Isentress (raltegravir,
previously known as MK-0518) 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 is the first
medicine to be approved in a new 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. The FDAs decision was based on a
24-week analysis of clinical trials in which Isentress,
in combination with optimized background therapy in
treatment-experienced patients, provided significant reductions
in HIV RNA viral load and increases in CD4 cell counts. In
February 2008, the Company announced 48 week data that
demonstrated Isentress, in combination with other
anti-HIV medicines, maintained significant HIV-1 viral load
suppression and increased CD4 cell counts through 48 weeks
of therapy compared to placebo in combination with anti-HIV
medicines, in two Phase III studies of
treatment-experienced patients failing antiretroviral therapies.
Patients in the studies had HIV resistant to at least one drug
in each of three classes of oral antiretroviral medicines. By
the end of 2007, the medicine was approved for use in the EU,
Canada and Mexico. Merck is also conducting Phase III
clinical trials of Isentress in the treatment-naïve
(previously untreated) HIV population. Potent antiretroviral
activity has been demonstrated with no significant changes in
serum lipids at week 48 and Isentress was generally well
tolerated in patients. The Company anticipates making a
supplemental filing with FDA for the treatment-naïve
indication in 2008. Sales for Isentress were
$41.3 million in 2007.
Other products experiencing growth in 2007 include Cosopt
to treat elevated intraocular pressure in patients with
open-angle glaucoma or ocular hypertension, Emend for
prevention of acute and delayed nausea and vomiting associated
with moderately and highly emetogenic cancer chemotherapy, as
well as for the treatment of post-operative nausea and vomiting,
Arcoxia for the treatment of arthritis and pain,
Maxalt to treat migraine pain,
57
Primaxin, an antibiotic, Propecia for male pattern
hair loss and Invanz for the treatment of selected
moderate to severe infection in adults.
The patent that provides U.S. market exclusivity for
Trusopt and Cosopt expires in October 2008. After
such time, the Company expects significant declines in
U.S. sales of these products.
Proscar, Mercks urology product for the treatment
of symptomatic benign prostate enlargement, lost market
exclusivity in the United States in June 2006. Mercks
U.S. sales of Proscar declined 76% in 2007 and 34%
in 2006. The basic patent for Proscar also covers
Propecia, however, Propecia is protected by
additional patents which expire in October 2013.
In April 2007, the FDA issued a non-approvable letter in
response to the Companys NDA for Arcoxia
(etoricoxib) for the symptomatic treatment of
osteoarthritis. Arcoxia had been under review by the FDA
as an investigational selective COX-2 inhibitor since the NDA
was submitted in December 2003 for a 60 mg once-daily dose
along with review of a separate related NDA for a 30 mg
once-daily dose submitted in April 2004. In the non-approvable
letter, the FDA indicated that Merck would need to provide
additional data in support of the
benefit-to-risk
profile for the proposed doses of Arcoxia in order to
gain approval. Merck continues to evaluate the options available
with regard to a potential path forward in the United States.
Arcoxia is currently available in 65 countries in Europe,
Latin America, the Asia-Pacific region and Middle East/Northern
Africa. Merck will continue to market Arcoxia outside the
United States, where it has been approved for a broad range of
indications, including osteoarthritis.
In November 2007, Merck and GlaxoSmithKline (GSK)
announced that they had entered into an agreement for
over-the-counter
marketing rights for Mevacor (lovastatin). Mevacor
is part of a class of cholesterol-reducing medicines known
as statins. The U.S. patent for Mevacor
expired in 2001. In January 2008, Merck received a
non-approvable letter from the FDA to its NDA seeking approval
for
over-the-counter
Mevacor. The FDA indicated in its letter that it would
require a revised label and additional data from Merck in order
to gain marketing approval. As a consequence of the FDAs
non-approvable letter, the Company terminated the agreement with
GSK.
Vaccines
Segment Revenues
Sales of the Vaccines segment were $3.8 billion in 2007,
$1.7 billion in 2006 and $984.2 million in 2005. The
increases in 2007 and 2006 are the result of new product
launches in the latter part of 2006 and the continued success of
in-line vaccines. The following discussion of vaccines includes
total vaccines sales, of which the vast majority are included in
the Vaccines segment and the remainder, representing certain
sales of vaccines by
non-U.S. subsidiaries,
are managed by and included in the Pharmaceutical segment. These
amounts do not reflect 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 reflected in Equity income from affiliates.
Total vaccine sales as recorded by Merck in 2007 (including the
$3.8 billion reflected in the Vaccines segment and the
$440.6 million reflected in the Pharmaceutical segment)
were $4.3 billion compared with $1.9 billion in 2006
and $1.1 billion in 2005. Growth in vaccines was led by
Gardasil, as well as by the strong performance of
Varivax, RotaTeq and Zostavax.
Total sales as recorded by Merck for Gardasil were
$1.5 billion in 2007, which included initial purchases by
many states through the U.S. Centers for Disease Control
and Prevention (CDC) Vaccines for Children program,
compared with $234.8 million in 2006. Gardasil was
approved by the FDA in June 2006 and is the only approved
vaccine in the United States to help prevent cervical cancer,
pre-cancerous and low-grade lesions, vulvar and vaginal
pre-cancers, and genital warts caused by HPV types 6, 11, 16 and
18. Gardasil was approved for use in the EU in September
2006. Gardasil is a three dose, intra muscular vaccine
given over six months, approved for 9- to
26-year-old
girls and women. By the end of 2007, Gardasil was
approved in 93 countries, many under fast-track or expedited
review, with launches under way in 76 of those countries. The
vaccine remains under review in approximately 40 other countries
and territories. The Company is a party to certain third party
license agreements with respect to Gardasil (including a
cross-license and settlement agreement with GSK). As a result of
these agreements, the Company pays royalties on worldwide
Gardasil sales of approximately 24% to 26% in the
aggregate, which are included in Materials and production costs.
58
In March 2007, the CDC adopted the unanimous recommendation of
its Advisory Committee on Immunization Practices
(ACIP) for the use of Gardasil. In June 2006,
the ACIP voted unanimously to recommend that girls and women 11
to 26 years old be vaccinated with Gardasil. The
ACIP recommended that 9- and
10-year-old
females be vaccinated with Gardasil at the discretion of
their physicians. The vaccination guidelines, published in the
CDCs Morbidity and Mortality Weekly Report,
finalize the provisional recommendations issued by the ACIP.
In May 2007, the FDA accepted for standard review a supplemental
Biologics License Application (sBLA) for Gardasil
which includes data on protection against vaginal and vulvar
cancer caused by HPV types 16 and 18 and data on immune memory.
In July 2007, the FDA accepted for standard review an sBLA for
the prevention of cervical disease caused by non-vaccine types
(cross protection). FDA action on both the vaginal and vulvar
cancer sBLA and the cross protection sBLA is expected in the
second quarter of 2008.
In November 2007, the Company presented data at the
International Papillomavirus Conference about the efficacy of
Gardasil in women through age 45. In January 2008,
Merck submitted an sBLA with the FDA seeking an expanded
indication for the use of Gardasil in women through
age 45.
Clinical studies to evaluate the efficacy of Gardasil in
males 16 to 26 years of age continue and the Company also
expects to submit to the FDA an indication for males 16 to
26 years of age in 2008.
RotaTeq, Mercks vaccine to help protect against
rotavirus gastroenteritis in infants and children, achieved
worldwide sales as recorded by Merck of $524.7 million in
2007 compared with $163.4 million in 2006. The FDA approved
RotaTeq in February 2006. By the end of 2007,
RotaTeq was approved in 70 countries and was launched in
42.
In December 2007, the Company announced that the prescribing
information for RotaTeq now includes data showing that
RotaTeq reduced hospitalizations and emergency department
visits caused by the G9P1A[8] rotavirus serotype by 100% (zero
cases were seen in those who received RotaTeq compared
with 14 cases in placebo recipients). These data are from a
post-hoc analysis of healthcare utilization data from more than
68,000 infants in the Rotavirus Efficacy and Safety Trial
(REST), one of the largest pre-licensure vaccine clinical trials
ever conducted.
In July 2007, the Company announced that both Gardasil
and RotaTeq have been adopted by all 55
U.S.-based
immunization projects of the CDC Vaccines for Children program.
The Vaccines for Children program provides vaccines to children
who are Medicaid-eligible, uninsured, underinsured (when seen at
a Federally Qualified Health Center or Rural Health Clinic), or
Native American.
As previously disclosed, the Company has been working to resolve
an issue related to the bulk manufacturing process for the
Companys varicella zoster virus
(VZV)-containing vaccines. Manufacturing of bulk
varicella has resumed, however product will not be available
until the changes have been fully validated and approved by the
applicable regulatory agencies. This situation does not affect
the quality of any of Mercks VZV-containing vaccines
currently on the market, any lots of vaccine in inventory that
are ready for release to the market or any vaccines which will
be filled and finished from existing VZV bulk. ProQuad,
the Companys combination vaccine that protects against
measles, mumps, rubella and chickenpox, 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 $264.4 million
for 2007 compared with $234.8 million in 2006. Mercks
sales of Varivax, the Companys vaccine for the
prevention of chickenpox (varicella), were $854.9 million
in 2007 compared with $327.9 million in 2006 as the
ACIPs June 2006 second-dose recommendation continued to be
implemented. Varivax is the only vaccine available in the
United States to help protect against chickenpox.
Sales of Zostavax, the Companys vaccine to help
prevent shingles (herpes zoster) recorded by Merck were
$236.0 million in 2007 compared with $38.6 million in
2006. Zostavax was approved by the FDA as well as by
regulatory authorities in Australia and the EU in May 2006. The
vaccine is the first and only medical option for the prevention
of shingles.
In December 2007, Merck announced that it had initiated a
voluntary recall of 11 lots of its Haemophilus influenzae
type B vaccine, PedvaxHIB [Haemophilus b Conjugate
Vaccine (Meningococcal Protein Conjugate)],
59
and two lots of its combination Haemophilus influenzae
type B/ hepatitis B vaccine, Comvax [Haemophilus b
Conjugate (Meningococcal Protein Conjugate) and Hepatitis B
(Recombinant) vaccine]. The recall was specific to these 13 lots
and did not affect any other vaccines manufactured by Merck.
Merck conducted the recall because it could not assure sterility
of these specific vaccine lots. The potential contamination of
these specific lots was identified as part of the Companys
standard evaluation of its manufacturing processes. Sterility
tests of the vaccine lots that are the subject of this recall
have not found any contamination in the vaccine. The efficacy of
the vaccine was not affected. Costs associated with the recall
were not significant.
Merck temporarily stopped accepting orders for pediatric and
adult vial formulations of Vaqta, a vaccine against
hepatitis A, on October 1, 2007 in the United States. Merck
will continue to accept orders for the adult formulation of
Vaqta in pre-filled syringes until supplies are depleted.
This situation is the result of manufacturing changes which
require regulatory review and approval prior to product
distribution. Until the manufacturing changes are approved, the
availability of both pediatric and adult formulations of
Vaqta will be affected. In the United States, the Company
expects the pediatric formulation of Vaqta will be
available again early in third quarter 2008. The adult
formulation of Vaqta in vials is expected to be available
again in fourth quarter 2008. Outside of the United States, the
impact of this situation will vary depending on inventory levels
and the regulatory requirements in each market. This situation
does not in any way impact the quality or safety of Vaqta
available on the market. Sales of Vaqta recorded by
Merck were $148.5 million in 2007.
