10-K
As filed with the Securities and Exchange Commission on
February 27, 2009
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, 2008
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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 Stock Exchange
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Number of shares of Common Stock ($0.01 par value)
outstanding as of January 30, 2009: 2,107,712,364.
Aggregate market value of Common Stock ($0.01 par value)
held by non-affiliates on June 30, 2008 based on closing
price on June 30, 2008: $80,729,000,000.
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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check One):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Documents
Incorporated by Reference:
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Document
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Part of Form 10-K
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Proxy Statement for the Annual Meeting of
Stockholders to be held April 28, 2009, 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 and Infectious
Diseases segment. The Pharmaceutical segment includes human
health pharmaceutical products marketed either directly by Merck
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
and Infectious Diseases segment includes human health vaccine
and infectious disease products marketed either directly by
Merck or, in the case of vaccines, also through a joint venture.
Vaccine 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.
Infectious disease products consist of therapeutic agents for
the treatment of infection sold primarily to drug wholesalers
and retailers, hospitals and government agencies. 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.
For financial information and other information about the
Pharmaceutical segment and the Vaccines and Infectious Diseases
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 2008, the Company continued
to address business challenges in the midst of an evolving
pharmaceutical industry environment. Revenue declined by 1% in
2008 driven largely by lower sales of Fosamax
(alendronate sodium) for the treatment and prevention of
osteoporosis. Fosamax and Fosamax Plus D
(alendronate sodium/cholecalciferol) lost market exclusivity
for substantially all formulations in the United States in
February 2008 and April 2008, respectively, and as a result the
Company is experiencing a significant decline in sales in the
United States within the Fosamax franchise. Also
contributing to the decline were lower sales of Zocor
(simvastatin), the Companys statin for
modifying cholesterol which lost U.S. market exclusivity in
2006. Partially offsetting these declines were higher sales of
Januvia (sitagliptin phosphate) and Janumet
(sitagliptin phosphate and metformin hydrochloride) for the
treatment of type 2 diabetes and Isentress (raltegravir),
an antiretroviral therapy for the treatment of HIV infection.
To address the business and industry challenges that Merck
faces, the Company remains focused on innovation and customer
value in order to drive the growth of its business and help
position Merck for future success.
The Company has made significant progress with re-engineering
its operations through research and development initiatives, the
roll-out of a new commercial model and the continuation of
Mercks supply strategy. These activities should enable the
Company to optimize its product portfolio and invest in growth
opportunities, such as emerging markets, Merck BioVentures and
business development.
Merck continues its efforts to diversify the Companys
scientific portfolio both through internal programs and external
research collaborations. The Company is focused on developing
novel,
best-in-class
or follow-on treatments for patients in primary care, specialty
care, and hospital settings. Additionally, Merck Research
Laboratories is pursuing a portfolio of treatment modalities
that not only includes small molecules and vaccines, but also
biologics, peptides and RNA interference (RNAi).
Further, Merck is moving to diversify its portfolio by creating
a new division, Merck BioVentures, which leverages a unique
technology platform for both follow-on and novel biologics.
The Company has numerous active clinical programs across the
Companys major research franchises: bone, respiratory,
immunology and endocrine; cardiovascular; diabetes and obesity;
infectious diseases; neuroscience; oncology and vaccines. The
Company currently has nine candidates in Phase III clinical
development and
2
anticipates submitting two New Drug Applications
(NDA) with the U.S. Food and Drug
Administration (FDA) with respect to two of the
candidates in 2009: MK-0974, telcagepant, an investigational
compound for the treatment of migraines, and MK-7418,
rolofylline, an investigational compound for the treatment of
acute heart failure. In addition, the Company anticipates
submitting an NDA in 2009 for MK-0653C, ezetimibe combined with
atorvastatin, an investigational medication for the treatment of
dyslipidemia being developed by the Merck/Schering-Plough joint
venture. Also, the Company anticipates regulatory action in 2009
on two supplemental filings that have been submitted to the FDA:
one for Gardasil, Mercks HPV vaccine, for use in
males; and one for Isentress, a
first-in-class
integrase inhibitor for the treatment of HIV-1 infection, for an
expanded indication for use in treatment-naïve patients.
On the commercial side, the Company is rolling out a more
customer-centric selling model that is designed to provide a
competitive advantage, help build trust with customers, and
improve patient outcomes. The strategy employs the use of new
marketing technologies to complement a new, more
customer-centered approach; and moves away from the traditional
frequency-based sales and marketing approach; it also creates
efficiencies by eliminating redundancies in core functions and
across the sales organization.
On the manufacturing side, Merck has made significant progress
in the three years since it began re-engineering to create a
lean, flexible, cost-effective capability. The Company continues
to address its manufacturing issues and it is working to build
additional capacity in vaccines and biologics, as well as to
support Mercks expansion into emerging markets. To assist
this goal, the Company is shifting investments from developed
markets into emerging markets commensurate with the size and
strategic importance of the opportunity.
In October 2008, the Company announced a global restructuring
program (the 2008 Restructuring Program) to reduce
its cost structure, increase efficiency, and enhance
competitiveness. As discussed above, Merck is rolling out a new,
more customer-centric selling model. Additionally, the Company
will make greater use of outside technology resources,
centralize common sales and marketing activities, and
consolidate and streamline its operations. Mercks
manufacturing division will further focus its capabilities on
core products and outsource non-core manufacturing. Also, Merck
is expanding its access to worldwide external science through a
basic research global operating strategy, which is designed to
provide a sustainable pipeline and is focused on translating
basic research productivity into late-stage clinical success. To
increase efficiencies, basic research operations will
consolidate work in support of a given therapeutic area into one
of four locations. This will provide a more efficient use of
research facilities and result in the closure of three basic
research sites located in Tsukuba, Japan; Pomezia, Italy; and
Seattle by the end of 2009. As part of the 2008 Restructuring
Program, the Company expects to eliminate approximately 7,200
positions 6,800 active employees and 400
vacancies across all areas of the Company worldwide
by the end of 2011, approximately 1,750 of which the Company
eliminated in 2008. About 40% of the total reductions will occur
in the United States. As part of the 2008 Restructuring Program,
the Company is streamlining management layers by reducing its
total number of senior and mid-level executives globally by
approximately 25%. The Company, however, continues to hire new
employees as the business requires. The 2008 Restructuring
Program is expected to be completed by the end of 2011 with the
total pretax costs estimated to be $1.6 billion to
$2.0 billion. In 2008, the Company recorded pretax
restructuring costs of $921.3 million related to the 2008
Restructuring Program. The Company estimates that two-thirds of
the cumulative pretax costs will result in future cash outlays,
primarily from employee separation expense. Approximately
one-third of the cumulative pretax costs are non-cash, relating
primarily to the accelerated depreciation of facilities to be
closed or divested. Merck expects the 2008 Restructuring Program
to yield cumulative pretax savings of $3.8 billion to
$4.2 billion from 2008 to 2013.
During 2008, in connection with certain transactions with
AstraZeneca LP (AZLP), the Company recorded an
aggregate pretax gain of $2.2 billion which is included in
Other (income) expense, net and received net proceeds from AZLP
of $2.6 billion. See Note 8 to the consolidated
financial statements for further information.
Earnings per common share (EPS) assuming dilution
for 2008 were $3.64, including the impact of the gain on
distribution from AZLP of $0.66 per share and restructuring
costs of $(0.44) per share. In addition, EPS in 2008 reflects
the favorable impact of certain tax items. All of these items
are discussed more fully in the notes to the consolidated
financial statements.
3
Product
Sales
Sales(1) of
the Companys products were as follows:
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($ in millions)
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2008
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2007
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2006
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Pharmaceutical:
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Singulair
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$
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4,336.9
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$
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4,266.3
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$
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3,579.0
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Cozaar/Hyzaar
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3,557.7
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3,350.1
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3,163.1
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Fosamax
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1,552.7
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3,049.0
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3,134.4
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Januvia
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1,397.1
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667.5
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42.9
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Cosopt/Trusopt
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781.2
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786.8
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697.1
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Zocor
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660.1
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876.5
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2,802.7
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Maxalt
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529.2
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467.3
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406.4
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Propecia
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429.1
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405.4
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351.8
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Arcoxia
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377.3
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329.1
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265.4
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Vasotec/Vaseretic
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356.7
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494.6
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547.2
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Janumet
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351.1
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86.4
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Proscar
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323.5
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411.0
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618.5
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Emend
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263.8
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204.2
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130.8
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Other
pharmaceutical(2)
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2,278.9
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2,422.9
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2,780.5
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Vaccine and infectious disease product sales included in the
Pharmaceutical
segment(3)
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2,187.6
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1,800.5
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1,315.8
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Pharmaceutical segment revenues
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19,382.9
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19,617.6
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19,835.6
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Vaccines(4)
and Infectious Diseases:
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Gardasil
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1,402.8
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1,480.6
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234.8
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ProQuad/M-M-R II/Varivax
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1,268.5
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1,347.1
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820.1
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RotaTeq
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664.5
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524.7
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163.4
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Zostavax
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312.4
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236.0
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38.6
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Hepatitis vaccines
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148.3
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279.9
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248.5
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Other vaccines
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354.6
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409.9
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354.0
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Primaxin
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760.4
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763.5
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704.8
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Cancidas
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596.4
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536.9
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529.8
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Isentress
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361.1
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41.3
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-
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Crixivan/Stocrin
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275.1
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310.2
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327.3
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Invanz
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265.0
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190.2
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139.2
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Other infectious disease
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15.5
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1.7
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-
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Vaccine and infectious disease product sales included in the
Pharmaceutical
segment(3)
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(2,187.6
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(1,800.5
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(1,315.8
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Vaccines and Infectious Diseases segment revenues
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4,237.0
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4,321.5
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2,244.7
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Other segment
revenues(5)
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81.8
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162.0
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162.1
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Total segment revenues
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23,701.7
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24,101.1
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22,242.4
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Other(6)
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148.6
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96.6
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393.6
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$
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23,850.3
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$
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24,197.7
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$
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22,636.0
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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 AZLP primarily relating to sales of
Nexium, as well as Prilosec. Revenue from AZLP was
$1.6 billion, $1.7 billion and $1.8 billion in
2008, 2007 and 2006, respectively. In 2006, other pharmaceutical
also reflected certain supply sales, including supply sales
associated with the Companys arrangement with
Dr. Reddys Laboratories for the sale of generic
simvastatin.