Costs,
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
|
|
Materials and production
|
|
$
|
6,140.7
|
|
|
|
2
|
%
|
|
$
|
6,001.1
|
|
|
|
17
|
%
|
|
$
|
5,149.6
|
|
Marketing and administrative
|
|
|
7,556.7
|
|
|
|
−7
|
%
|
|
|
8,165.4
|
|
|
|
14
|
%
|
|
|
7,155.5
|
|
Research and development
|
|
|
4,882.8
|
|
|
|
2
|
%
|
|
|
4,782.9
|
|
|
|
24
|
%
|
|
|
3,848.0
|
|
Restructuring costs
|
|
|
327.1
|
|
|
|
*
|
|
|
|
142.3
|
|
|
|
−56
|
%
|
|
|
322.2
|
|
Equity income from affiliates
|
|
|
(2,976.5
|
)
|
|
|
30
|
%
|
|
|
(2,294.4
|
)
|
|
|
34
|
%
|
|
|
(1,717.1
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
4,850.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other (income) expense, net
|
|
|
46.2
|
|
|
|
*
|
|
|
|
(382.7
|
)
|
|
|
|
*
|
|
|
(110.2
|
)
|
|
|
|
|
$
|
20,827.0
|
|
|
|
27
|
%
|
|
$
|
16,414.6
|
|
|
|
12
|
%
|
|
$
|
14,648.0
|
|
|
Materials
and Production
In 2007, materials and production costs increased primarily due
to an increase in sales. This increase was partially offset by
lower costs related to the global restructuring program. In
2007, $483.1 million of restructuring costs comprised of
$460.6 million of accelerated depreciation associated with
the planned sale or closure of certain of the Companys
manufacturing facilities and $22.5 million of asset
impairment charges were recorded compared with
$736.4 million in 2006 representing $707.3 million of
accelerated depreciation and $29.1 million of asset
impairments. (See Note 3 to the consolidated financial
statements.) The impact from inflation on materials and
production costs in 2007 was not significant.
In 2006, materials and production costs increased 17% compared
with a 3% increase in sales primarily reflecting higher global
restructuring costs. Materials and production costs in 2006 also
included stock option expense of $23.8 million, as a result
of the adoption of Financial Accounting Standards Board
(FASB) Statement No. 123R, Share-Based
Payment (FAS 123R) (see Note 12 to the
consolidated financial statements). Additionally, materials and
production costs for 2006 included a 1% unfavorable impact from
inflation.
Gross margin was 74.6% in 2007 compared with 73.5% in 2006 and
76.6% in 2005. The restructuring charges noted above had an
unfavorable impact of 2.0 percentage points in 2007,
3.3 percentage points in 2006 and 0.8 percentage
points in 2005. Gross margin in 2007 reflects a slight
unfavorable impact from changes in product mix and the positive
impact of manufacturing efficiencies. Gross margin in 2006
reflects the unfavorable impact of changes in product mix,
including the decline in Zocor sales as a result of the
loss of U.S. market exclusivity in June 2006.
60
Marketing
and Administrative
In 2007, marketing and administrative expenses declined 7%
compared with 2006 including a 2% unfavorable effect from
foreign exchange and a 2% unfavorable effect from inflation.
Marketing and administrative expenses in 2007 reflect the
necessary support for new and anticipated product launches.
Marketing and administrative expenses in 2007 and 2006 included
$280 million and $673 million, respectively, of
additional reserves solely for future Vioxx legal defense
costs. In addition, marketing and administrative expenses for
2007 included a $455 million gain from an insurance
arbitration award related to Vioxx product liability
litigation coverage. (See Note 10 to the consolidated
financial statements for more information on
Vioxx-related matters). Marketing and administrative
expenses in 2006 also reflected a $48 million charge for
Fosamax legal defense costs.
In 2006, marketing and administrative expenses increased 14%,
including a 3% unfavorable effect from inflation. Marketing and
administrative expenses reflected $721 million of
additional reserves for Vioxx and Fosamax legal
defense costs, expenses associated with the launches of three
new vaccines and Januvia in the United States, as
well as stock option expense of $143.7 million.
Research
and Development
Research and development expenses increased 2% in 2007 and 24%
in 2006 including unfavorable effects from inflation of 2% in
both 2007 and 2006. Research and development expenses in 2007
also reflected significant growth in the number of compounds
entering clinical trials from internal projects as well as
integration of late stage acquisitions. Research and development
expenses in 2007 included $325.1 million of acquired
research expense related to the NovaCardia acquisition and a
$75 million initial milestone payment associated with the
licensing of deforolimus (MK-8669), a Phase III compound
the Company is developing with ARIAD Pharmaceuticals, Inc.
(ARIAD). In 2006, research and development expenses
included $466.2 million of acquired research related to the
acquisition of Sirna, as well as $296.3 million of acquired
research associated with the GlycoFi acquisition. In addition,
research and development expenses for 2006 reflected accelerated
depreciation costs of $56.5 million related to the closure
of research facilities in connection with the global
restructuring program.
During 2007, the Company continued the advancement of drug
candidates through the pipeline, including the FDA approvals for
Janumet and Isentress. The Companys research
pipeline chart is included in Item 1.
Business Research and Development above.
In addition, on January 25, 2008, the FDA approved Emend
(fosaprepitant dimeglumine) for Injection, 115mg, for the
prevention of CINV. Emend for Injection provides a new
option for day one oral Emend (125 mg) as part of
the recommended
three-day
regimen that delivers five days of protection from nausea and
vomiting. Prior to the FDA decision, the EU on January 11,
2008 granted marketing approval for Emend for Injection,
known as IVEmend in the EU, an action that applies to all
27 EU member countries as well as Norway and Iceland.
In August 2007, the FDA accepted for standard review the NDA for
Cordaptive (the proposed trademark for MK-0524A, ER
niacin/laropiprant). Cordaptive is an investigational
compound containing Mercks own ER niacin and laropiprant,
a novel flushing pathway inhibitor designed to reduce flushing
often associated with niacin treatment. Niacin is widely
recognized as an effective lipid-modifying therapy; however,
treatment has been limited as a result of the flushing side
effect. Data included in the application support the proposed
use of Cordaptive, either alone or with a statin, as
adjunctive therapy to diet for the treatment of elevated
low-density lipoprotein cholesterol (LDL-C or
bad cholesterol), low high-density lipoprotein
cholesterol (HDL-C or good cholesterol)
and elevated triglyceride levels. All are conditions associated
with increased risk of heart disease.
In September 2007, the Company announced Phase III clinical
study results in which Cordaptive reduced LDL-C levels,
increased HDL-C levels and reduced triglyceride levels compared
to placebo. Patients treated with Cordaptive also
reported significantly less flushing compared to those patients
treated with ER niacin alone. Cordaptive was administered
as 1- and 2- gram doses alone or added to ongoing statin therapy
in patients with dyslipidemia. Across weeks 12 to 24 of the
study, 2 grams (two 1-gram tablets) of Cordaptive
produced significant percent changes from baseline in LDL-C
levels (-18%), HDL-C levels (20%) and triglyceride levels (-26%)
relative to placebo. In addition, patients treated with
Cordaptive reported significantly less flushing both at
the initiation of therapy and during maintenance therapy,
compared to patients on ER niacin alone. Merck anticipates FDA
action in April 2008. The Company is also moving forward with
filings in countries outside the United States.
61
The Company currently has seven drug candidates in
Phase III development and anticipates making NDA filings
with respect to two of the candidates in 2008:
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. In November 2007, the Company presented
results of a study at the American Heart Association 2007
Scientific Sessions which demonstrate ER niacin/laropiprant
(Cordaptive) coadministered with simvastatin had
significant additive effects on reducing LDL-C, increasing HDL-C
and reducing triglyceride levels in a Phase III study with
patients with primary hypercholesterolemia or mixed
dyslipidemia. In the study, 2 g (two 1-gram tablets) of
Cordaptive coadministered with simvastatin (pooled across
20 mg or 40 mg doses) reduced LDL-C by 48%, increased
HDL-C by 28%, and reduced triglyceride levels by 33% following
12 weeks of treatment. The primary study endpoint was LDL-C
reduction; secondary endpoints included increased HDL-C,
triglyceride reduction and effects on other lipoproteins. A 1 g
tablet of Cordaptive contains 1 g of Merck-developed ER
niacin and 20 mg of laropiprant, a novel flushing pathway
inhibitor that is designed to reduce the flushing associated
with niacin. The Company plans to file MK-0524B with the FDA in
2008.
MK-0364, taranabant, is an investigational highly selective
cannabinoid-1 receptor inverse agonist that in early clinical
studies has demonstrated dose-related weight loss versus
placebo. Taranabant was generally well-tolerated, however, as
reported with another cannabinoid-1 receptor inverse agonist,
some dose-dependent psychiatric adverse events were observed.
The Company previously announced the initiation of a targeted
Phase III program in 2006. Merck anticipates filing an NDA
in 2008.
MK-0974, an investigational oral calcitonin gene-related peptide
receptor antagonist, utilizes a new mechanism for the treatment
of migraines that has demonstrated efficacy at least comparable
to triptans in early clinical studies. In June 2007, clinical
results from a Phase II study were presented for the first
time at the American Headache Society annual meeting which
showed that MK-0974 significantly improved migraine pain relief
two hours after dosing compared to placebo, and the relief was
sustained through 24 hours. MK-0974 was generally well
tolerated in the study. In addition to the measure of migraine
pain, MK-0974 provided relief of migraine-associated symptoms,
including nausea and sensitivity to light and sound, and
improved functional disability two hours post dose, as well as
reduced patients need for rescue medication. The drug
candidate entered Phase III development during 2007. The
Company anticipates filing the NDA for MK-0974 in 2009.
MK-7418, rolofylline, is a Phase III investigational drug
being evaluated for the treatment of acute heart failure.
Phase III pilot study preliminary results indicated that
rolofylline was generally well tolerated and that treatment
resulted in a greater proportion of patients with improved
dyspnea, fewer patients with worsening heart failure and greater
weight loss compared to placebo. These benefits were achieved
while preserving renal function compared to progressive
worsening of renal function in patients treated with placebo.
Merck acquired the drug candidate as part of the 2007
acquisition of NovaCardia and anticipates filing an NDA with the
FDA in 2009.
MK-8669, deforolimus, 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 under an agreement reached in mid-2007
(as discussed below). The Company anticipates filing an NDA for
a metastatic sarcoma indication in 2010.
A novel investigational hepatitis B vaccine, V270, currently is
being evaluated in a Phase III clinical trial in adults and
in patients undergoing dialysis treatment. Merck is jointly
developing V270 with Dynavax Technologies Corporation
(Dynavax) under an agreement reached in late 2007
(as discussed below). Merck anticipates filing an NDA in 2010
for adults.
MK-0822, odanacatib, is an investigational highly selective
inhibitor of the cathepsin K enzyme, which is being evaluated
for the treatment of osteoporosis. The cathepsin K enzyme is
believed to play a role in both osteoclastic bone resorption and
in degrading the protein component of bone. The inhibition of
the cathepsin K enzyme by the investigational compound
odanacatib is a mechanism of action different from that of
currently approved treatments such as bisphosphonates. In
September 2007, twelve month results from a Phase IIB study with
odanacatib demonstrated dose-dependent increases in bone mineral
density (BMD) at key fracture sites, and reduced
bone turnover compared to placebo in postmenopausal women with
low BMD when given at doses of 10,
62
25 or 50 mg. These findings were presented at the
29th Annual Meeting of the American Society for Bone and
Mineral Research. BMD reflects the amount of mineralized bone
tissue in a certain volume of bone, and correlates with the
strength of bones and with their resistance to fracture. A BMD
test is used to measure bone density and to help determine
fracture risk. The Phase III program began in mid-2007.
Merck anticipates filing an NDA with the FDA in 2012.
Additionally, in December 2007, the Company announced it plans
to initiate a sequenced Phase III program in 2008 for
MK-0859, anacetrapib, its investigational selective cholesteryl
ester transfer protein (CETP) inhibitor, to obtain
additional clinical experience in patients before initiating an
outcomes study. In October 2007, the Company presented results
from a Phase IIb study demonstrating that MK-0859 significantly
reduced LDL-C and Apolipoprotein B and increased HDL-C and
Apolipoprotein
A-1 both as
monotherapy and in combination with atorvastatin 20 mg
compared to placebo in patients with dyslipidemia. Anacetrapib
produced these positive effects on lipids with no observed blood
pressure changes. CETP inhibitors work by inhibiting CETP, a
plasma protein that facilitates the transport of cholesteryl
esters and triglycerides between the lipoproteins.
In March 2007, Merck and H. Lundbeck A/S (Lundbeck)
announced the discontinuation of their joint development program
for gaboxadol, an investigational new medicine for the treatment
of insomnia that was in Phase III development. Data from
completed clinical studies suggested that the overall clinical
profile for gaboxadol in insomnia does not support further
development. As a result of this information, Merck and Lundbeck
will not file an NDA for gaboxadol for the treatment of insomnia
with the FDA, or other regulatory agencies worldwide, and have
terminated ongoing clinical studies.
In September 2007, Merck announced that vaccination in a
Phase II clinical trial of the Companys
investigational HIV vaccine (V520) was discontinued because the
vaccine was not effective. The trial, called STEP, was
co-sponsored by Merck, the National Institutes of Healths
National Institute of Allergies and Infectious Diseases
(NIAID) and the HIV Vaccine Trials Network. The
independent Data Safety Monitoring Board (DSMB) for
STEP recommended discontinuation because the STEP trial would
not meet its efficacy endpoints. In October 2007, the NIAID
announced that a separate DSMB for a second clinical trial being
conducted in South Africa of the same vaccine candidate
recommended that vaccination and enrollment in the South Africa
trial be permanently discontinued. The South Africa DSMB also
recommended that volunteers in that trial be told whether they
received the vaccine or placebo, be strongly encouraged to
return to study sites for protocol-related tests, and be
counseled about the possibility that those who received the
vaccine might have an increased susceptibility to HIV
infections. Detailed analyses of the available data are being
conducted, including analyses to better understand if there may
be an increased susceptibility to HIV infection among those
volunteers who received the vaccine. The vaccine itself does not
cause HIV infection.
In August 2006, Merck and Gilead Sciences, Inc.
(Gilead) established an agreement for the
distribution of Atripla in developing countries around the
world. Atripla contains 600 mg of efavirenz, a
non-nucleoside reverse transcriptase inhibitor, 200 mg of
emtricitabine and 300 mg of tenofovir disoproxil fumarate,
both nucleoside reverse transcriptase inhibitors. Efavirenz is
marketed by Merck under the tradename Stocrin in all
territories outside of the United States, Canada and certain
European countries (where it is commercialized by Bristol Myers
Squibb under the tradename Sustiva). Emtricitabine and tenofovir
disoproxil fumarate are commercialized by Gilead under the
tradenames Emtriva and Viread, respectively. Atripla was
approved in the EU in 2007.
Merck continues to remain focused on augmenting its internal
efforts by capitalizing on growth opportunities, ranging from
targeted acquisitions to research collaborations, preclinical
and clinical compounds and technology transactions that will
drive both near- and long-term growth. The Company completed
55 transactions in 2007 across a broad range of therapeutic
categories, as well as early-stage technology transactions.
Merck is currently evaluating other opportunities, and is
actively monitoring the landscape for a range of targeted
acquisitions that meet the Companys strategic criteria.
Highlights from these activities for the year include:
In July 2007, Merck and ARIAD announced that they had entered
into a global collaboration to jointly develop and commercialize
deforolimus (MK-8669), ARIADs novel mTOR inhibitor, for
use in cancer. Each party will fund 50% of the cost of
global development of MK-8669, except that Merck will
fund 100% of the cost of
ex-U.S. development
that is specific to the development or commercialization of
MK-8669 outside the U.S. that is
63
not currently part of the global development plan. The agreement
provided for an initial payment of $75 million to ARIAD,
which the Company recorded as Research and development expense,
up to $452 million more in milestone payments to ARIAD
based on the successful development of MK-8669 in multiple
cancer indications (including $13.5 million paid for the
initiation of the Phase III clinical trial in metastatic
sarcomas and $114.5 million to be paid for the initiation
of other Phase II and Phase III clinical trials), up
to an additional $200 million based on achievement of
significant sales thresholds, at least $200 million in
estimated contributions by Merck to global development, up to
$200 million in interest-bearing repayable development-cost
advances from Merck to cover a portion of ARIADs share of
global-development costs (after ARIAD has paid $150 million
in global development costs), and potential commercial returns
from profit sharing in the U.S. or royalties paid by Merck
outside the U.S. In the U.S., ARIAD will distribute and
sell MK-8669 for all cancer indications, and ARIAD and Merck
will co-promote and will each receive 50% of the income from
such sales. Outside the U.S., Merck will distribute, sell and
promote MK-8669; Merck will pay ARIAD tiered double-digit
royalties on end-market sales of MK-8669.
In September 2007, Merck completed the acquisition of
NovaCardia, a privately held clinical-stage pharmaceutical
company focused on cardiovascular disease. This acquisition
added rolofylline (MK-7418), NovaCardias investigational
Phase III compound for acute heart failure, to Mercks
pipeline. Merck acquired all of the outstanding equity of
NovaCardia for a total purchase price of $366.4 million
(including $16.4 million of cash and investments on hand at
closing), which was paid through the issuance of
7.3 million shares of Merck common stock to the former
NovaCardia shareholders based on Mercks average closing
stock price for the five days prior to closing of the
acquisition. In connection with the acquisition, the Company
recorded a charge of $325.1 million for acquired research
associated with rolofylline as at the acquisition date,
technological feasibility had not been established and no
alternative future use existed (see Acquisitions
above).
In November 2007, Merck and Dynavax announced a global license
and development collaboration agreement to jointly develop V270,
a novel investigational hepatitis B vaccine, which is currently
being evaluated in a multi-center Phase III clinical trial
involving adults and in patients on dialysis. Under the terms of
the agreement, Merck receives worldwide exclusive rights to
V270, will fund future vaccine development, and be responsible
for commercialization. Dynavax received an initial payment of
$31.5 million, which the Company recorded as Research and
development expense, and will be eligible to receive up to
$105 million in development and sales milestone payments,
and double-digit tiered royalties on global sales of V270.
Also, in November 2007, Merck and GTx, Inc. (GTx)
announced that they had 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. This collaboration includes GTxs lead SARM
candidate, Ostarine
(MK-2866),
which is currently being evaluated in a Phase II clinical
trial for the treatment of muscle loss in patients with cancer,
and establishes a broad SARM collaboration under which GTx and
Merck will pool their programs and partner to discover, develop,
and commercialize current as well as future SARM molecules. As
part of this global agreement, Merck will be responsible for all
future costs associated with ongoing development and, if
approved, commercialization of Ostarine and other
investigational SARMs resulting from the collaboration. Under
the terms of the collaboration agreement and related stock
purchase agreement, GTx and Merck will combine their respective
SARM research programs. GTx received an upfront payment of
$40 million, which was recorded by Merck as Research and
development expense, and will also receive $15 million in
research reimbursements to be paid over the initial three years
of the collaboration. In addition, Merck made an investment of
$30 million in GTx common stock. GTx will also be eligible
to receive up to $422 million in future milestone payments
associated with the development and approval of a drug candidate
if multiple indications receive regulatory approval. Additional
milestones may be received for the development and approval of
other collaboration drug candidates. GTx will receive royalties
on any resulting worldwide product revenue.
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.
Mercks 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 such as atherosclerosis,
hypertension, diabetes and obesity, novel vaccines;
neurodegenerative and psychiatric diseases and targeted oncology
therapies. The Company will also make focused investments in
other areas of important unmet medical needs. In addition, the
64
Company is focused on utilizing new research technologies,
building alliances with external partners and making targeted
acquisitions which will complement the Companys strong
internal research capabilities. A chart reflecting the
Companys current research pipeline as of February 15,
2008 is set forth in Item 1. Business.
Share-Based
Compensation
On January 1, 2006, the Company adopted FAS 123R (see
Note 12 to the consolidated financial statements).
FAS 123R requires all share-based payments to employees be
expensed over the requisite service period based on the
grant-date fair value of the awards. Prior to adopting
FAS 123R, the Company accounted for employee stock options
using the intrinsic value method which measures share-based
compensation expense as the amount by which the market price of
the stock at the date of grant exceeds the exercise price. The
Company elected the modified prospective transition method for
adopting FAS 123R, and therefore, prior periods were not
restated. Under this method, the provisions of FAS 123R
applied to all awards granted or modified after January 1,
2006. Total pretax share-based compensation expense was
$330.2 million in 2007, $312.5 million in 2006 and
$48.0 million in 2005. In addition, the unrecognized
expense of awards that had not yet vested at the date of
adoption are recognized in Net income in the periods after the
date of adoption. At December 31, 2007, there was
$402.8 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 2.0 years. For segment
reporting, share-based compensation costs are unallocated
expenses.
Restructuring
Costs
Restructuring costs were $327.1 million,
$142.3 million and $322.2 million for 2007, 2006 and
2005, respectively. In 2007, 2006 and 2005, Merck incurred
$251.4 million, $113.7 million and
$182.4 million, respectively, in separation costs
associated with actual headcount reductions, as well as
headcount reductions that were probable and could be reasonably
estimated related to the global restructuring program. The
Company eliminated 2,400 positions in 2007; 3,700 positions in
2006 and 1,100 positions in 2005. 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 the Companys pension and other
postretirement benefit plans and shutdown costs. In addition, in
2005, the Company recorded $116.8 million for separation
costs associated with other restructuring programs. For segment
reporting, restructuring costs are unallocated expenses.
Equity
Income from Affiliates
Equity income from affiliates reflects the performance of the
Companys joint ventures and partnerships. In 2007, 2006
and 2005, the increase in Equity income from affiliates
primarily reflects the successful performance of Vytorin
and Zetia through the Merck/Schering-Plough
partnership. See Selected Joint Venture and Affiliate
Information below.
U.S.