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(3)
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Sales of vaccine and infectious disease products by
non-U.S.
subsidiaries are included in the Pharmaceutical segment.
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(4)
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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. These amounts do, however, reflect
supply sales to Sanofi Pasteur MSD.
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(5)
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Includes other non-reportable human and animal health
segments.
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(6)
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Other revenues are primarily comprised of miscellaneous
corporate revenue, sales related to divested products or
businesses and other supply sales not included in segment
results.
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4
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
failure products; Fosamax and Fosamax Plus D,
Mercks osteoporosis products for the treatment and, in the
case of Fosamax, prevention of osteoporosis; Januvia
and Janumet for the treatment of type 2 diabetes;
Cosopt (dorzolamide hydrochloride and timolol maleate
ophthalmic solution) and Trusopt (dorzolamide
hydrochloride ophthalmic solution), Mercks
largest-selling ophthalmological products; Zocor,
Mercks statin for modifying cholesterol; Maxalt
(rizatriptan benzoate), an acute migraine product;
Propecia (finasteride), a product for the treatment of
male pattern hair loss; Arcoxia (etoricoxib) for the
treatment of arthritis and pain; Proscar (finasteride), a
urology product for the treatment of symptomatic benign prostate
enlargement; and Emend (aprepitant) for the prevention of
chemotherapy-induced and post-operative nausea and vomiting.
The Companys vaccine and infectious disease products
include Gardasil, a vaccine to help prevent cervical,
vulvar and vaginal cancers, precancerous or dysplastic lesions,
and genital warts caused by HPV types 6, 11, 16 and 18;
Varivax (Varicella Virus Vaccine Live), a vaccine to help
prevent chickenpox; ProQuad (Measles, Mumps, Rubella and
Varicella Virus Vaccine Live), a pediatric combination vaccine
against measles, mumps, rubella and varicella; M-M-R II
(Measles, Mumps and Rubella Virus Vaccine Live), a vaccine
against measles, mumps and rubella; RotaTeq (Rotavirus
Vaccine Live, Oral, Pentavalent), a vaccine to help protect
against rotavirus gastroenteritis in infants and children;
Zostavax (Zoster Vaccine Live), a vaccine to help prevent
shingles (herpes zoster); Primaxin (imipenem and
cilastatin sodium) and Cancidas (caspofungin acetate),
anti-bacterial/anti-fungal products; Isentress,
Crixivan (indinavir sulfate) and Stocrin
(efavirenz), antiretroviral therapies for the treatment of
HIV infection; and Invanz (ertapenem sodium) for the
treatment of infection. 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
January 25, 2008, the FDA approved Emend
(fosaprepitant dimeglumine) for Injection, 115 mg, for the
prevention of
chemotherapy-induced
nausea and vomiting. Emend for Injection provides a new
option for day one, as a substitute for Emend
(125 mg) taken orally, as part of the recommended
three-day
regimen. 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.
On August 5, 2008, Merck announced that the FDA approved an
expanded label for Cancidas, which makes it the first and
only echinocandin therapy approved in the United States for the
treatment of pediatric patients aged three months to
17 years with indicated fungal infections.
On September 12, 2008, the FDA approved Gardasil for
the prevention of vulvar and vaginal cancers caused by HPV types
16 and 18. The approval is based on data from a combined
analysis of three studies that demonstrated the efficacy and
safety of Gardasil in more than 15,000 patients.
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 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% 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.
5
As of October 30, 2008, the deadline for enrollment in the
Settlement Program (as defined below), more than 48,100 of the
approximately 48,325 individuals who were eligible for the
Settlement Program and whose claims were not 1) dismissed,
2) expected to be dismissed in the near future, or
3) tolled claims that appear to have been abandoned had
submitted some or all of the materials required for enrollment
in the Settlement Program. This represents approximately 99.8%
of the eligible MI and IS claims previously registered with the
Settlement Program. Under the terms of the Settlement Agreement,
Merck could exercise a right to walk away from the Settlement
Agreement if the thresholds and other requirements were not met.
The Company waived that right as of August 4, 2008. The
waiver of that right triggered Mercks obligation to pay a
fixed total of $4.85 billion. Payments will be made in
installments into the settlement funds. The first payment of
$500 million was made in August 2008 and an additional
payment of $250 million was made in October 2008.
Additional payments will be made on a periodic basis going
forward, when and as needed to fund payments of claims and
administrative expenses.
Joint Ventures The Company has a number of
joint ventures relating to its Pharmaceutical and Vaccines and
Infectious Diseases 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.
As previously disclosed, in January 2008, the Company announced
the results of the Effect of Combination Ezetimibe and High-Dose
Simvastatin vs. Simvastatin Alone on the Atherosclerotic Process
in Patients with Heterozygous Familial Hypercholesterolemia
(ENHANCE) clinical trial, an imaging trial in
720 patients with heterozygous familial
hypercholesterolemia, a rare genetic condition that causes very
high levels of LDL bad cholesterol and greatly
increases the risk for premature coronary artery disease. As
previously reported, despite the fact that ezetimibe/simvastatin
10/80 mg (Vytorin) significantly lowered LDL
bad cholesterol more than simvastatin 80 mg
alone, there was no significant difference between treatment
with ezetimibe/simvastatin and simvastatin alone on the
pre-specified primary endpoint, a change in the thickness of
carotid artery walls over two years as measured by ultrasound.
There also were no significant differences between treatment
with ezetimibe/simvastatin and simvastatin on the four
pre-specified key secondary endpoints: percent of patients
manifesting regression in the average carotid artery
intima-media thickness (CA IMT); proportion of
patients developing new carotid artery plaques >1.3 mm;
changes in the average maximum CA IMT; and changes in the
average CA IMT plus in the average common femoral artery IMT. In
ENHANCE, when compared to simvastatin alone,
ezetimibe/simvastatin significantly lowered LDL bad
cholesterol, as well as triglycerides and C-reactive protein
(CRP). Ezetimibe/simvastatin is not indicated for
the reduction of CRP. In the ENHANCE study, the overall safety
profile of ezetimibe/simvastatin was generally consistent with
the product label. The ENHANCE study was not designed nor
powered to evaluate cardiovascular clinical events. The Improved
Reduction in High-Risk Subjects Presenting with Acute Coronary
Syndrome (IMPROVE-IT) trial is underway and is
designed to provide cardiovascular outcomes data for
ezetimibe/simvastatin in patients with acute coronary syndrome.
No incremental benefit of ezetimibe/simvastatin on
cardiovascular morbidity and mortality over and above that
demonstrated for simvastatin has been established. In March
2008, the results of ENHANCE were reported at the annual
Scientific Session of the American College of Cardiology.
On July 21, 2008, efficacy and safety results from the
Simvastatin and Ezetimibe in Aortic Stenosis (SEAS)
study were announced. SEAS was designed to evaluate whether
intensive lipid lowering with Vytorin
10/40 mg
would reduce the need for aortic valve replacement and the risk
of cardiovascular morbidity and mortality versus placebo in
patients with asymptomatic mild to moderate aortic stenosis who
had no indication for statin therapy. Vytorin failed to
meet its primary end point for the reduction of major
cardiovascular events. There also was no significant difference
in the key secondary end point of aortic valve events; however,
there was a reduction in the group of patients taking Vytorin
compared to placebo in the key secondary end point of
ischemic cardiovascular
6
events. Vytorin is not indicated for the treatment of
aortic stenosis. No incremental benefit of Vytorin on
cardiovascular morbidity and mortality over and above that
demonstrated for simvastatin has been established. In the study,
patients in the group who took Vytorin 10/40 mg had
a higher incidence of cancer than the group who took placebo.
There was also a nonsignificant increase in deaths from cancer
in patients in the group who took Vytorin versus those
who took placebo. Cancer and cancer deaths were distributed
across all major organ systems. The Company believes the cancer
finding in SEAS is likely to be an anomaly that, taken in light
of all the available data, does not support an association with
Vytorin. In August 2008, the FDA announced that it was
investigating the results from the SEAS trial. In this
announcement, the FDA also cited interim data from two large
ongoing cardiovascular trials of Vytorin the
Study of Heart and Renal Protection (SHARP) and the
IMPROVE-IT clinical trials in which there was no
increased risk of cancer with the combination of simvastatin
plus ezetimibe. The SHARP trial is expected to be completed in
2010. The IMPROVE-IT trial is scheduled for completion around
2012. The FDA determined that, as of that time, these findings
in the SEAS trial plus the interim data from ongoing trials
should not prompt patients to stop taking Vytorin or any
other cholesterol lowering drug.
The Company, through Merck/Schering-Plough Pharmaceuticals (the
MSP Partnership), is committed to working with
regulatory agencies to further evaluate the available data and
interpretations of those data; however, the Company does not
believe that changes in the clinical use of Vytorin are
warranted.
As previously disclosed, the Company and its joint venture
partner, Schering-Plough, have received several letters
addressed to both companies from the House Committee on Energy
and Commerce, its Subcommittee on Oversight and Investigations
(O&I), and the Ranking Minority Member of the
Senate Finance Committee, collectively seeking a combination of
witness interviews, documents and information on a variety of
issues related to the ENHANCE clinical trial, the sale and
promotion of Vytorin, as well as sales of stock by
corporate officers. In addition, since August 2008, the
companies have received three additional letters from O&I,
including one dated February 19, 2009, seeking certain
information and documents related to the SEAS clinical trial. As
previously disclosed, the companies have each received subpoenas
from the New York and New Jersey State Attorneys General Offices
and a letter from the Connecticut Attorney General seeking
similar information and documents. In addition, the Company has
received five Civil Investigative Demands (CIDs)
from a multistate group of 35 State Attorneys General who are
jointly investigating whether the companies violated state
consumer protection laws when marketing Vytorin. Finally,
in September 2008, the Company received a letter from the Civil
Division of the Department of Justice (DOJ )
informing it that the DOJ is investigating whether the
companies conduct relating to the promotion of Vytorin
caused false claims to be submitted to federal health care
programs. The Company is cooperating with these investigations
and working with Schering-Plough to respond to the inquiries. In
addition, the Company has become aware of or been served with
approximately 145 civil class action lawsuits alleging common
law and state consumer fraud claims in connection with the MSP
Partnerships sale and promotion of Vytorin and
Zetia. Certain of those lawsuits allege personal injuries
and/or seek
medical monitoring. These actions, which have been filed in or
transferred to federal court, are coordinated in a multidistrict
litigation in the U.S. District Court for the District
Court of New Jersey before District Judge Dennis M. Cavanaugh.