Vioxx
Settlement Agreement Charge
On November 9, 2007, Merck entered into 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 MI and IS claims
already filed against the Company in the United States. If
certain participation conditions under the Settlement Agreement
are met (or waived), the Company will pay 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 enter into
the Settlement Program. As a consequence of the Settlement
Agreement, the Company recorded a pretax charge of
$4.85 billion in 2007. (See Note 10 to the
consolidated financial statements).
Other
(Income) Expense, Net
The change in Other (income) expense, net during 2007 primarily
reflects a $671.1 million charge related to the resolution
of certain civil governmental investigations (see Note 10
to the consolidated financial statements) partially offset by
the favorable impact of gains on sales of assets and product
divestitures, as well as a net gain on the settlements of
certain patent disputes. The change in Other (income) expense,
net, in 2006 reflects an increase in
65
interest income generated from the Companys investment
portfolio derived from higher interest rates and higher average
investment portfolio balances.
Segment
Profits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Pharmaceutical segment profits
|
|
$
|
14,076.7
|
|
|
$
|
13,649.4
|
|
|
$
|
13,157.9
|
|
Vaccines segment profits
|
|
|
2,605.0
|
|
|
|
892.8
|
|
|
|
767.0
|
|
Other segment profits
|
|
|
452.7
|
|
|
|
380.7
|
|
|
|
355.5
|
|
Other
|
|
|
(13,763.7
|
)
|
|
|
(8,701.5
|
)
|
|
|
(6,916.5
|
)
|
|
|
Income before income taxes
|
|
$
|
3,370.7
|
|
|
$
|
6,221.4
|
|
|
$
|
7,363.9
|
|
|
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, the Company does not allocate the vast majority
of indirect production 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 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 increased 3% in 2007 and 4% in
2006 reflecting higher equity income, primarily driven by the
strong performance of the Merck/Schering-Plough partnership,
partially offset by the loss of U.S. market exclusivity for
Zocor and Proscar.
Vaccines segment profits nearly tripled in 2007 and grew 16% in
2006 driven by the launch of three new vaccines in the latter
part of 2006 and the successful performance of Varivax.
Vaccines segment profits also reflect equity income from SPMSD.
Taxes on
Income
The Companys effective income tax rate was 2.8% in 2007,
28.7% in 2006 and 37.1% in 2005. 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. The higher effective tax rate in 2005 reflects an
unfavorable impact of 9.1 percentage points primarily
related to the Companys decision to repatriate
$15.9 billion of foreign earnings in accordance with the
American Jobs Creation Act of 2004 (AJCA).
Net
Income and Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions except per share
amounts)
|
|
2007
|
|
|
Change
|
|
2006
|
|
|
Change
|
|
2005
|
|
|
|
|
Net income
|
|
$
|
3,275.4
|
|
|
−26%
|
|
$
|
4,433.8
|
|
|
−4%
|
|
$
|
4,631.3
|
|
As a % of sales
|
|
|
13.5
|
%
|
|
|
|
|
19.6
|
%
|
|
|
|
|
21.0
|
%
|
As a % of average total assets
|
|
|
7.0
|
%
|
|
|
|
|
9.9
|
%
|
|
|
|
|
10.6
|
%
|
Earnings per common share assuming dilution
|
|
$
|
1.49
|
|
|
−27%
|
|
$
|
2.03
|
|
|
−3%
|
|
$
|
2.10
|
|
|
Net
Income and Earnings per Common Share
Net income decreased 26% in 2007 and declined 4% in 2006.
Earnings per common share assuming dilution declined 27% in 2007
compared to a decline of 3% in 2006. The declines in 2007
reflect the impact of the U.S. Vioxx Settlement
Agreement charge and civil governmental investigations charge,
partially offset by lower reserves for legal defense costs, a
gain from an insurance arbitration award related to Vioxx
product liability
66
litigation coverage, lower acquired research costs and the
favorable impact of gains on sales of assets and product
divestitures, as well as a net gain on the settlements of
certain patent disputes. Net income and EPS in 2007 also reflect
revenue growth of vaccines, Singulair and Januvia,
as well as higher equity income from affiliates. Net income and
EPS declines in 2006 primarily reflect acquired research
charges, higher restructuring charges, increased reserves for
legal defense costs and the incremental impact of expensing
stock options, partially offset by growth in equity income from
affiliates. Net income as a percentage of sales was 13.5% in
2007, 19.6% in 2006 and 21.0% in 2005. The decrease in the
percentage of sales ratio in 2007 as compared to 2006 reflects
the same factors discussed above. Net income as a percentage of
average total assets was 7.0% in 2007, 9.9% in 2006 and 10.6% in
2005.
Selected
Joint Venture and Affiliate Information
To expand its research base and realize synergies from combining
capabilities, opportunities and assets, in previous years the
Company formed a number of joint ventures. (See Note 8 to
the consolidated financial statements.)
Merck/Schering-Plough
Partnership
In 2000, the Company and Schering-Plough Corporation
(Schering-Plough) (collectively, the
Partners) entered into agreements to create separate
equally-owned partnerships to develop and market in the
United States new prescription medicines in the
cholesterol-management and respiratory therapeutic areas. These
agreements generally provide for equal sharing of development
costs and for co-promotion of approved products by each company.
In 2001, the cholesterol-management partnership agreements were
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).
The cholesterol agreements provide for the sharing of operating
income generated by the Merck/Schering-Plough cholesterol
partnership (the MSP Partnership) based upon
percentages that vary by product, sales level and country. In
the U.S. market, the Partners share profits on Zetia
and Vytorin sales equally, with the exception of the
first $300 million of annual Zetia sales, on which
Schering-Plough receives a greater share of profits. Operating
income includes expenses that the Partners have contractually
agreed to share, such as a portion of manufacturing costs,
specifically identified promotion costs (including
direct-to-consumer
advertising and direct and identifiable
out-of-pocket
promotion) and other agreed upon costs for specific services
such as on-going clinical research, market support, market
research, market expansion, as well as a specialty sales force
and physician education programs. Expenses incurred in support
of the MSP Partnership but not shared between the Partners, such
as marketing and administrative expenses (including certain
sales force costs), as well as certain manufacturing costs, are
not included in Equity income from affiliates. However, these
costs are reflected in the overall results of the Company.
Certain research and development expenses are generally shared
equally by the Partners, after adjusting for earned milestones.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Vytorin
|
|
$
|
2,779.1
|
|
|
$
|
1,955.3
|
|
|
$
|
1,028.3
|
|
Zetia
|
|
|
2,407.1
|
|
|
|
1,928.8
|
|
|
|
1,396.7
|
|
|
|
|
|
$
|
5,186.2
|
|
|
$
|
3,884.1
|
|
|
$
|
2,425.0
|
|
|
Global sales of Vytorin grew 42% in 2007 and 90% in 2006.
Vytorin is the only combination tablet cholesterol
treatment to provide LDL cholesterol lowering through the dual
inhibition of cholesterol production and absorption. Global
sales of Zetia increased 25% in 2007 and 38% in 2006.
On January 14, 2008, the MSP Partnership announced the
primary endpoint and other results of the ENHANCE (Effect of
Combination Ezetimibe and High-Dose Simvastatin vs. Simvastatin
Alone on the Atherosclerotic Process in Patients with
Heterozygous Familial Hypercholesterolemia) trial. The MSP
Partnership
67
submitted an abstract on the ENHANCE trial for presentation at
the American College of Cardiology meeting in March 2008 and was
notified of its acceptance by the College. ENHANCE was a
surrogate endpoint trial conducted in 720 patients with
Heterozygous Familial Hypercholesterolemia, a rare condition
that affects approximately 0.2% of the population. All analyses
were conducted in accordance with the original statistical
analysis plan. The primary endpoint was the mean change in the
intima-media thickness measured at three sites in the carotid
arteries (the right and left common carotid, internal carotid
and carotid bulb) between patients treated with
ezetimibe/simvastatin 10/80 mg versus patients treated with
simvastatin 80 mg alone over a two year period. There was
no statistically significant difference between treatment groups
on the primary endpoint. There was also no statistically
significant difference between the treatment groups for each of
the components of the primary endpoint, including the common
carotid artery. Key secondary imaging endpoints showed no
statistical difference between treatment groups. The overall
incidence rates of treatment-related adverse events, serious
adverse events or adverse events leading to discontinuation were
generally similar between treatment groups. Both medicines were
generally well tolerated. Overall, the safety profiles of
ezetimibe/simvastatin and simvastatin alone were similar and
generally consistent with their product labels. In the trial,
there was a significant difference in low-density lipoprotein
(LDL) cholesterol lowering seen between the
treatment groups 58% LDL cholesterol lowering at
24 months on ezetimibe/simvastatin as compared to 41% at
24 months on simvastatin alone. This surrogate endpoint
study was not powered nor designed to assess cardiovascular
clinical event outcomes. The MSP Partnership is currently
conducting the IMPROVE-IT trial, a large clinical cardiovascular
outcomes trial comparing Vytorin (ezetimibe/simvastatin)
and simvastatin and including more than 10,000 patients.
Vytorin contains two medicines: ezetimibe and
simvastatin. Vytorin has not been shown to reduce heart
attacks or strokes more than simvastatin alone.
During December 2007 and through February 26, 2008, the
Company and its joint-venture partner, Schering-Plough, received
several joint letters from the House Committee on Energy and
Commerce and the House Subcommittee on Oversight and
Investigations, and one letter from 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.
On January 25, 2008, the companies and the MSP Partnership
each received two subpoenas from the New York State Attorney
Generals Office seeking similar information and documents.
Merck and Schering-Plough have also each received a letter from
the Office of the Connecticut Attorney General dated
February 1, 2008, requesting documents related to the
marketing and sale of Vytorin and Zetia and the
timing of disclosures of the results of ENHANCE. The Company is
cooperating with these investigations and working with
Schering-Plough to respond to the inquiries. In addition, since
mid-January 2008, the Company has become aware of or been served
with approximately 85 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.
The Company has been closely monitoring sales of Vytorin
and Zetia following the release of the ENHANCE clinical
trial results in the press release on January 14, 2008. To
date, sales of both products in the U.S. have been below the
Companys prior expectations. In addition, wholesalers in
the U.S. have moderated their purchases of both products to
reduce their inventory levels.
The respiratory therapeutic agreements provide for the joint
development and marketing in the United States by the
Partners of a once-daily, fixed-combination tablet containing
the active ingredients montelukast sodium and loratadine.
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. In
August 2007, the Partners announced that the New Drug
Application filing for montelukast sodium/loratadine had been
accepted by the U.S. Food and Drug Administration for
standard review. The Partners are seeking U.S. marketing
approval of the medicine for treatment of allergic rhinitis
symptoms in patients who want relief from nasal congestion. The
Company anticipates FDA action in the second quarter of 2008.
The results from the Companys interest in the MSP
Partnership are recorded in Equity income from affiliates. Merck
recognized equity income of $1,830.8 million in 2007,
$1,218.6 million in 2006 and $570.4 million in 2005.
68
The financial statements of the MSP Partnership are included in
Item 15. (a)(2) Financial Statement
Schedules below.
AstraZeneca
LP
In 1982, the Company entered into an agreement with Astra AB
(Astra) to develop and market Astra products in the
United States. In 1994, the Company and Astra formed an
equally-owned joint venture that developed and marketed most of
Astras new prescription medicines in the United States
including Prilosec, 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, the Company and Astra restructured the joint venture
whereby the Company 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 which the Company maintains a
limited 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.