The parties are presently engaged in motions practice and
briefing. Also, as previously disclosed, on April 3, 2008,
a Merck shareholder filed a putative class action lawsuit in
federal court in the Eastern District of Pennsylvania alleging
that Merck and its Chairman, President and Chief Executive
Officer, Richard T. Clark, violated the federal securities laws.
On April 22, 2008, a member of a Company Employee
Retirement Income Security Act ( ERISA) plan filed a
putative class action lawsuit against the Company and certain of
its officers and directors alleging they breached their
fiduciary duties under ERISA.
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 (omeprazole), the first in a class of
medications known as proton pump inhibitors, which slows the
production of acid from the cells of the stomach lining.
In 1998, 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 exchange for a 1% limited partner
interest. Astra contributed the net assets of its wholly owned
subsidiary, Astra USA, Inc., to the Partnership in exchange for
a
7
99% general partner interest. The Partnership, renamed
AstraZeneca LP (AZLP) upon Astras 1999 merger
with Zeneca Group Plc (the AstraZeneca merger),
became the exclusive distributor of the products for which KBI
retained rights.
The Company earns certain Partnership returns as well as ongoing
revenue based on sales of current and future KBI products. The
Partnership returns include a priority return provided for in
the Partnership Agreement, variable returns based, in part, upon
sales of certain former Astra USA, Inc. products, and a
preferential return representing the Companys share of
undistributed Partnership GAAP earnings. The AstraZeneca merger
triggered a partial redemption in March 2008 of Mercks
interest in certain AZLP product rights. Upon this redemption,
Merck received $4.3 billion from AZLP. This amount was
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). Merck
recorded a $1.5 billion pretax gain on the partial
redemption in 2008. The partial redemption of Mercks
interest in the product rights did not result in a change in
Mercks 1% limited partner interest. As described in
Item 7. Managements Discussion and
Analysis below, after certain adjustments, the Company
recorded an aggregate pretax gain of $2.2 billion.
In conjunction with the 1998 restructuring, Astra purchased an
option (the Asset Option) for a payment of
$443.0 million, which was recorded as deferred income, to
buy Mercks interest in the KBI products, excluding the
gastrointestinal medicines Nexium (esomeprazole) 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 would not exercise the Asset
Option, thus the $443.0 million remains deferred. In
addition, in 1998, the Company granted Astra an option (the
Shares Option) to buy Mercks common stock
interest in KBI and, therefore, Mercks interest in
Nexium and Prilosec, exercisable two years after
Astras exercise of the Asset Option. Astra can also
exercise the Shares Option in 2017 or if combined annual sales
of the two products fall below a minimum amount provided, in
each case, only so long as AstraZenecas Asset Option has
been exercised in 2010. The exercise price for the Shares Option
is based on the net present value of estimated future net sales
of Nexium and Prilosec as determined at the time
of exercise, subject to certain
true-up
mechanisms.
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. 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
businesses to form Merial Limited (Merial), a
fully integrated animal health company, which is a stand-alone
joint venture, 50% owned by each party. Merial provides a
comprehensive range of pharmaceuticals and vaccines to enhance
the health, well-being and performance of a wide range of animal
species.
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.
8
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 also continues to pursue external
alliances. 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 and Fosamax Plus D
lost marketing exclusivity in the United States in 2008. As
a result of these events, the Company is experiencing
significant declines in Fosamax and Fosamax Plus D
U.S. sales. Also, Trusopt and Cosopt lost
market exclusivity in the United States in October 2008 and as a
result the Company is experiencing a significant decline in
sales of these products.
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.
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 and Infectious Diseases 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.
9
These proposals may include removing the current legal
prohibition against the Secretary of the Health and Human
Services intervening in price negotiations between Medicare drug
benefit program plans and pharmaceutical companies. They may
also include mandating the payment of rebates for some or all of
the pharmaceutical utilization in Medicare drug benefit plans.
In addition, Congress may again consider proposals to allow,
under certain conditions, the importation of medicines from
other countries.
For many years, the pharmaceutical industry has been under
federal and state oversight with the approval process for new
drugs, drug safety, advertising and promotion, drug purchasing
and reimbursement programs and formularies 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 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.
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.
In January 2008, the European Commission (EC)
launched a sector inquiry in the pharmaceutical markets under
the rules of EU competition law. As part of its inquiry, the
Companys offices in Germany were inspected by the
authorities in January 2008. The Preliminary Report of the EC
was issued on November 28, 2008, in which the EC stated
that it had confirmed its original hypothesis that competition
in the pharmaceutical sector may be restricted or distorted, as
indicated by a decline in innovation measured by the number of
novel medicines reaching the market, and by alleged instances of
delayed market entry of generic medicines. The public
consultation period with respect to the Preliminary Report
expired on January 31, 2009, and the EC has issued further
inquiries in respect of the subject of the investigation. The EC
has not alleged that the Company or any of its subsidiaries have
10
engaged in any unlawful practices. The final report is planned
for later in 2009. The Company is cooperating with the EC in
this sector inquiry.
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, including recently enacted
laws in a majority of U.S. states requiring security breach
notification.
Patents, Trademarks and Licenses Patent
protection is considered, in the aggregate, to be of material
importance in the Companys marketing of human health
products in the United States and in most major foreign markets.
Patents may cover products per se, pharmaceutical
formulations, processes for or intermediates useful in the
manufacture of products or the uses of products. Protection for
individual products extends for varying periods in accordance
with the legal life of patents in the various countries. The
protection afforded, which may also vary from country to
country, depends upon the type of patent and its scope of
coverage.
The FDA Modernization Act includes a Pediatric Exclusivity
Provision that may provide an additional six months of market
exclusivity in the United States for indications of new or
currently marketed drugs if certain agreed upon pediatric
studies are completed by the applicant. These exclusivity
provisions were re-authorized by the Prescription Drug User Fee
Act passed in September 2007. Current U.S. patent law
provides additional patent term under Patent Term Restoration
for periods when the patented product was under regulatory
review before the FDA.
Patent portfolios developed for products introduced by the
Company normally provide market exclusivity. The Company has the
following key U.S. patent protection (including Patent Term
Restoration and Pediatric Exclusivity) for major marketed
products:
|
|
|
Product
|
|
Year of Expiration (in
U.S.)
|
|
Cancidas
|
|
2015
|
Comvax
|
|
2020
|
Cozaar
|
|
2010
|
Crixivan
|
|
2012 (compound)/2018 (formulation)
|
Emend
|
|
2015
|
Gardasil
|
|
2026
|
Hyzaar
|
|
2010
|
Invanz
|
|
2016 (compound)/2017 (composition)
|
Isentress
|
|
2023
|
Januvia/Janumet
|
|
2022 (compound)/2026 (salt)
|
Maxalt
|
|
2012 (compound)/2014 (other)
|
Primaxin
|
|
2009
|
Propecia
|
|
2013
|
Recombivax
|
|
2020
|
RotaTeq
|
|
2019 (with pending Patent Term Restoration)
|
Singulair
|
|
2012
|
Zetia/Vytorin
|
|
2017 (ezetimibe component in both products)
|
Zolinza
|
|
2015
|
Zostavax
|
|
2016
|
11
A basic patent is also in effect for Sustiva/Stocrin.
Bristol-Myers Squibb Company, 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.
While the expiration of a product patent normally results in a
loss of market exclusivity for the covered pharmaceutical
product, commercial benefits may continue to be derived from:
(i) later-granted patents on processes and intermediates
related to the most economical method of manufacture of the
active ingredient of such product; (ii) patents relating to
the use of such product; (iii) patents relating to novel
compositions and formulations; and (iv) in the United
States and certain other countries, market exclusivity that may
be available under relevant law. The effect of product patent
expiration on pharmaceutical products also depends upon many
other factors such as the nature of the market and the position
of the product in it, the growth of the market, the complexities
and economics of the process for manufacture of the active
ingredient of the product and the requirements of new drug
provisions of the Federal Food, Drug and Cosmetic Act or similar
laws and regulations in other countries.
Additions to market exclusivity are sought in the United States
and other countries through all relevant laws, including laws
increasing patent life. Some of the benefits of increases in
patent life have been partially offset by a general increase in
the number of incentives for and use of generic products.
Additionally, improvements in intellectual property laws are
sought in the United States and other countries through reform
of patent and other relevant laws and implementation of
international treaties.
For further information with respect to the Companys
patents, see Patent Litigation and Risk
Factors below.
Worldwide, all of the Companys important products are sold
under trademarks that are considered in the aggregate to be of
material importance. Trademark protection continues in some
countries as long as used; in other countries, as long as
registered. Registration is for fixed terms and can be renewed
indefinitely.
Royalties received during 2008 on patent and know-how licenses
and other rights amounted to $209.3 million. The Company
also paid royalties amounting to $1.318 billion in 2008
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
11,000 people are employed in the Companys research
activities. Research and development expenses were
$4.8 billion in 2008, $4.9 billion in 2007 and
$4.8 billion in 2006. 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 of unmet medical needs, scientific
opportunity and commercial opportunity. Merck is managing its
research and development portfolio across diverse approaches to
discovery and development by balancing investments appropriately
on novel, innovative targets with the potential to have a major
impact on human health, on developing
best-in-class
approaches, and on delivering maximum value of the
Companys new medicines and vaccines through new
indications and new formulations. Another important component of
Mercks science-based diversification is based on expanding
the Companys portfolio of modalities to include not only
small molecules and vaccines, but also biologics, peptides and
RNAi. Further, Merck is moving to diversify its portfolio by
creating a new division, Merck BioVentures, which leverages a
unique platform for both follow-on and novel biologics. The
Company will continue to pursue appropriate external licensing
opportunities.
During 2008, the Company began implementing a new model for its
basic research global operating strategy. The new model will
align franchise and function through clear roles and
responsibilities, align resources
12
with disease area priorities and balance capacity across
discovery phases and allow the Company to act upon those
programs with the highest probability of success. Additionally,
the strategy is designed to expand the Companys access to
worldwide external science and incorporate external research as
a key component of the Companys early discovery pipeline
in order to translate basic research productivity into
late-stage clinical success.