Merck earns ongoing revenue based on sales of current and future
KBI products and such revenue was $1.7 billion,
$1.8 billion and $1.7 billion in 2007, 2006 and 2005,
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
$820.1 million, $783.7 million and $833.5 million
in 2007, 2006 and 2005, respectively. The AstraZeneca merger
triggers a partial redemption of Mercks limited
partnership interest in 2008. Upon this redemption, AZLP will
distribute to KBI an amount based primarily on a multiple of
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).
In conjunction with the 1998 restructuring for a payment of
$443.0 million, which was recorded as deferred income,
Astra purchased an option (the Asset Option) to buy
Mercks interest in the KBI products, excluding the
gastrointestinal medicines Nexium and Prilosec
(the Non-PPI Products). The Asset Option is
exercisable in the first half of 2010 at an exercise price equal
to 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). Merck also
had the right to require Astra to purchase such interest in 2008
at the Appraised Value. In February 2008, the Company advised
AZLP that it will not exercise the Asset Option. In addition, in
1998 the Company granted Astra an option to buy Mercks
common stock interest in KBI, and, therefore, Mercks
interest in Nexium and Prilosec, exercisable two
years after Astras purchase of Mercks interest in
the Non-PPI Products. The exercise of this option by Astra is
also provided for in the year 2017 or if combined annual sales
of the two products fall below a minimum amount provided, in
each case, only so long as AstraZenecas option in 2010 has
been exercised. The exercise price 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.
Also, as a result of the AstraZeneca merger, in exchange for
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), which is subject to a
true-up
calculation (the
True-Up
Amount) in 2008 that may require repayment of all or a
portion of this amount. The
True-Up
Amount is directly dependent on the fair market value in 2008 of
the Astra product rights retained by the Company. Accordingly,
recognition of this contingent income has been deferred until
the realizable amount is determinable in 2008. In 2007, the
Company reclassified this amount to Accrued and other current
liabilities from non-current liabilities as this
true-up
calculation will occur before the end of the second quarter of
2008.
The sum of the Limited Partner Share of Agreed Value, the
Appraised Value and the
True-Up
Amount is guaranteed to be a minimum of $4.7 billion.
Distribution of the Limited Partner Share of Agreed Value and
payment of the
True-Up
Amount will occur in the first half of 2008 and such amounts are
anticipated to represent a substantial portion of the
$4.7 billion. These payments will result in a pretax gain
estimated to be $2.1 billion to
69
$2.3 billion. AstraZenecas purchase of Mercks
interest in the Non-PPI Products is contingent upon the exercise
of AstraZenecas option in 2010 and, therefore, payment of
the Appraised Value may or may not occur.
Merial
Limited
In 1997, Merck and Rhône-Poulenc S.A. (now Sanofi-Aventis
S.A.) combined their animal health and poultry genetics
businesses to form Merial Limited (Merial), a
fully integrated animal health company, which is a stand-alone
joint venture, equally owned by each party. Merial provides a
comprehensive range of pharmaceuticals and vaccines to enhance
the health, well-being and performance of a wide range of animal
species.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Fipronil products
|
|
$
|
1,033.3
|
|
|
$
|
886.9
|
|
|
$
|
757.7
|
|
Biological products
|
|
|
674.9
|
|
|
|
600.7
|
|
|
|
533.2
|
|
Avermectin products
|
|
|
478.4
|
|
|
|
468.7
|
|
|
|
467.5
|
|
Other products
|
|
|
262.2
|
|
|
|
238.4
|
|
|
|
228.6
|
|
|
|
|
|
$
|
2,448.8
|
|
|
$
|
2,194.7
|
|
|
$
|
1,987.0
|
|
|
Sanofi
Pasteur MSD
In 1994, 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.
In 2006, Merck launched three new vaccines that have been
approved for use in the EU and are being marketed by SPMSD in
certain Western European countries: Gardasil to help
prevent cervical cancer, pre-cancerous and low-grade lesions,
vulvar and vaginal pre-cancers, and genital warts caused by HPV
types 6, 11, 16 and 18; RotaTeq to help protect against
rotavirus gastroenteritis in infants and children; and
Zostavax to help prevent shingles (herpes zoster) in
individuals 60 years of age or older.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Viral vaccines
|
|
$
|
86.8
|
|
|
$
|
100.1
|
|
|
$
|
78.5
|
|
Hepatitis vaccines
|
|
|
72.9
|
|
|
|
70.9
|
|
|
|
81.1
|
|
Gardasil
|
|
|
476.0
|
|
|
|
7.5
|
|
|
|
-
|
|
Other vaccines
|
|
|
802.3
|
|
|
|
735.4
|
|
|
|
705.5
|
|
|
|
|
|
$
|
1,438.0
|
|
|
$
|
913.9
|
|
|
$
|
865.1
|
|
|
Johnson &
Johnson°Merck Consumer Pharmaceuticals Company
In 1989, 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 expanded in Europe in 1993 and into Canada in 1996. In 2004,
Merck sold its 50% equity stake in its European joint venture to
Johnson & Johnson. Merck will continue to benefit
through royalties on certain products and also regained the
rights to potential future products that switch from
prescription to
over-the-counter
status in Europe.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Gastrointestinal products
|
|
$
|
218.5
|
|
|
$
|
250.9
|
|
|
$
|
250.8
|
|
Other products
|
|
|
1.2
|
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
|
|
$
|
219.7
|
|
|
$
|
252.6
|
|
|
$
|
253.3
|
|
|
70
Capital
Expenditures
Capital expenditures were $1.0 billion in 2007,
$980.2 million in 2006 and $1.4 billion in 2005.
Expenditures in the United States were $788.0 million in
2007, $714.7 million in 2006 and $938.7 million in
2005. Expenditures during 2007 included $372.7 million for
production facilities, $226.2 million for research and
development facilities, $9.3 million for environmental
projects, and $402.8 million for administrative, safety and
general site projects, of which approximately 40% represents
capital investments related to a multi-year initiative to
standardize the Companys information systems. Capital
expenditures for 2008 are estimated to be $1.6 billion.
Depreciation expense was $1.8 billion in 2007,
$2.1 billion in 2006 and $1.5 billion in 2005, of
which $1.4 billion, $1.5 billion and
$1.1 billion, respectively, applied to locations in the
United States. Total depreciation expense in 2007, 2006 and 2005
included accelerated depreciation of $460.6 million,
$763.8 million and $84.6 million, respectively,
associated with the global restructuring program. Additionally,
depreciation expense for 2005 reflects $103.1 million
associated with the closure of the Terlings Park basic research
center (see Note 3 to the consolidated financial
statements).
Analysis
of Liquidity and Capital Resources
Mercks strong financial profile enables the Company to
fully fund research and development, focus on external
alliances, support in-line products and maximize upcoming
launches while providing significant cash returns to
shareholders.
Selected
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Working capital
|
|
$
|
2,787.2
|
|
|
$
|
2,507.5
|
|
|
$
|
7,806.9
|
|
Total debt to total liabilities and equity
|
|
|
11.9
|
%
|
|
|
15.3
|
%
|
|
|
18.1
|
%
|
Cash provided by operations to total debt
|
|
|
1.2:1
|
|
|
|
1.0:1
|
|
|
|
0.9:1
|
|
|
Cash provided by operating activities, which was
$7.0 billion in 2007, $6.8 billion in 2006 and
$7.6 billion in 2005, continues to be the Companys
primary source of funds to finance capital expenditures,
treasury stock purchases and dividends paid to stockholders. At
December 31, 2007, the total of worldwide cash and
investments was $15.4 billion, including $8.2 billion
of cash, cash equivalents and short-term investments, and
$7.2 billion of long-term investments.
Working capital levels are more than adequate to meet the
operating requirements of the Company. The ratios of total debt
to total liabilities and equity and cash provided by operations
to total debt reflect the strength of the Companys
operating cash flows and the ability of the Company to cover its
contractual obligations.
During 2006, the Company began shifting its mix of investments
from short-term to long-term, resulting in a reduction of
working capital in line with historical levels relative to the
level at December 31, 2005. In 2005, to enable execution of
the AJCA repatriation, the Company changed its mix of
investments from long-term to short-term, resulting in a
significant increase in working capital as of December 31,
2005. The AJCA created temporary incentives through
December 31, 2005 for U.S. multinationals to
repatriate accumulated income earned outside of the United
States as of December 31, 2002. In connection with the
AJCA, the Company repatriated $15.9 billion during 2005. As
a result, the Company recorded an income tax charge of
$766.5 million in Taxes on Income in 2005 related to this
repatriation, $185 million of which was paid in 2005 and
the remainder of which was paid in the first quarter of 2006. As
of December 31, 2005, approximately $5.2 billion of
the AJCA repatriation was invested in fully collateralized
overnight repurchase agreements. In early 2006, the Company
began reinvesting its repurchase agreement balances into other
investments.
During 2008, the Company anticipates that under the
U.S. Vioxx Settlement Agreement, if participation
conditions are met or waived, the Company will make payments of
up to approximately $1.6 billion pursuant to the
Settlement Agreement. Also, the Company anticipates making
payments of approximately $671 million related to the
resolution of investigations of civil claims by federal and
state authorities relating to certain past marketing and selling
activities. The Company will receive payments in the first half
of 2008 for certain AZLP-related activities as
71
discussed above in Selected Joint Venture and Affiliate
Information. Distribution of such amounts are anticipated
to represent a substantial portion of the $4.7 billion
minimum.
As previously disclosed, the IRS has completed its examination
of the Companys tax returns for the years 1993 to 2001. As
a result of the examination, the Company 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 the Company 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 the Companys results of operations in
2007 as these amounts had been previously provided for.
As previously disclosed, Mercks Canadian tax returns for
the years 1998 through 2004 are being examined by the Canada
Revenue Agency (CRA). In October 2006, the CRA
issued the Company a notice of reassessment containing
adjustments related to certain intercompany pricing matters,
which result in additional Canadian and provincial tax due of
approximately $1.6 billion (U.S. dollars) plus
interest of approximately $810 million (U.S. dollars).
In addition, in July 2007, the CRA proposed additional
adjustments for 1999 relating to another intercompany pricing
matter. The adjustments would increase Canadian tax due by
approximately $22 million (U.S. dollars) plus
$21 million (U.S. dollars) of interest. 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 assessment through the CRA appeals process and the courts if
necessary. In connection with the appeals process, during 2007,
the Company 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. The collateral is included in Other
Assets in the Consolidated Balance Sheet and totaled
approximately $1.4 billion at December 31, 2007. The
Company has previously established reserves for these matters.
While the resolution of these matters may result in liabilities
higher or lower than the reserves, management believes that
resolution of these matters will not have a material effect on
the Companys financial position or liquidity. However, an
unfavorable resolution could have a material effect on the
Companys results of operations or cash flows in the
quarter in which an adjustment is recorded or tax is due.
In July 2007, the CRA notified the Company that it is in the
process of proposing a penalty of $160 million
(U.S. dollars) in connection with the 2006 notice. The
penalty is for failing to provide information on a timely basis.