In the development of human health products, industry practice
and government regulations in the United States and most
foreign countries provide for the determination of effectiveness
and safety of new chemical compounds through preclinical tests
and controlled clinical evaluation. Before a new drug or vaccine
may be marketed in the United States, recorded data on
preclinical and clinical experience are included in the NDA for
a drug or the Biologics License Application (BLA)
for a vaccine submitted to the FDA for the required approval.
Once the Companys scientists discover a new small molecule
compound that they believe has promise to treat a medical
condition, the Company commences preclinical testing with that
compound. Preclinical testing includes laboratory testing and
animal safety studies to gather data on chemistry, pharmacology
and toxicology. Pending acceptable preclinical data, the Company
will initiate clinical testing in accordance with established
regulatory requirements. The clinical testing begins with Phase
I studies, which are designed to assess safety, tolerability,
pharmacokinetics, and preliminary pharmacodynamic activity of
the compound in humans. If favorable, additional, larger
Phase II studies are initiated to determine the efficacy of
the compound in the affected population, define appropriate
dosing for the compound, as well as identify any adverse effects
that could limit the compounds usefulness. If data from
the Phase II trials are satisfactory, the Company commences
large-scale Phase III trials to confirm the compounds
efficacy and safety. Upon completion of those trials, if
satisfactory, the Company submits regulatory filings with the
appropriate regulatory agencies around the world to have the
product candidate approved for marketing. There can be no
assurance that a compound that is the result of any particular
program will obtain the regulatory approvals necessary for it to
be marketed.
Vaccine development follows the same general pathway as for
drugs. Preclinical testing focuses on the vaccines safety
and ability to elicit a protective immune response
(immunogenicity). Pre-marketing vaccine clinical trials are
typically done in three phases. Initial Phase I clinical studies
are conducted in normal subjects to evaluate the safety,
tolerability and immunogenicity of the vaccine candidate.
Phase II studies are dose-ranging studies and may enroll
hundreds of subjects. Finally, Phase III trials typically
enroll thousands of individuals and provide the necessary data
on effectiveness and safety. If successful, the Company submits
regulatory filings with the appropriate regulatory agencies.
Also during this stage, the proposed manufacturing facility
undergoes a pre-approval inspection during which production of
the vaccine as it is in progress is examined in detail.
In the United States, the FDA review process begins once a
complete NDA is submitted and received by the FDA. Pursuant to
the Prescription Drug User Fee Act, the FDA review period
targets for NDAs or supplemental NDAs is either six months, for
priority review, or ten months, for a standard review. Within
60 days after receipt of an NDA, the FDA determines if the
application is sufficiently complete to permit a substantive
review. The FDA also assesses, at that time, whether the
application will be granted a priority review or standard
review. Once the review timelines are defined, the FDA will
generally act upon the application within those timelines,
unless a major amendment has been submitted (either at the
Companys own initiative or the FDAs request) to the
pending application. If this occurs, the FDA may extend the
review period to allow for review of the new information, but by
no more than 180 days. Extensions to the review period are
communicated to the Company. The FDA can act on an application
by issuing an approval letter or a complete response letter.
The Company anticipates filing an NDA with the FDA in 2009 for
MK-0974, telcagepant, an investigational oral calcitonin
gene-related peptide receptor antagonist, which represents a new
mechanism for the treatment of migraine and has demonstrated
efficacy comparable to zolmitriptan, an effective triptan, in
the Phase III clinical program.
The Company also anticipates filing an NDA with the FDA in 2009
for MK-7418, rolofylline, a potential
first-in-class
selective adenosine A1 antagonist, which is a Phase III
investigational drug being evaluated for the treatment of acute
heart failure.
13
Additionally, the Company anticipates filing an NDA with the FDA
in 2009 for MK-0653C, ezetimibe combined with atorvastatin, an
investigational medication for the treatment of dyslipidemia
being developed by the Merck/Schering-Plough joint venture.
The Company also anticipates regulatory action in 2009 on two
supplemental filings that have been submitted to the FDA: one
for Gardasil, Mercks HPV vaccine, for use in males;
and one for Isentress, a
first-in-class
integrase inhibitor for the treatment of HIV-1 infection, for an
expanded indication for use in treatment-naïve patients.
In January 2009, the Company received a second complete response
letter from FDA regarding the supplemental BLA
(sBLA) for the use of Gardasil in women
ages 27 though 45. The agency has completed its review of
the response that Merck provided in July 2008 and has
recommended that Merck submit additional data when the
48 month study has been completed. The initial sBLA
included data collected through an average of 24 months
from enrollment into the study, which is when the number of
pre-specified endpoints had been met. Following a review of the
final results of the study, Merck anticipates providing a
response to the agency in the fourth quarter of 2009. The letter
does not affect current indications for Gardasil in
females ages 9 through 26 nor does the letter relate to the
sBLA that was submitted in December 2008 for the use of
Gardasil in males.
In February 2009, data on several Phase III Isentress
studies were presented at the
16th Conference
on Retroviruses and Opportunistic Infections in Montreal,
Canada. In new subgroup analyses of a Phase III study
(STARTMRK) that compared Isentress to efavirenz (one of
the leading antiretrovirals prescribed for previously untreated
(treatment-naïve) HIV-infected patients), Isentress
was found to be as effective as efavirenz at suppressing
viral load and provided improvements in immune system function
across a broad spectrum of patient subpopulations through
48 weeks. The use of Isentress in previously
untreated HIV-infected patients is an investigational use of the
drug. Both medicines were taken in combination with
tenofovir/emtricitabine. In addition, results from two
Phase III studies (SWITCHMRK-1 and -2) evaluating the
effect of switching patients whose HIV is controlled on a
lopinavir/ritonavir-based regimen to a regimen containing
Isentress tablets showed that Isentress
significantly improved total cholesterol, triglycerides and
non-HDL-cholesterol. The study also showed that Isentress
did not demonstrate non-inferior virologic efficacy at
maintaining viral load suppression. As a result of the viral
load findings in these trials, Merck discontinued these two
studies.
Merck currently has nine products in Phase III development
(including MK-0974 and MK-7418 discussed above):
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 2007. A Phase III study (SUCCEED) in
patients with metastatic soft-tissue or bone sarcomas is under
way. The Company continues to anticipate filing an NDA with the
FDA in 2010.
V503 is a nine-valent HPV vaccine in development to expand
protection against cancer-causing HPV types. The Phase III
clinical program is underway and Merck anticipates filing a BLA
with the FDA in 2012.
MK-0822, odanacatib, is a highly selective inhibitor of the
cathepsin K enzyme, which is being evaluated for the treatment
of osteoporosis. The Phase III program is ongoing. Merck
continues to anticipate filing an NDA with the FDA in 2012.
MK-0524A is a drug candidate that combines extended-release
(ER) niacin and a novel flushing inhibitor,
laropiprant. MK-0524A has demonstrated the ability to lower
LDL-cholesterol (LDL-C), raise HDL-cholesterol
(HDL-C) and lower triglycerides with significantly
less flushing than traditional extended release niacin alone.
High LDL-C, low HDL-C and elevated triglycerides are risk
factors associated with heart attacks and strokes. In April
2008, Merck received a non-approvable action letter from the FDA
in response to its NDA for MK-0524A. At a meeting to the discuss
the letter, the FDA stated that additional efficacy and safety
data were required and suggested that the Company wait for the
results of the Treatment of HDL to Reduce the Incidence of
Vascular Events (HPS2-THRIVE) cardiovascular
outcomes study, which is expected to be completed in January
2012. Merck anticipates filing an NDA with the FDA for MK-0524A
in 2012.
14
In July 2008, the Company announced that Tredaptive (also
known as MK-0524A) was approved for marketing in the 27
countries of the EU, Iceland and Norway. Tredaptive is
approved for the treatment of dyslipidemia, particularly in
patients with combined mixed dyslipidemia (characterized by
elevated levels of LDL-C and triglycerides and low HDL-C) and in
patients with primary hypercholesterolemia (heterozygous
familial and non-familial). Tredaptive should be used in
patients in combination with statins, when the cholesterol
lowering effects of statin monotherapy is inadequate.
Tredaptive can be used as monotherapy only in patients in
whom statins are considered inappropriate or not tolerated. The
launch of Tredaptive in Europe and other markets has been
delayed due to a manufacturing-related issue. Merck is committed
to quickly resolving the issue and to making Tredaptive
available in Europe as soon as possible. In other countries
around the world, Merck continues to pursue regulatory approvals
for MK-0524A.
MK-0524B is a drug candidate that combines the novel approach to
raising HDL-C and lowering triglycerides from ER niacin combined
with laropiprant with the proven benefits of simvastatin in one
combination product. Merck will not seek approval for MK-0524B
in the United States until it files its complete response
relating to MK-0524A.
MK-0859, anacetrapib, is an inhibitor of the cholesteryl ester
transfer protein that has shown promise in lipid management by
raising HDL-C and reducing LDL-C without raising blood pressure.
A Phase III study was initiated in 2008 and enrollment in a
cardiovascular outcomes study is planned to begin in 2010. The
Company anticipates filing an NDA with the FDA beyond 2014.
MK-0431C combines Januvia with pioglitazone, another type
2 diabetes therapy. The Company anticipates filing an NDA with
the FDA in 2011.
In October 2008, Merck announced it will not seek regulatory
approval for taranabant, an investigational medicine, to treat
obesity and has discontinued its Phase III clinical
development program for taranabant for obesity. Available
Phase III data showed that both efficacy and adverse events
were dose related, with greater efficacy and more adverse events
in the higher doses. Therefore, after careful consideration, the
Company determined that the overall profile of taranabant did
not support further development for obesity.
In December 2008, the Company terminated its collaboration with
Dynavax Technologies Corporation (Dynavax) for the
development of V270, an investigational hepatitis B vaccine,
which was entered into in 2007. In October 2008, Merck and
Dynavax received notification from the FDA regarding the two
companies response to the agencys request for safety
information relating to the clinical hold on the two
Investigational New Drug (IND) Applications for
V270. In issuing the clinical hold in March 2008, the FDA
requested a review of clinical and safety data including all
available information about a single case of Wegeners
granulomatosis, an uncommon disease in which the blood vessels
are inflamed, reported in a Phase III clinical trial.