The Company vigorously disagrees with the penalty and feels it
is inapplicable and that appropriate information was provided on
a timely basis. The Company is pursuing all appropriate remedies
to avoid having the penalty assessed and was notified in early
August 2007 that the CRA is holding the imposition of a penalty
in abeyance pending a review of the Companys submissions
as to the inapplicability of a penalty.
The IRS recently began its examination of the Companys
2002 to 2005 federal income tax returns. In addition, various
state and foreign tax examinations are in progress. Tax years
that remain subject to examination by major tax jurisdictions
include Germany from 1999, Italy and Japan from 2000 and the
United Kingdom from 2002.
72
The Companys contractual obligations as of
December 31, 2007 are as follows:
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Total
|
|
|
2008
|
|
|
2009 - 2010
|
|
|
2011 -2012
|
|
|
Thereafter
|
|
|
|
|
Purchase obligations
|
|
$
|
776.7
|
|
|
$
|
336.0
|
|
|
$
|
377.3
|
|
|
$
|
17.6
|
|
|
$
|
45.8
|
|
Loans payable and current portion of long-term debt
|
|
|
1,823.6
|
|
|
|
1,823.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt
|
|
|
3,915.8
|
|
|
|
-
|
|
|
|
120.7
|
|
|
|
432.6
|
|
|
|
3,362.5
|
|
U.S. Vioxx Settlement Agreement
(1)
|
|
|
4,850.0
|
|
|
|
1,600.0
|
|
|
|
3,250.0
|
|
|
|
-
|
|
|
|
-
|
|
Civil governmental investigations resolution
|
|
|
671.0
|
|
|
|
671.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unrecognized tax benefits
(2)
|
|
|
50.0
|
|
|
|
50.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating leases
|
|
|
157.6
|
|
|
|
43.1
|
|
|
|
62.6
|
|
|
|
34.9
|
|
|
|
17.0
|
|
|
|
|
|
$
|
12,244.7
|
|
|
$
|
4,523.7
|
|
|
$
|
3,810.6
|
|
|
$
|
485.1
|
|
|
$
|
3,425.3
|
|
|
|
|
(1)
|
Payments under the U.S. Vioxx Settlement Agreement are
contingent upon participation conditions being met or waived.
Also, the timing of such payments may vary depending on the
timing of the claims assessment process.
|
|
(2)
|
As of December 31, 2007, the Companys Consolidated
Balance Sheet reflects a liability for unrecognized tax benefits
of $3.69 billion, including $50.0 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 2008 can not
be made.
|
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
$331.7 million of long-dated notes that are subject to
repayment at the option of the holders on an annual basis.
Required funding obligations for 2008 relating to the
Companys pension and other postretirement benefit plans
are not expected to be material.
In December 2004, the Company increased the capacity of its
shelf registration statement filed with the Securities and
Exchange Commission (SEC) to issue debt securities
by an additional $3.0 billion. In February 2005, the
Company issued $1.0 billion of 4.75% ten-year notes under
the shelf. In November 2006, the Company issued
$500 million of 5.75% twenty-year notes and
$250 million of 5.125% five-year notes under the shelf. The
remaining capacity under the Companys shelf registration
statement is approximately $2.0 billion.
In April 2007, the Company extended the maturity date of its
$1.5 billion,
5-year
revolving credit facility from April 2011 to April 2012. The
facility provides backup liquidity for the Companys
commercial paper borrowing facility and is for general corporate
purposes. The Company has not drawn funding from this facility.
The Companys long-term credit ratings assigned by
Moodys Investors Service and Standard &
Poors are Aa3 with a developing outlook and AA- with a
stable 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. Total cash and investments of
$15.4 billion exceeds the sum of loans payable and
long-term debt of $5.7 billion. We place our cash and
investments in instruments that meet high credit quality
standards, as specified in our 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 10 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 July 2002, the Board of Directors approved purchases over
time of up to $10.0 billion of Merck shares. Total treasury
stock purchased under this program in 2007 was
$1.4 billion. As of December 31, 2007,
$5.1 billion remains under the 2002 stock repurchase
authorization approved by the Merck Board of Directors.
73
Financial
Instruments Market Risk Disclosures
Foreign
Currency Risk Management
While the U.S. dollar is the functional currency of the
Companys foreign subsidiaries, 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.
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 anticipated third-party 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 sales hedged as it
gets closer to the expected date of the transaction, 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. Merck 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 fully 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. While a weaker
U.S. dollar would result in a net benefit, the market value
of the Companys hedges would have declined by
$69.5 million and $38.7 million, respectively, from a
uniform 10% weakening of the U.S. dollar at
December 31, 2007 and 2006. 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 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 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. 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. Merck routinely enters into contracts to
fully 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 on a more limited basis and
only 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. 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 weakened by 10%
against all currency exposures of the Company at
December 31, 2007 and 2006, Income before taxes would have
declined by $24.6 million and $32.7 million,
respectively. Because
74
Merck is in a net short position relative to its major foreign
currencies after consideration of forward contracts, a uniform
weakening of the U.S. dollar will yield the largest overall
potential net loss in earnings due to exchange. 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.
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, 2007, 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 were two swaps maturing in 2011 with notional
amounts of $125 million each; one swap maturing in 2013
with a notional amount of $500 million and four swaps
maturing in 2015 with notional amounts of $250 million
each. The swaps effectively convert the fixed-rate obligations
to floating-rate instruments. In January and February 2008, the
Company terminated the four interest rate swap contracts with
notional amounts of $250 million each, which effectively
converted its 4.75% fixed-rate notes due 2015 to variable rate
debt. As a result of the swap terminations, the Company received
$96.2 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 have been deferred and will be 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 impacted by changes in interest
rates. The market value of the Companys medium- to
long-term fixed-rate investments is modestly impacted 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 the
Companys 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, 2007 and 2006
would have positively impacted the net aggregate market value of
these instruments by $62.1 million and $111.0 million,
respectively. A one percentage point decrease at
December 31, 2007 and 2006 would have negatively impacted
the net aggregate market value by $114.6 million and
$171.0 million, respectively. The fair value of the
Companys debt was determined using pricing models
reflecting one percentage point shifts in the appropriate yield
curves. The fair value of the Companys investments was
determined using a combination of pricing and duration models.
Critical
Accounting Policies and Other Matters
The consolidated financial statements 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, depreciable and
amortizable lives, recoverability of inventories 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, amounts recorded in
connection with acquisitions, impairments of long-lived assets
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.
Revenue
Recognition
Revenues from sales of products are recognized when title and
risk of loss passes to the customer. Due to changes in terms and
conditions for domestic pharmaceutical sales in the fourth
quarter of 2007, revenues for these products, previously
recognized at the time of shipment, were recognized at time of
delivery consistent with many foreign subsidiaries and vaccine
sales. There was no significant impact on revenue in the fourth
quarter of 2007 as a
75
result of these changes. 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 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. 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 wholesale purchaser. 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 assumes a
first-in,
first-out movement of inventory within the supply chain for
purposes of estimating its aggregate indirect customer discount
accrual. In addition, 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
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.
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 2007, 2006 or 2005.
Summarized information about changes in the aggregate indirect
customer discount accrual is as follows:
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Balance, January 1
|
|
$
|
757.1
|
|
|
$
|
1,166.5
|
|
Current provision
|
|
|
2,109.7
|
|
|
|
3,519.4
|
|
Adjustments to prior years
|
|
|
(14.1
|
)
|
|
|
(29.5
|
)
|
Payments
|
|
|
(2,153.3
|
)
|
|
|
(3,899.3
|
)
|
|
|
Balance, December 31
|
|
$
|
699.4
|
|
|
$
|
757.1
|
|
|
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 $82.5 million and $616.9 million,
respectively, at December 31, 2007, and $60.4 million
and $696.7 million, respectively, at December 31, 2006.
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, 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 2007,
2006 and 2005.
Through its distribution program with U.S. wholesalers, the
Company encourages wholesalers to align purchases with
underlying demand and maintain inventories within specified
levels. The terms of the program 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
76
reducing product returns. Information provided through the
wholesaler distribution program 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 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 impacted 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, 2007 and 2006 were not
significant.
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 10 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 January 1, 2006, the Company had a reserve
of $685 million solely for its future legal defense costs
related to the Vioxx Litigation (as defined below).
During 2006, the Company spent $500 million in the
aggregate in legal defense costs related to the Vioxx
Litigation and recorded additional charges of
$673 million. Accordingly, as of December 31, 2006,
the Company had a reserve of $858 million solely for its
future legal defense costs related to the Vioxx
Litigation. During 2007, the Company spent $616 million
in the aggregate in 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). In the second quarter and third quarter
of 2007, the Company recorded charges of $210 million and
$70 million, respectively, to increase the reserve solely
for its future legal defense costs related to the Vioxx
Litigation. In increasing the reserve, the Company
considered the same factors that it considered when it
previously established reserves for the Vioxx Litigation.
On November 9, 2007, Merck entered into 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 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. If certain participation conditions under the
Settlement Agreement are met (or waived), Merck will pay a
fixed aggregate amount into two funds for qualifying claims that
enter into the Settlement Program. As a result of entering into
the Settlement Agreement, the Company 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. In the fourth quarter of 2007, the Company
spent approximately $200 million in Vioxx legal
defense costs which resulted
77
in a reserve of $522 million at December 31, 2007 for
its future legal defense costs related to the Vioxx
Litigation. After entering into the Settlement Agreement,
the Company reviewed its reserve for the Vioxx legal
defense costs and allocated approximately $80 million of
its reserve to Mercks anticipated future costs to
administer the Settlement Program. Some of the significant
factors considered in the review of the 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 the Settlement
Agreement will be consummated, but 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 Product Liability Lawsuits. Events
such as scheduled trials that are expected to occur throughout
2008 and 2009, and the inherent inability to predict the
ultimate outcomes of such trials and the disposition of the
Vioxx Product Liability Lawsuits not participating in or
not eligible for the Settlement Program, limit the
Companys ability to reasonably estimate its legal costs
beyond 2009. Together with the $4.85 billion reserved for
the Settlement Program, the aggregate amount of the reserve
established for the Vioxx Litigation as of
December 31, 2007 was approximately $5.372 billion.
While the Company does not anticipate that it will need to
increase the reserve every quarter, it will continue to monitor
its legal defense costs and review the adequacy of the
associated reserves and may determine to increase its reserves
for legal defense costs at any time in the future if, based upon
the factors set forth, it believes it would be appropriate to do
so.
The Company currently anticipates that a number of Vioxx
Product Liability Lawsuits will be tried throughout 2008. A
trial in the Oregon securities case is scheduled for 2008, but
the Company cannot predict whether this trial will proceed on
schedule or the timing of any of the other Vioxx
Shareholder Lawsuit trials. 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 or the Vioxx Investigations,
including for those cases in which verdicts or judgments have
been entered against the Company, and are now in post-verdict
proceedings or on appeal. In each of those cases the Company
believes it has strong points to raise on appeal and therefore
that unfavorable outcomes in such cases are not probable.
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, 2007, the Company had a remaining
reserve of approximately $27 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
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 end of
2009. 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 is a party 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 feasibility studies and related cost assessments of
remedial techniques are completed, and as the extent to which
other potentially responsible parties (PRPs) 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. A worldwide survey was initially performed to assess all
sites for potential contamination resulting from past industrial
activities. Where
78
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. Estimates of the extent of
contamination at each site were initially made at the
pre-investigation stage and liabilities for the potential cost
of remediation were accrued at that time. As more definitive
information became available during the course of investigations
and/or
remedial efforts at each site, estimates were refined and
accruals were adjusted accordingly. These estimates and related
accruals continue to be refined annually.