Dynavax and Merck had previously provided a response to the FDA
in September 2008. In its October 2008 correspondence, the FDA
advised the companies that the balance of risk versus potential
benefit no longer favored continued clinical evaluation of V270
in healthy adults and children.
The Companys clinical pipeline includes candidates in
multiple disease areas, including anemia, atherosclerosis,
cancer, diabetes, heart failure, hypertension, infectious
diseases, migraine, neurodegenerative diseases, psychiatric
diseases, osteoporosis, 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 a
number of transactions in 2008, including research
collaborations, preclinical and clinical compounds, and
technology transactions across a broad range of therapeutic
categories.
In September 2008, Merck and Japan Tobacco Inc. (JT)
signed a worldwide licensing agreement to develop and
commercialize JTT-305, an investigational oral osteoanabolic
(bone growth stimulating) agent for the treatment of
osteoporosis, a disease which reduces bone density and strength
and results in an increased risk of bone fractures. JTT-305 is
an investigational oral calcium sensing receptor antagonist that
is currently being evaluated by JT in Phase II clinical
trials in Japan for its effect on increasing bone density and is
in Phase I clinical trials outside of Japan. Under the terms of
the agreement, Merck gained worldwide rights, except for Japan,
to develop and commercialize JTT-305 and certain other related
compounds. JT received an upfront payment of $85 million,
which
15
the Company recorded as Research and development expense, and is
eligible to receive additional cash payments upon achievement of
certain milestones associated with the development and approval
of a drug candidate covered by this agreement. JT will also be
eligible to receive royalties from sales of any drug candidates
that receive marketing approval. The license agreement between
Merck and JT will remain in effect until expiration of all
royalty and milestone obligations, and may be terminated in the
event of an uncured material breach by the other party. The
agreement may also be terminated by Merck without cause before
initial commercial sale of JTT-305 by giving six months prior
notice to JT, and thereafter by giving one year prior notice
thereof to JT. The license agreement may also be terminated
immediately by Merck if Merck determines due to safety
and/or
efficacy concerns based on available scientific evidence to
cease development of JTT-305
and/or to
withdraw JTT-305 from the market on a permanent basis.
In February 2009, Merck entered into a definitive agreement with
Insmed Inc. (Insmed) to purchase Insmeds
portfolio of follow-on biologic therapeutic candidates and its
commercial manufacturing facilities located in Boulder,
Colorado. Under the terms of the agreement, Merck will pay
Insmed an aggregate of $130 million in cash to acquire all
rights to the Boulder facilities and Insmeds pipeline of
follow-on biologic candidates. Insmeds follow-on biologics
portfolio includes two clinical candidates: INS-19, an
investigational recombinant granulocyte-colony stimulating
factor (G-CSF) that will be evaluated for its
ability to prevent infections in patients with cancer receiving
chemotherapy, and INS-20, a pegylated recombinant G-CSF designed
to allow for less frequent dosing. The agreement provides for
initial payments of up to $10 million for INS-19 and
INS-20. Merck will pay Insmed the remaining balance upon closing
of the transaction, which is expected by the end of the first
quarter of 2009, without any further milestone or royalty
obligations.
The chart below reflects the Companys current research
pipeline as of February 15, 2009. Candidates shown in
Phase III include specific products. Candidates shown in
Phase I and II include the most advanced 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. All clinical programs in Merck BioVentures division are
included.
Phase I
Alzheimers
Disease
V950
Anemia
MK-2578
Cancer
MK-0752
MK-1775
MK-2206
MK-4101
MK-4827
MK-5108
MK-8033
V934/V935
Cardiovascular
MK-1597
MK-3614
MK-8984
Phase I
Diabetes
MK-4074
Infectious Disease
MK-3281
Neurologic
MK-5395
Neutropenia
INS-19
INS-20
Psychiatric Disease
MK-0594
MK-8368
MK-8998
Respiratory Disease
MK-5932
Phase II
Atherosclerosis
MK-1903
MK-6213
Cancer
MK-0646
Diabetes
MK-0893
MK-0941
MK-8245
Infectious Disease
MK-7009
V419
V710
Insomnia
MK-4305
Neurologic
MK-0249
Osteoporosis
MK-5442 (JTT-305)
Psychiatric Disease
MK-5757
Respiratory Disease
MK-0476C
MK-0633
Sarcopenia
MK-2866
Phase III
Acute Heart Failure
MK-7418
(rolofylline)
Atherosclerosis
MK-0524A
(extended-release
niacin/laropiprant)
MK-0524B
(extended-release
niacin/laropiprant/
simvastatin)
MK-0859
(anacetrapib)
Cancer
MK-8669
(deforolimus;
AP23573)
Diabetes
MK-0431C
HPV
V503
Migraine
MK-0974
(telcagepant)
Osteoporosis
MK-0822
(odanacatib)
16
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.
Employees
As of December 31, 2008, the Company had approximately
55,200 employees worldwide, with approximately 28,800
employed in the United States, including Puerto Rico.
Approximately 21% of worldwide employees of the Company are
represented by various collective bargaining groups.
In October 2008, the Company announced a global restructuring
program (the 2008 Restructuring Program) to reduce
its cost structure, increase efficiency, and enhance
competitiveness. As part of the 2008 Restructuring Program, the
Company expects to eliminate approximately 7,200
positions 6,800 active employees and 400
vacancies across all areas of the Company worldwide
by the end of 2011. About 40% of the total reductions will occur
in the United States. As part of the 2008 Restructuring Program,
the Company is streamlining management layers by reducing its
total number of senior and mid-level executives globally by
approximately 25%. Merck will rollout a new, more
customer-centric selling model designed to provide Merck with a
meaningful competitive advantage and help physicians, patients
and payers improve patient outcomes. The Company also will make
greater use of outside technology resources, centralize common
sales and marketing activities, and consolidate and streamline
its operations. Mercks manufacturing division will further
focus its capabilities on core products and outsource non-core
manufacturing. In addition, Merck is expanding its access to
worldwide external science through a basic research global
operating strategy, which is designed to provide a sustainable
pipeline and is focused on translating basic research
productivity into late-stage clinical success. To increase
efficiencies, basic research operations will consolidate work in
support of a given therapeutic area into one of four locations.
This will provide a more efficient use of research facilities
and result in the closure of three basic research sites in
Tsukuba, Japan; Pomezia, Italy; and Seattle by the end of 2009.
Environmental
Matters
The Company believes that it is in compliance in all material
respects with applicable environmental laws and regulations. In
2008, the Company incurred capital expenditures of approximately
$18.7 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
$34.5 million in 2008, $19.5 million in 2007,
$12.6 million in 2006, and are estimated at
$47.1 million for the years 2009 through 2013. These
amounts do not consider potential recoveries from other parties.
The Company has taken an active role in identifying and
providing for these costs and, in managements opinion, the
liabilities for all environmental matters which are probable and
reasonably estimable have been accrued and totaled
$89.5 million at December 31, 2008. 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 $70.0 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 44% of sales in
2008 and 39% of sales in 2007 and 2006.
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.
17
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).
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, 2008, approximately
10,800 product liability lawsuits, involving approximately
26,800 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 242 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 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% 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.
As of October 30, 2008, the deadline for enrollment in the
Settlement Program, more than 48,100 of the approximately 48,325
individuals who were eligible for the Settlement Program and
whose claims were not 1) dismissed, 2) expected to be
dismissed in the near future, or 3) tolled claims that
appear to have been abandoned had submitted some or all of the
materials required for enrollment in the Settlement Program.
This represents approximately 99.8% of the eligible MI and IS
claims previously registered with the Settlement Program. Under
the terms of the Settlement Agreement, Merck could exercise a
right to walk away from the Settlement Agreement if the
thresholds and other requirements were not met. The Company
waived that right as of August 4, 2008. The waiver of that
right triggered Mercks obligation to pay a fixed total of
$4.85 billion. Payments will be made in installments into
the settlement funds. The first payment of $500 million was
made in August 2008 and an additional payment of
18
$250 million was made in October 2008. Additional payments
will be made on a periodic basis going forward, when and as
needed to fund payments of claims and administrative expenses.
Of the plaintiff groups described above, most are currently in
the Vioxx Settlement Program. As of December 31,
2008, 70 plaintiff groups who were otherwise eligible for the
Settlement Program have not participated and their claims
remained pending against Merck. In addition, the claims of 1,400
plaintiff groups who are not eligible for the program remained
pending against Merck. A number of the 1,400 plaintiff groups
are subject to motions to dismiss for failure to comply with
court-ordered deadlines. Since December 31, 2008, hundreds
of these plaintiff groups have since been dismissed.
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. Discovery is currently ongoing
in these cases, and a status conference with the court took
place in January 2009 to discuss scheduling issues, including
the selection of early trial pool cases.
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 was appealed to
the New Jersey Supreme Court. That court heard argument on
October 22, 2007. On June 4, 2008, the New Jersey
Supreme Court reversed the Appellate Division and dismissed this
action.
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). On April 12, 2007, Judge Chesler granted
defendants motion to dismiss the complaint with prejudice.
Plaintiffs appealed Judge Cheslers decision to the United
States Court of Appeals for the Third Circuit. On
September 9, 2008, the Third Circuit issued an opinion
reversing Judge Cheslers order and remanding the case to
the District Court. On September 23, 2008, Merck filed a
petition seeking rehearing en banc, which was denied. The
case was remanded to the District Court in October 2008, and
Plaintiffs have filed their Consolidated and Fifth Amended
Class Action Complaint. In addition, various putative class
actions have been brought against the Company and several
current and former employees, officers, and directors of the
Company alleging violations of ERISA. (All of these suits are
referred to as the Vioxx ERISA Lawsuits.) 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 ten states, five counties and New York City with
respect to the marketing of Vioxx. The Company
anticipates that additional lawsuits relating to Vioxx
may 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 DOJ 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.
This investigation includes subpoenas for witnesses to appear
before a grand jury. There are also ongoing investigations by
local authorities in Europe. The Company is cooperating with
authorities in all of these investigations. (All of these
investigations are referred to as the Vioxx
Investigations.) The Company cannot predict the
outcome of any of these investigations; however, they could
result in potential civil
and/or
criminal liability.
Juries have now decided in favor of the Company twelve 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
plaintiffs verdicts. There have been two unresolved
mistrials. With respect to the five plaintiffs verdicts,
Merck filed an appeal or sought judicial review in each of those
cases. In one of those five, an
19
intermediate appellate court overturned the trial verdict and
directed that judgment be entered for Merck, and in another, an
intermediate appellate court overturned the trial verdict,
entering judgment for Merck on one claim and ordering a new
trial on the remaining claims. 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.
A trial in a representative action in Australia is scheduled to
commence on March 30, 2009, in the Federal Court of
Australia. The named plaintiff, who alleges he suffered a MI,
seeks to represent others in Australia who ingested Vioxx
and suffered a MI, thrombotic stroke, unstable angina,
transient ischemic attack or peripheral vascular disease. On
November 24, 2008, the Company filed a motion for an order
that the proceeding no longer continue as a representative
proceeding. During a hearing on December 5, 2008, the court
dismissed that motion and, on January 9, 2009, issued its
reasons for that decision. On February 17, 2009, the
Companys motion for leave to appeal that decision was
denied and the parties were directed to prepare proposed lists
of issues to be tried.
The Company currently anticipates that two U.S. Vioxx
Product Liability Lawsuits will be tried in 2009. Except
with respect to the product liability trial scheduled to be held
in Australia, the Company cannot predict the timing of any other
trials related to the Vioxx Litigation. The Company
believes that it has meritorious defenses to the Vioxx
Product Liability Lawsuits, Vioxx Shareholder
Lawsuits and Vioxx Foreign Lawsuits (collectively, the
Vioxx Lawsuits) and will vigorously defend
against them. The Companys insurance coverage with respect
to the Vioxx Lawsuits will not be adequate to cover its
defense costs and any losses.
During 2008, the Company spent approximately $305 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 fourth quarter of 2008, the Company
recorded a charge of $62 million to add to the reserve
solely for its future legal defense costs related to the
Vioxx Litigation which was $522 million at
December 31, 2007 and $279 million at
December 31, 2008. In addition, in 2007, 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. During 2008, the Company paid
$750 million into the settlement funds for the Settlement
Program. Thus, the Companys total reserve for the Vioxx
Litigation at December 31, 2008 was $4.379 billion
(the Vioxx Reserve). The amount of the
Vioxx Reserve allocated to defense costs is based on
certain assumptions, described below under Legal
Proceedings, and is the best estimate of the minimum
amount that the Company believes will be incurred in connection
with the remaining aspects of the Vioxx Litigation,
however, events such as additional trials in the Vioxx
Litigation and other events that could arise in the course of
the Vioxx Litigation could affect the ultimate amount of
defense costs to be incurred by the Company.
The Company is not currently able to estimate any additional
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 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
20
drugs. Loss of patent protection for one of the Companys
products typically leads to a rapid loss of sales for that
product, as lower priced generic versions of that drug become
available. In the case of products that contribute significantly
to the Companys sales, the loss of patent protection can
have a material adverse effect on the Companys business,
cash flow, results of operations, financial position and
prospects.
Fosamax and Fosamax Plus D lost marketing
exclusivity in the United States in 2008. As a result of these
events, the Company is experiencing significant declines in
Fosamax and Fosamax Plus D U.S. sales. 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. Also, Trusopt and Cosopt lost
market exclusivity in the United States in October 2008 and as a
result the Company is experiencing a significant decline in
sales of these products.
The patent that provides U.S. market exclusivity for
Primaxin expires in September 2009. After such time, the
Company expects a significant decline in U.S. sales of
Primaxin. In addition, Cozaar and Hyzaar
will each lose patent protection in the United States in April
2010. The Company expects significant declines in U.S. sales of
these products after that time.
A chart listing the U.S. patent protection for the
Companys major marketed products is set forth above in
Item 1. Business Patents, Trademarks and
Licenses.
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 after the loss of marketing exclusivity
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 approved or launched;
whether it will be able to develop, license or otherwise acquire
compounds, product candidates or products; or whether any
products, once launched, will be commercially successful. The
Company must maintain a continuous flow of successful new
products and successful new indications or brand extensions for
existing products sufficient both to cover its substantial
research and development costs and to replace sales that are
lost as profitable products, such as Zocor and
Fosamax, lose patent protection or are displaced by
competing products or therapies. Failure to do so in the short
term or long term would have a material adverse effect on the
Companys business, results of operations, cash flow,
financial position and prospects.
21
Issues concerning Vytorin and the ENHANCE and SEAS
clinical trials have had an adverse effect on sales of
Vytorin and Zetia in the U.S.
The Company and Schering-Plough sell Vytorin and Zetia
through their joint venture company, the MSP Partnership. On
January 14, 2008, the MSP Partnership announced the primary
endpoint and other results of the ENHANCE 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.
As previously disclosed, the Company and its joint venture
partner, Schering-Plough, have received several letters
addressed to both companies from the House Committee on Energy
and Commerce, its Subcommittee on Oversight and Investigations
(O&I), and the Ranking Minority Member of the
Senate Finance Committee, collectively seeking a combination of
witness interviews, documents and information on a variety of
issues related to the ENHANCE clinical trial, the sale and
promotion of Vytorin, as well as sales of stock by
corporate officers. In addition, since August 2008, the
companies have received three additional letters from O&I,
including one dated February 19, 2009, seeking certain
information and documents related to the SEAS clinical trial,
which is described in more detail below. The companies have each
received subpoenas from the New York and New Jersey State
Attorneys General Offices and a letter from the Connecticut
Attorney General seeking similar information and documents. In
addition, the Company has received five Civil Investigative
Demands (CIDs) from a multistate group of 35 State
Attorneys General who are jointly investigating whether the
companies violated state consumer protection laws when marketing
Vytorin. Finally, in September 2008, the Company received
a letter from the Civil Division of the DOJ informing it that
the DOJ is investigating whether the companies conduct
relating to the promotion of Vytorin caused false claims
to be submitted to federal health care programs. The Company is
cooperating with these investigations and working with
Schering-Plough to respond to the inquiries. In addition, the
Company has become aware of or been served with approximately
145 civil class action lawsuits alleging common law and state
consumer fraud claims in connection with the MSP
Partnerships sale and promotion of Vytorin and
Zetia. Certain of those lawsuits allege personal injuries
and/or seek
medical monitoring. Also, as previously disclosed, on
April 3, 2008, a Merck shareholder filed a putative class
action lawsuit in federal court in the Eastern District of
Pennsylvania alleging that Merck and its Chairman, President and
Chief Executive Officer, Richard T. Clark, violated the federal
securities laws. On April 22, 2008, a member of a Merck
ERISA plan filed a putative class action lawsuit against the
Company and certain of its officers and directors alleging they
breached their fiduciary duties under ERISA.
In January 2009, the FDA announced that it had completed its
review of the final clinical study report of ENHANCE. The FDA
stated that the results from ENHANCE did not change its position
that an elevated LDL cholesterol is a risk factor for
cardiovascular disease and that lowering LDL cholesterol reduces
the risk for cardiovascular disease. The FDA also stated that,
based on current available data, patients should not stop taking
Vytorin or other cholesterol lowering medications and
should talk to their doctor if they have any questions about
Vytorin, Zetia, or the ENHANCE trial.
In July 2008, efficacy and safety results from the SEAS study
were announced. SEAS was designed to evaluate whether intensive
lipid lowering with Vytorin would reduce the need for
aortic valve replacement and the risk of cardiovascular
morbidity and mortality versus placebo in patients with
asymptomatic mild to moderate aortic stenosis who had no
indication for statin therapy. Vytorin failed to meet its
primary end point for the reduction of major cardiovascular
events. There also was no significant difference in the key
secondary end point of aortic valve events; however, there was a
reduction in the group of patients taking Vytorin
compared to placebo in the key secondary end point of
ischemic cardiovascular events. In the study, patients in the
group who took Vytorin had a higher incidence of cancer
than the group who took placebo. There was also a nonsignificant
increase in deaths from
22
cancer in patients in the group who took Vytorin versus
those who took placebo. Cancer and cancer deaths were
distributed across all major organ systems.
In August 2008, the FDA announced that it was investigating the
results from the SEAS trial. In this announcement, the FDA also
cited interim data from two large ongoing cardiovascular trials
of Vytorin the Study of Heart and Renal
Protection (SHARP) and the IMPROVE-IT clinical
trials in which there was no increased risk of
cancer with the combination of simvastatin plus ezetimibe. The
SHARP trial is expected to be completed in 2010. The IMPROVE-IT
trial is scheduled for completion around 2012. The FDA
determined that, as of that time, these findings in the SEAS
trial plus the interim data from ongoing trials should not
prompt patients to stop taking Vytorin or any other
cholesterol lowering drug.
Following the announcements of the ENHANCE and SEAS clinical
trial results, sales of Vytorin and Zetia declined
in 2008 in the U.S. These issues concerning the ENHANCE and
SEAS clinical trials have had an adverse effect on the MSP
Partnerships sales of Vytorin and Zetia and
could continue to have an adverse effect on such sales. If sales
of such products are materially adversely affected, the
Companys business, cash flow, results of operations,
financial position and prospects could also be materially
adversely affected. In addition, unfavorable outcomes resulting
from the government investigations or the litigation concerning
the sale and promotion of these products could have a material
adverse effect on the Companys business, cash flow,
results of operations, financial position and prospects.
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 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
23
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.
As discussed below in Item 3. Legal
Proceedings Patent Litigation, the Company has
received a notice from Teva Pharmaceuticals, Inc.
(Teva), a generic company, indicating that it had
filed an ANDA for montelukast and that it is challenging the
U.S. patent that is listed for Singulair. On
April 2, 2007, the Company filed a patent infringement
action against Teva. The lawsuit automatically stays FDA
approval of Tevas ANDA until August 2009 or until an
adverse court decision, if any, whichever may occur earlier. A
trial in this matter commenced on February 23, 2009.
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 business, cash flow, results of
operations, financial position and prospects.
The Company faces intense competition from new products.
The Companys products face intense competition from
competitors products. This competition may increase as new
products enter the market. In such an event, the
competitors products may be safer or more effective or
more effectively marketed and sold than the Companys
products. Alternatively, in the case of generic competition,
they may be equally safe and effective products 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, cash flow, results of operations, financial position
and prospects.
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. 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.