The Company believes that it is in compliance in all material
respects with applicable environmental laws and regulations.
Expenditures for remediation and environmental liabilities were
$19.5 million in 2007, and are estimated at
$69.1 million for the years 2008 through 2012. In
managements opinion, the liabilities for all environmental
matters that are probable and reasonably estimable have been
accrued and totaled $109.6 million and $129.0 million
at December 31, 2007 and December 31, 2006,
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 $54.0 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 recognizes compensation cost relating to share-based
payment transactions in Net income using a fair-value
measurement method, in accordance with FAS 123R, which it
adopted on January 1, 2006. FAS 123R requires all
share-based payments to employees, including grants of stock
options, to be recognized in Net income as compensation expense
based on fair value over the requisite service period 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
$489.3 million in 2007 and $563.7 million in 2006.
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 annually and modified to
reflect the prevailing market rate at December 31 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, 2007,
the Company changed its discount rate to 6.50% from 6.00% for
its U.S. pension plans and its U.S. other
postretirement benefit plans.
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 and applies
adjustments that reflect more recent capital market experience.
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
targeted 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 2008, the Companys expected rate of return of 8.75%
remained unchanged from 2007 for its U.S. pension and other
postretirement benefit plans.
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
79
long-term nature of the plans benefit obligation. 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.
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
$42.4 million favorable (unfavorable) impact on its
U.S. 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
$13.7 million favorable (unfavorable) impact on its
U.S. net pension and postretirement benefit cost. The
Company does not expect to have a minimum pension funding
requirement under the Internal Revenue Code during 2008. 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 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, 2007 is expected to
increase net pension and other postretirement benefit cost by
approximately $68 million annually from 2008 through 2012.
Acquisitions
The Company accounts for acquired businesses using the purchase
method of accounting in accordance with FAS 141,
Business Combinations, which requires that the assets
acquired and liabilities assumed be recorded at the date of
acquisition at their respective fair values. Any excess of the
purchase price over the estimated fair values of net assets
acquired is recorded as goodwill. If the Company determines the
acquired company is a development stage company which has not
commenced its planned principal operations, the acquisition will
be accounted for as an acquisition of assets rather than as a
business combination and, therefore, goodwill would not be
recorded. The fair value of intangible assets, including
acquired research, 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 research and
expensed at the date of acquisition if technological feasibility
has not been established and no alternative future use exists.
For projects which can be used immediately in the research
process that have alternative future uses, the Company
capitalizes these intangible assets and amortizes them over an
appropriate useful life. The valuations and useful life
assumptions are based on information available near the
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
impact the Companys results of operations.
For intangible assets, including acquired research, the Company
typically uses the income approach, which estimates fair value
based on each projects projected cash flows. Future cash
flows are predominately based on a net income forecast of each
project, consistent with historical pricing, margins and expense
levels of similar products. Revenues are estimated based on
relevant market size and growth factors, expected industry
trends, individual project life cycles, and the life of each
research projects underlying patent, if any. Expected
revenues are then adjusted for the probability of technical and
marketing success and the resulting cash flows are discounted at
a risk-adjusted discount rate.
Impairments
of Long-Lived Assets
The Company assesses changes in economic 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 are recoverable in
accordance with FAS 144, Accounting for the
80
Impairments or Disposal of Long-Lived Assets. 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 its
fair value using a discounted value of estimated future cash
flows approach.
The Company tests its goodwill for impairment at least annually
in accordance with FAS 142, Goodwill and Other
Intangible Assets, using a fair value based test. Goodwill
represents the excess of acquisition costs over the fair value
of net assets of businesses purchased and is assigned to
reporting units within the Companys segments. Other
acquired intangibles are recorded at cost. When events or
circumstances warrant a review, the Company will assess
recoverability from future operations of other intangibles using
undiscounted cash flows derived from the lowest appropriate
asset groupings, generally the subsidiary level. Impairments are
recognized in operating results to the extent that carrying
values exceed fair value, which is determined based on the net
present value of estimated cash flows.
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 the
Companys ability and intent to hold the investments.
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. In accordance with FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, which Merck adopted on January 1, 2008,
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. 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 15 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.
As previously disclosed, the AJCA created a temporary incentive
for U.S. multinationals to repatriate accumulated income
earned outside of the United States as of December 31,
2002. In connection with the AJCA, the Company repatriated
$15.9 billion during 2005 (see Note 15 to the
consolidated financial statements). As a result of
81
this repatriation, the Company recorded an income tax charge of
$766.5 million in Taxes on Income in 2005 related to this
repatriation. This charge was partially offset by a
$100 million benefit associated with a decision to
implement certain tax planning strategies. The Company has not
changed its intention to indefinitely reinvest accumulated
earnings earned subsequent to December 31, 2002. At
December 31, 2007, foreign earnings of $17.2 billion
have been retained indefinitely by subsidiary companies for
reinvestment. No provision will be made for income taxes that
would be payable upon the distribution of such earnings and it
is not practicable to determine the amount of the related
unrecognized deferred income tax liability.
Recently
Issued Accounting Standards
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (FAS 157), which
clarifies the definition of fair value, establishes a framework
for measuring fair value, and expands the disclosures on fair
value measurements. FAS 157 was originally effective
January 1, 2008. In February 2008, the FASB issued Staff
Position (FSP)
157-2 that
deferred the effective date of FAS 157 for one year for
nonfinancial assets and liabilities recorded at fair value on a
non-recurring basis. The effect of adoption of FAS 157 and
FSP 157-2
on the Companys financial position and results of
operations is not expected to be material.
In February 2007, the FASB issued Statement
No. FAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities including an
amendment of FASB Statement No. 115
(FAS 159), which is effective
January 1, 2008. FAS 159 permits companies to choose
to measure certain financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings at
each subsequent reporting date. The effect of adoption of
FAS 159 on the Companys financial position and
results of operations is not expected to be material.
In June 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force (EITF) on Issue
No. 07-3,
Accounting for Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities
(Issue
07-3),
which is effective January 1, 2008 and is applied
prospectively for new contracts entered into on or after the
effective date. Issue
07-3
addresses nonrefundable advance payments for goods or services
that will be used or rendered for future research and
development activities. Issue
07-3 will
require these payments be deferred and capitalized and
recognized as an expense as the related goods are delivered or
the related services are performed. The effect of adoption of
Issue 07-3
on the Companys financial position and results of
operations is not expected to be material.
In December 2007, the FASB issued Statements No. 141R,
Business Combinations (FAS 141R), and
No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB
No. 51 (FAS 160). FAS 141R
expands the scope of acquisition accounting to all transactions
under which control of a business is obtained. Among other
things, FAS 141R requires that contingent consideration as
well as contingent assets and liabilities 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 date, and also requires transaction costs and
costs to restructure the acquired company be expensed.
FAS 160 requires, among other things, that noncontrolling
interests be recorded as equity in the consolidated financial
statements. FAS 141R and FAS 160 are both effective
January 1, 2009. The Company is assessing the impacts of
these standards on its financial position and results of
operations.
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
82
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.
83
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The consolidated balance sheet of Merck & Co., Inc.
and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, of retained earnings,
of comprehensive income and of cash flows for each of the three
years in the period ended December 31, 2007, the Notes to
Consolidated Financial Statements, and the report dated
February 27, 2008 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Sales
|
|
|
$24,197.7
|
|
|
|
$22,636.0
|
|
|
|
$22,011.9
|
|
|
|
Costs, Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
|
6,140.7
|
|
|
|
6,001.1
|
|
|
|
5,149.6
|
|
Marketing and administrative
|
|
|
7,556.7
|
|
|
|
8,165.4
|
|
|
|
7,155.5
|
|
Research and development
|
|
|
4,882.8
|
|
|
|
4,782.9
|
|
|
|
3,848.0
|
|
Restructuring costs
|
|
|
327.1
|
|
|
|
142.3
|
|
|
|
322.2
|
|
Equity income from affiliates
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
|
)
|
|
|
(1,717.1
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
4,850.0
|
|
|
|
-
|
|
|
|
-
|
|
Other (income) expense, net
|
|
|
46.2
|
|
|
|
(382.7
|
)
|
|
|
(110.2
|
)
|
|
|
|
|
|
20,827.0
|
|
|
|
16,414.6
|
|
|
|
14,648.0
|
|
|
|
Income Before Taxes
|
|
|
3,370.7
|
|
|
|
6,221.4
|
|
|
|
7,363.9
|
|
Taxes on Income
|
|
|
95.3
|
|
|
|
1,787.6
|
|
|
|
2,732.6
|
|
|
|
Net Income
|
|
|
$3,275.4
|
|
|
|
$4,433.8
|
|
|
|
$4,631.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common Share