Outside the United States, numerous major markets have pervasive
government involvement in funding healthcare, and in that
regard, fix the pricing and reimbursement of pharmaceutical and
vaccine products.
24
Consequently, in those markets, the Company is subject to
government decision making and budgetary actions with respect to
its products.
The Company expects pricing pressures to increase in the future.
The Company is experiencing difficulties and delays in the
manufacturing of certain of its products.
As previously disclosed, the Company has experienced
difficulties in manufacturing certain of its vaccines and other
products. The Company is working on these issues, but there can
be no assurance of when or if these issues will be finally
resolved.
In addition to the difficulties that the Company is experiencing
currently, the Company may experience difficulties and delays
inherent in manufacturing its products, such as (i) failure
of the Company or any of its vendors or suppliers to comply with
Current Good Manufacturing Practices and other applicable
regulations and quality assurance guidelines that could lead to
manufacturing shutdowns, product shortages and delays in product
manufacturing; (ii) construction delays related to the
construction of new facilities or the expansion of existing
facilities, including those intended to support future demand
for the Companys products; and (iii) other
manufacturing or distribution problems including changes in
manufacturing production sites and limits to manufacturing
capacity due to regulatory requirements, changes in types of
products produced, or physical limitations that could impact
continuous supply. Manufacturing difficulties can result in
product shortages, leading to lost sales.
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.
The recent financial crisis and current uncertainty in global
economic conditions could negatively affect the Companys
operating results.
The current financial crisis and uncertainty in global economic
conditions have resulted in substantial volatility in the credit
markets and a low level of liquidity in many financial markets.
These conditions may result in a further slowdown to the global
economy that could affect the Companys business by
reducing the prices that drug wholesalers and retailers,
hospitals, government agencies and managed health care providers
may be able or willing to pay for the Companys products or
by reducing the demand for the Companys products, which
could in turn negatively impact the Companys sales and
revenue generation and result in a material adverse effect on
the Companys business, cash flow, results of operations,
financial position and prospects.
Reliance on third party relationships and outsourcing
arrangements could adversely affect the Companys
business.
The Company depends on third parties, including suppliers,
alliances with other pharmaceutical and biotechnology companies
and third party service providers, for key aspects of its
business including development, manufacture and
commercialization of its products and support for its
information technology systems. Failure of these third parties
to meet their contractual, regulatory and other obligations to
the Company or the development of factors that materially
disrupt the relationships between the Company and these third
parties, could have a material adverse effect on the
Companys business.
25
The Company is increasingly dependent on sophisticated
information technology
and infrastructure.
The Company is increasingly dependent on sophisticated
information technology and infrastructure. Any significant
breakdown, intrusion, interruption or corruption of these
systems or data breaches could have a material adverse effect on
our business. In addition, the Company currently is proceeding
with a multi-year implementation of an enterprise wide resource
planning system, which includes modification to the design,
operation and documentation of its internal controls over
financial reporting, and intends to implement the resource
planning system in the U.S. in 2009. Any material problems
in the implementation 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, including the Annual Report, and other written
reports and oral statements made from time to time by the
Company may contain so-called forward-looking
statements, all of which are based on managements
current expectations and are subject to risks and uncertainties
which may cause results to differ materially from those set
forth in the statements. One can identify these forward-looking
statements by their use of words such as expects,
plans, will, estimates,
forecasts, projects and other words of
similar meaning. One can also identify them by the fact that
they do not relate strictly to historical or current facts.
These statements are likely to address the Companys growth
strategy, financial results, product development, product
approvals, product 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:
|
|
|
Significant litigation related to Vioxx.
|
|
|
Competition from generic products as the Companys products
lose patent protection.
|
|
|
Increased brand competition in therapeutic areas
important to the Companys long-term business performance.
|
|
|
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.
|
|
|
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.
|
|
|
Changes in government laws and regulations and the enforcement
thereof affecting the Companys business.
|
|
|
Efficacy or safety concerns with respect to marketed products,
whether or not scientifically justified, leading to product
recalls, withdrawals or declining sales.
|
|
|
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.
|
|
|
Lost market opportunity resulting from delays and uncertainties
in the approval process of the FDA and foreign regulatory
authorities.
|
26
|
|
|
Increased focus on privacy issues in countries around the world,
including the United States and the EU. The legislative and
regulatory landscape for privacy and data protection continues
to evolve, and there has been an increasing amount of focus on
privacy and data protection issues with the potential to affect
directly the Companys business, including recently enacted
laws in a majority of U.S. states requiring security breach
notification.
|
|
|
Changes in tax laws including changes related to the taxation of
foreign earnings.
|
|
|
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.
|
|
|
Economic factors over which the Company has no control,
including changes in inflation, interest rates and foreign
currency exchange rates.
|
This list should not be considered an exhaustive statement of
all potential risks and uncertainties. See Risk
Factors above.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None
The Companys corporate headquarters is located in
Whitehouse Station, New Jersey. The Companys
U.S. commercial operations are headquartered in Upper
Gwynedd, Pennsylvania. The Companys
U.S. pharmaceutical business is conducted through
divisional headquarters located in Upper Gwynedd and Whitehouse
Station, New Jersey. The Companys vaccines business is
conducted through divisional headquarters located in West Point,
Pennsylvania. 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. 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 2008 were $1.3 billion compared
with $1.0 billion for 2007. In the United States, these
amounted to $946.6 million for 2008 and $788.0 million
for 2007. Abroad, such expenditures amounted to
$351.7 million for 2008 and $223.0 million for 2007.
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.
|
|
Item 3.
|
Legal
Proceedings.
|
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,
27
and the counties of Philadelphia, Pennsylvania and Washoe and
Clark Counties, Nevada. As of December 31, 2008, the
Company had been served or was aware that it had been named as a
defendant in approximately 10,800 lawsuits, which include
approximately 26,800 plaintiff groups, alleging personal
injuries resulting from the use of Vioxx, and in
approximately 242 putative class actions alleging personal
injuries
and/or
economic loss. (All of the actions discussed in this paragraph
and in Other Lawsuits below are collectively
referred to as the Vioxx Product Liability
Lawsuits.) Of these lawsuits, approximately 8,850 lawsuits
representing approximately 22,050 plaintiff groups are or are
slated to be in the federal MDL and approximately 165 lawsuits
representing approximately 165 plaintiff groups are
included in a coordinated proceeding in New Jersey Superior
Court before Judge Carol E. Higbee.
Of the plaintiff groups described above, most are currently in
the Vioxx Settlement Program, described below. As of
December 31, 2008, 70 plaintiff groups who were otherwise
eligible for the Settlement Program have not participated and
their claims remained pending against Merck. In addition, the
claims of 1,400 plaintiff groups who are not eligible for the
Settlement Program remained pending against Merck. A number of
the 1,400 plaintiff groups are subject to motions to dismiss for
failure to comply with court-ordered deadlines. Since
December 31, 2008, hundreds of these plaintiff groups have
since been dismissed.
In addition to the Vioxx Product Liability Lawsuits
discussed above, the claims of over 27,400 plaintiffs had been
dismissed as of December 31, 2008. Of these, there have
been over 4,925 plaintiffs whose claims were dismissed with
prejudice (i.e., they cannot be brought again) either by
plaintiffs themselves or by the courts. Over 22,475 additional
plaintiffs have had their claims dismissed without prejudice
(i.e., subject to the applicable statute of limitations, they
can be brought again). Of these, approximately 13,750 plaintiff
groups represent plaintiffs who had lawsuits pending in the New
Jersey Superior Court at the time of the Settlement Agreement
described below and who enrolled in the program established by
the Settlement Agreement (the Settlement Program),
Judge Higbee has dismissed these cases without prejudice for
administrative reasons.
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
Plaintiffs Steering Committee (PSC) of the
federal Vioxx MDL as well as representatives of
plaintiffs counsel in the Texas, New Jersey and California
state coordinated proceedings to resolve state and federal 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% of the
U.S. Vioxx Product Liability Lawsuits. 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. Under the Settlement Agreement, Merck will
pay a fixed aggregate amount of $4.85 billion into two
funds ($4.0 billion for MI claims and $850 million for
IS claims) for qualifying claims that enter into 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, a
duration gate, and a proximity gate (each as defined in the
Settlement Agreement).
The Settlement Agreement provides that Merck does not admit
causation or fault. The Settlement Agreement provided that
Mercks payment obligations would 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%
of their clients who allege either MI or IS, and (2) by
June 30, 2008, plaintiffs enroll in the Settlement Program
at least 85% 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. Under the terms of the Settlement
Agreement, Merck could exercise a right to walk away from the
Settlement Agreement if the thresholds and other requirements
were not met. The Company waived that right as of August 4,
2008. The waiver of that right triggered Mercks obligation
to pay a fixed total of $4.85 billion. Payments will be
made in installments into the settlement funds. The first
payment of
28
$500 million was made in August 2008 and an additional
payment of $250 million was made in October 2008. Interim
payments have been made to certain plaintiffs who alleged that
they suffered an MI and the Company anticipates that interim
payments to IS claimants will begin shortly. Additional payments
will be made on a periodic basis going forward, when and as
needed to fund payments of claims and administrative expenses.
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. The distribution of
interim payments to qualified claimants began in August 2008 and
will continue on a rolling basis until all claimants who qualify
for an interim payment are paid. Final payments will be made
after the examination of all of the eligible claims has been
completed.
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) required plaintiffs
with cases pending as of November 9, 2007 to preserve and
produce records and serve expert reports; and (4) required
plaintiffs who file thereafter to make similar productions on an
accelerated schedule. The Clark County, Nevada and Washoe
County, Nevada coordinated proceedings were also generally
stayed.
As of October 30, 2008, the deadline for enrollment in the
Settlement Program, more than 48,100 of the approximately 48,325
individuals who were eligible for the Settlement Program and
whose claims were not 1) dismissed, 2) expected to be
dismissed in the near future, or 3) tolled claims that
appear to have been abandoned had submitted some or all of the
materials required for enrollment in the Settlement Program.
This represents approximately 99.8% of the eligible MI and IS
claims previously registered with the Settlement Program.