|
|
|
$1.51
|
|
|
|
$2.04
|
|
|
|
$2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share Assuming Dilution
|
|
|
$1.49
|
|
|
|
$2.03
|
|
|
|
$2.10
|
|
|
Consolidated
Statement of Retained Earnings
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Balance, January 1
|
|
$
|
39,095.1
|
|
|
$
|
37,980.0
|
|
|
$
|
36,687.4
|
|
|
|
Cumulative Effect of Adoption of FIN 48
|
|
|
81.0
|
|
|
|
-
|
|
|
|
-
|
|
Net Income
|
|
|
3,275.4
|
|
|
|
4,433.8
|
|
|
|
4,631.3
|
|
Dividends Declared on Common Stock
|
|
|
(3,310.7
|
)
|
|
|
(3,318.7
|
)
|
|
|
(3,338.7
|
)
|
|
|
Balance, December 31
|
|
$
|
39,140.8
|
|
|
$
|
39,095.1
|
|
|
$
|
37,980.0
|
|
|
Consolidated
Statement of Comprehensive Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Net Income
|
|
$
|
3,275.4
|
|
|
$
|
4,433.8
|
|
|
$
|
4,631.3
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on derivatives, net of tax and net
income realization
|
|
|
(4.4
|
)
|
|
|
(50.9
|
)
|
|
|
81.3
|
|
Net unrealized gain on investments, net of tax and net income
realization
|
|
|
58.0
|
|
|
|
26.1
|
|
|
|
50.3
|
|
Benefit plan net gain (loss) and prior service cost (credit),
net of tax and amortization
|
|
|
240.3
|
|
|
|
-
|
|
|
|
-
|
|
Minimum pension liability, net of tax
|
|
|
-
|
|
|
|
22.5
|
|
|
|
(7.0
|
)
|
Cumulative translation adjustment relating to equity investees,
net of tax
|
|
|
44.3
|
|
|
|
18.9
|
|
|
|
(26.4
|
)
|
|
|
|
|
|
338.2
|
|
|
|
16.6
|
|
|
|
98.2
|
|
|
|
Comprehensive Income
|
|
$
|
3,613.6
|
|
|
$
|
4,450.4
|
|
|
$
|
4,729.5
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
84
Consolidated
Balance Sheet
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,336.1
|
|
|
$
|
5,914.7
|
|
Short-term investments
|
|
|
2,894.7
|
|
|
|
2,798.3
|
|
Accounts receivable
|
|
|
3,636.2
|
|
|
|
3,314.8
|
|
Inventories (excludes inventories of $345.2 in 2007 and $416.1 in
|
|
|
|
|
|
|
|
|
2006 classified in Other assets see Note 6)
|
|
|
1,881.0
|
|
|
|
1,769.4
|
|
Prepaid expenses and taxes
|
|
|
1,297.4
|
|
|
|
1,433.0
|
|
|
|
Total current assets
|
|
|
15,045.4
|
|
|
|
15,230.2
|
|
|
|
Investments
|
|
|
7,159.2
|
|
|
|
7,788.2
|
|
|
|
Property, Plant and Equipment (at cost)
|
|
|
|
|
|
|
|
|
Land
|
|
|
405.8
|
|
|
|
408.9
|
|
Buildings
|
|
|
10,048.0
|
|
|
|
9,745.9
|
|
Machinery, equipment and office furnishings
|
|
|
13,553.7
|
|
|
|
13,172.4
|
|
Construction in progress
|
|
|
795.6
|
|
|
|
882.3
|
|
|
|
|
|
|
24,803.1
|
|
|
|
24,209.5
|
|
Less allowance for depreciation
|
|
|
12,457.1
|
|
|
|
11,015.4
|
|
|
|
|
|
|
12,346.0
|
|
|
|
13,194.1
|
|
|
|
Goodwill
|
|
|
1,454.8
|
|
|
|
1,431.6
|
|
|
|
Other Intangibles, Net
|
|
|
713.2
|
|
|
|
943.9
|
|
|
|
Other Assets
|
|
|
11,632.1
|
|
|
|
5,981.8
|
|
|
|
|
|
$
|
48,350.7
|
|
|
$
|
44,569.8
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt
|
|
$
|
1,823.6
|
|
|
$
|
1,285.1
|
|
Trade accounts payable
|
|
|
624.5
|
|
|
|
496.6
|
|
Accrued and other current liabilities
|
|
|
8,534.9
|
|
|
|
6,653.3
|
|
Income taxes payable
|
|
|
444.1
|
|
|
|
3,460.8
|
|
Dividends payable
|
|
|
831.1
|
|
|
|
826.9
|
|
|
|
Total current liabilities
|
|
|
12,258.2
|
|
|
|
12,722.7
|
|
|
|
Long-Term Debt
|
|
|
3,915.8
|
|
|
|
5,551.0
|
|
|
|
Deferred Income Taxes and Noncurrent Liabilities
|
|
|
11,585.3
|
|
|
|
6,330.3
|
|
|
|
Minority Interests
|
|
|
2,406.7
|
|
|
|
2,406.1
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock, one cent par value
|
|
|
|
|
|
|
|
|
Authorized 5,400,000,000 shares
|
|
|
|
|
|
|
|
|
Issued 2,983,508,675 shares
2007
2,976,223,337 shares 2006
|
|
|
29.8
|
|
|
|
29.8
|
|
Other paid-in capital
|
|
|
8,014.9
|
|
|
|
7,166.5
|
|
Retained earnings
|
|
|
39,140.8
|
|
|
|
39,095.1
|
|
Accumulated other comprehensive loss
|
|
|
(826.1
|
)
|
|
|
(1,164.3
|
)
|
|
|
|
|
|
46,359.4
|
|
|
|
45,127.1
|
|
Less treasury stock, at cost
|
|
|
|
|
|
|
|
|
811,005,791 shares 2007
|
|
|
|
|
|
|
|
|
808,437,892 shares 2006
|
|
|
28,174.7
|
|
|
|
27,567.4
|
|
|
|
Total stockholders equity
|
|
|
18,184.7
|
|
|
|
17,559.7
|
|
|
|
|
|
$
|
48,350.7
|
|
|
$
|
44,569.8
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
85
Consolidated
Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,275.4
|
|
|
$
|
4,433.8
|
|
|
$
|
4,631.3
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Vioxx Settlement Agreement charge
|
|
|
4,850.0
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
1,988.2
|
|
|
|
2,268.4
|
|
|
|
1,708.1
|
|
Deferred income taxes
|
|
|
(1,781.9
|
)
|
|
|
(530.2
|
)
|
|
|
9.0
|
|
Equity income from affiliates
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
|
)
|
|
|
(1,717.1
|
)
|
Dividends and distributions from equity affiliates
|
|
|
2,485.6
|
|
|
|
1,931.9
|
|
|
|
1,101.2
|
|
Share-based compensation
|
|
|
330.2
|
|
|
|
312.5
|
|
|
|
48.0
|
|
Acquired research
|
|
|
325.1
|
|
|
|
762.5
|
|
|
|
-
|
|
Taxes paid for Internal Revenue Service settlement
|
|
|
(2,788.1
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
(64.7
|
)
|
|
|
18.1
|
|
|
|
647.5
|
|
Net changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(290.7
|
)
|
|
|
(709.3
|
)
|
|
|
345.9
|
|
Inventories
|
|
|
(40.7
|
)
|
|
|
226.5
|
|
|
|
125.6
|
|
Trade accounts payable
|
|
|
117.7
|
|
|
|
16.4
|
|
|
|
63.6
|
|
Accrued and other current liabilities
|
|
|
451.1
|
|
|
|
461.6
|
|
|
|
238.2
|
|
Income taxes payable
|
|
|
987.2
|
|
|
|
(138.2
|
)
|
|
|
663.2
|
|
Noncurrent liabilities
|
|
|
26.2
|
|
|
|
(125.6
|
)
|
|
|
(412.2
|
)
|
Other
|
|
|
105.1
|
|
|
|
131.2
|
|
|
|
156.2
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
6,999.2
|
|
|
|
6,765.2
|
|
|
|
7,608.5
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,011.0
|
)
|
|
|
(980.2
|
)
|
|
|
(1,402.7
|
)
|
Purchases of securities and other investments
|
|
|
(10,132.7
|
)
|
|
|
(19,591.3
|
)
|
|
|
(125,308.4
|
)
|
Acquisitions of subsidiaries, net of cash acquired
|
|
|
(1,135.9
|
)
|
|
|
(404.9
|
)
|
|
|
-
|
|
Proceeds from sales of securities and other investments
|
|
|
10,860.2
|
|
|
|
16,143.8
|
|
|
|
128,981.4
|
|
Increase in restricted cash
|
|
|
(1,401.1
|
)
|
|
|
(48.1
|
)
|
|
|
-
|
|
Other
|
|
|
10.5
|
|
|
|
(3.0
|
)
|
|
|
(3.1
|
)
|
|
|
Net Cash (Used) Provided by Investing Activities
|
|
|
(2,810.0
|
)
|
|
|
(4,883.7
|
)
|
|
|
2,267.2
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings
|
|
|
11.4
|
|
|
|
(1,522.8
|
)
|
|
|
1,296.2
|
|
Proceeds from issuance of debt
|
|
|
-
|
|
|
|
755.1
|
|
|
|
1,000.0
|
|
Payments on debt
|
|
|
(1,195.3
|
)
|
|
|
(506.2
|
)
|
|
|
(1,014.9
|
)
|
Purchases of treasury stock
|
|
|
(1,429.7
|
)
|
|
|
(1,002.3
|
)
|
|
|
(1,015.3
|
)
|
Dividends paid to stockholders
|
|
|
(3,307.3
|
)
|
|
|
(3,322.6
|
)
|
|
|
(3,349.8
|
)
|
Proceeds from exercise of stock options
|
|
|
898.6
|
|
|
|
369.9
|
|
|
|
136.5
|
|
Other
|
|
|
156.2
|
|
|
|
(375.3
|
)
|
|
|
(93.1
|
)
|
|
|
Net Cash Used by Financing Activities
|
|
|
(4,866.1
|
)
|
|
|
(5,604.2
|
)
|
|
|
(3,040.4
|
)
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
98.3
|
|
|
|
52.1
|
|
|
|
(128.8
|
)
|
|
|
Net (Decrease) Increase in Cash and Cash Equivalents
|
|
|
(578.6
|
)
|
|
|
(3,670.6
|
)
|
|
|
6,706.5
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
5,914.7
|
|
|
|
9,585.3
|
|
|
|
2,878.8
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
5,336.1
|
|
|
$
|
5,914.7
|
|
|
$
|
9,585.3
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
86
Notes to
Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
Merck is a global research-driven pharmaceutical company that
discovers, develops, manufactures and markets a broad range of
innovative products to improve human and animal health. The
Companys operations are principally managed on a products
basis and are comprised of two reportable segments: the
Pharmaceutical segment and the Vaccines segment. The
Pharmaceutical segment includes human health pharmaceutical
products marketed either directly or through joint ventures.
These products consist of therapeutic and preventive agents,
sold by prescription, for the treatment of human disorders.
Merck 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. The Vaccines segment includes human health vaccine
products marketed either directly or through a joint venture.
These products consist of preventive pediatric, adolescent and
adult vaccines, primarily administered at physician offices.
Merck 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.
|
|
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. 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 stockholders
interests are shown as Minority interests. 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.
Foreign Currency Translation The
U.S. dollar is the Companys functional currency.
Cash Equivalents Cash equivalents are
comprised of certain highly liquid investments with original
maturities of less than three months.
Inventories Substantially all domestic
inventories are valued at the lower of
last-in,
first-out (LIFO) cost or market for both book and
tax purposes. Foreign inventories are valued at the lower of
first-in,
first-out (FIFO) cost or market. 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 classified as
available-for-sale
are reported at fair value, with unrealized gains or losses, to
the extent not hedged, reported net of tax in Accumulated other
comprehensive income (AOCI). Investments in debt
securities classified as
held-to-maturity,
consistent with managements intent, are reported at cost.
Impairment losses are charged to Other (income) expense, net,
for
other-than-temporary
declines in fair value. The Company considers available evidence
in evaluating potential impairment of its investments, including
the duration and extent to which fair value is less than cost
and the Companys ability and intent to hold the investment.
Revenue Recognition Revenues from sales of
products are recognized when title and risk of loss passes to
the customer. Due to changes in terms and conditions for
domestic pharmaceutical sales in the fourth quarter of 2007,
revenues for these products, previously recognized at the time
of shipment, were recognized at time of delivery, consistent
with many foreign subsidiaries and vaccine sales. There was no
significant impact on revenue in the fourth quarter of 2007 as a
result of these changes. Recognition of revenue also requires
reasonable assurance of collection of sales proceeds and
completion of all performance obligations. Domestically, sales
discounts are issued
87
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. 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 accrued expenses. The
accrued balances relative to these provisions included in
Accounts receivable and Accrued and other current liabilities
were $82.5 million and $616.9 million, respectively,
at December 31, 2007 and $60.4 million and
$696.7 million, respectively, at December 31, 2006.
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 in accordance
with Statement of Position
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Capitalized software costs are
included in Property, plant and equipment and amortized over a
period ranging from 3 to 5 years, beginning when the asset
is substantially ready for use. Costs incurred during the
preliminary project stage and post-implementation stage, as well
as maintenance and training costs, are expensed as incurred. At
December 31, 2007, the Company had approximately
$200 million of unamortized capitalized software costs
related to a multi-year initiative to standardize its
information systems.
Acquisitions The Company accounts for
acquired businesses using the purchase method of accounting in
accordance with Financial Accounting Standards Boar