On April 14, 2008 and June 3, 2008, two groups of
various private insurance companies and health plans filed suit
against BrownGreer, the claims administrator for the Settlement
Program (the Claims Administrator), and
U.S. Bancorp, escrow agent for the Settlement Program (the
AvMed and Greater New York Benefit Fund
suits). The private insurance companies and health plans claim
to have paid healthcare costs on behalf of some of the enrolling
claimants and seek to enjoin the Claims Administrator from
paying enrolled claimants until their claims for reimbursement
from the enrolled claimants are resolved. Each group sought
temporary restraining orders and preliminary injunctions. Judge
Fallon denied these requests. In AvMed, the defendants moved to
sever the claims of the named plaintiffs and, in Greater New
York Benefit Fund, to strike the class allegations. Judge Fallon
granted these motions. AvMed appealed both of these decisions.
The Fifth Circuit heard argument on AvMeds appeal on
November 4, 2008. On November 17, 2008, the Court of
Appeals affirmed the district courts ruling that denied
the two motions for preliminary injunctive relief. Greater New
York Benefit Fund has served a notice of appeal. On
January 22, 2009, the PSC and counsel for certain private
insurers announced that they reached a settlement agreement. The
agreement provides a program for resolution of liens asserted by
private insurers against payments received by certain claimants
who have enrolled in the Settlement Program. The agreement can
be terminated by the private insurers if fewer than 90% of
eligible claimants participate. The plaintiffs in the AvMed and
Greater New York Benefit Fund lawsuits have agreed to
participate in the settlement.
There are two U.S. Vioxx Product Liability Lawsuits
currently scheduled for trial in 2009. The Company maintains 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
2008.
Juries have now decided in favor of the Company twelve 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
plaintiffs verdicts. There have been two unresolved
mistrials. With respect to the five plaintiffs verdicts,
Merck filed an appeal or sought judicial review in each of those
cases. In one of those five, an intermediate appellate court
overturned the trial verdict and directed that judgment be
entered for Merck, and in another, an intermediate appellate
court overturned the trial verdict, entering judgment for Merck
on one claim and ordering a new trial on the remaining claims.
29
All but the following three cases that went to trial are now
resolved: McDarby v. Merck, Ernst v. Merck, and
Garza v. Merck.
The first, McDarby, was originally tried along with a second
plaintiff, Cona, in April 2006, 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 May 29,
2008, the New Jersey Appellate Division vacated the consumer
fraud awards in both cases on the grounds that the Product
Liability Act provides the sole remedy for personal injury
claims. The Appellate Division also vacated the McDarby punitive
damage award on the ground of federal preemption and vacated the
attorneys fees and costs awarded under the Consumer Fraud
Act in both cases. The Court upheld the McDarby compensatory
award. The Company has filed with the Supreme Court of
New Jersey a petition to appeal those parts of the trial
courts rulings that the Appellate Division affirmed.
Plaintiffs filed a cross-petition to appeal those parts of the
trial courts rulings that the Appellate Division reversed.
On October 8, 2008, the Supreme Court of New Jersey granted
Mercks petition for certification of appeal, limited
solely to the issue of whether the Federal Food, Drug and
Cosmetic Act preempts state law tort claims predicated on the
alleged inadequacy of warnings contained in Vioxx
labeling that was approved by the FDA. The court denied the
plaintiffs cross-petition. On December 4, 2008, the
New Jersey Supreme Court granted Mercks motion to stay the
appeal pending the issuance of a decision from United States
Supreme Court in Wyeth v. Levine.
As previously reported, in September 2006, Merck filed a notice
of appeal of the August 2005 jury verdict in favor of the
plaintiff in the Texas state court case, Ernst v. Merck. On
May 29, 2008, the Texas Court of Appeals reversed the trial
courts judgment and issued a judgment in favor of Merck.
The Court of Appeals found the evidence to be legally
insufficient on the issue of causation. Plaintiffs have filed a
motion for rehearing en banc in the Court of Appeals.
Merck filed a response in October 2008. In January 2009,
plaintiffs filed a reply in support of their rehearing motion.
As previously reported, in April 2006, in Garza v. Merck, a jury
in state court in Rio Grande City, Texas returned a verdict in
favor of the family of decedent Leonel Garza. The jury awarded a
total of $7 million in compensatory damages to
Mr. Garzas widow and three sons. The jury also
purported to award $25 million in punitive damages even
though under Texas law, in this case, potential punitive damages
were capped at $750,000. On May 14, 2008, the
San Antonio Court of Appeals reversed the judgment and
rendered a judgment in favor of Merck. On December 10,
2008, the Court of Appeals, on rehearing, vacated its prior
ruling and issued a replacement. In the new ruling, the Court
ordered a take-nothing judgment for Merck on the design defect
claim, but reversed and remanded for a new trial as to the
strict liability claim because of juror misconduct. On
January 26, 2009, Merck filed a petition for review with
the Texas Supreme Court.
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.
30
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 counsel purporting to represent a large number of
third-party payors have filed additional such actions. Judge
Higbee lifted the stay in these cases and the cases are
currently in the discovery phase. A status conference with the
court took place in January 2009 to discuss scheduling issues in
these cases, including the selection of early trial pool cases.
The New Jersey Superior Court heard argument on plaintiffs
motion for class certification in Martin-Kleinman v. Merck,
which is a putative consumer class action, on December 5,
2008.
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. The majority of these cases are at early
procedural stages. On June 12, 2008, a Missouri state court
certified a class of Missouri plaintiffs seeking reimbursement
for
out-of-pocket
costs relating to Vioxx. The plaintiffs do not allege any
personal injuries from taking Vioxx. The Company filed a
petition for interlocutory review on June 23, 2008, which
was granted on July 30, 2008. Briefing is now complete.
During the pendency of the appeal, discovery is proceeding in
the lower court. On February 3, 2009, Judge Fallon
dismissed the master personal injury/wrongful death class action
master complaint and the medical monitoring class action master
complaint in the MDL.
Plaintiffs also have filed a class action in California state
court seeking class certification of California third-party
payors and end-users. The parties are engaged in class
certification discovery and briefing. The court heard oral
argument on the class certification issue on February 19,
2009.
The Company has also been named as a defendant in eighteen
separate lawsuits brought by Attorneys General of ten states,
five counties, the City of New York, and private citizens (whom
have brought qui tam and taxpayer derivative suits). One
of the lawsuits brought by the counties is a class action filed
by Santa Clara County, California on behalf of all
similarly situated California counties. 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.
With the exception of a case filed by the Texas Attorney General
(which remains in Texas state court and is currently scheduled
for trial in November 2009), a case filed by the Michigan
Attorney General (which was ordered remanded to state court in
January 2009), a case recently filed by the Pennsylvania
Attorney General (which has been removed to federal court but is
the subject of a pending motion to remand), and one case which
has not been removed to federal court, the rest of the actions
described in the above paragraph have been transferred to the
federal MDL and are in the discovery phase.
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
31
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 appealed Judge Cheslers decision to the United
States Court of Appeals for the Third Circuit. On
September 9, 2008, the Third Circuit issued an opinion
reversing Judge Cheslers order and remanding the case to
the District Court. On September 23, 2008, Merck filed a
petition seeking rehearing en banc, which was denied. The
case was remanded to the District Court in October 2008, and
plaintiffs have filed their Consolidated and Fifth Amended
Class Action Complaint. Merck filed a petition for a writ
of certiorari with the United States Supreme Court on
January 15, 2009. Merck expects to file a motion to dismiss
the Fifth Amended Class Action Complaint.
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 Judge Chesler resolves any motion to
dismiss in the consolidated securities action.
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. The Court
denied the motion in June 2008 and closed the case. Plaintiffs
have appealed Judge Cheslers decision to the United States
Court of Appeals for the Third Circuit.
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. On February 9, 2009, the Court denied the
motion for certification of a class as to one count and granted
the motion as to the remaining counts. The Court also limited
the class to those individuals who were participants in and
beneficiaries of the Companys retirement savings plans who
suffered a loss due to their investments in Merck stock through
the plans and who did not execute a settlement releasing their
claims. On October 6, 2008, defendants filed
32
a motion for judgment on the pleadings seeking dismissal of the
complaint. On December 24, 2008, plaintiffs filed a motion
for partial summary judgment against certain individual
defendants. Both motions are pending. Discovery is ongoing in
this litigation.
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, New Jersey 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. The current and
former executive and director defendants filed motions to
dismiss the complaint in June 2008. On October 30, 2008,
proceedings in the case were stayed through March 1, 2009.
On November 21, 2008, the pending motions to dismiss were
denied without prejudice.
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.
On May 30, 2008, the provincial court of Queens Bench
in Saskatchewan, Canada entered an order certifying a class of
Vioxx users in Canada, except those in Quebec. The class
includes individual purchasers who allege inducement to purchase
by unfair marketing practices; individuals who allege Vioxx
was not of acceptable quality, defective or not fit for the
purpose of managing pain associated with approved indications;
or ingestors who claim Vioxx caused or exacerbated a
cardiovascular or gastrointestinal condition. On June 17,
2008, the Court of Appeal for Saskatchewan granted the Company
leave to appeal the certification order. That appeal was argued
before that court, and the court has reserved decision. On
July 28, 2008, the Superior Court in Ontario denied the
Companys motion to stay class proceedings in Ontario,
which had been based on the earlier certification order entered
in Saskatchewan, and decided to certify an overlapping class of
Vioxx users in Canada, except those in Quebec and
Saskatchewan, who allege negligence and an entitlement to elect
to waive the tort. On November 24, 2008, the Ontario
Divisional Court granted the Companys motion for leave to
appeal the Superior Courts decision denying the stay of
the Ontario class proceedings and denied the Companys
motion to appeal the certification order. The Companys
appeal was heard by the Ontario Divisional Court in February
2009. On February 13, 2009, the Divisional Court declined
to set aside the order denying the stay. The Company intends to
seek leave to appeal from the Ontario Court of Appeal. Earlier,
in November 2006, the Superior court in Quebec authorized the
institution of a class action on behalf of all individuals who,
in Quebec, consumed Vioxx and suffered damages arising
out of its ingestion. As of December 31, 2008, the
plaintiffs have not instituted an action based upon that
authorization.
A trial in a representative action in Australia is scheduled to
commence on March 30, 2009, in the Federal Court of
Australia. The named plaintiff, who alleges he suffered an MI,
seeks to represent others in Australia who ingested Vioxx
and suffered an MI, thrombotic stroke, unstable angina,
transient ischemic attack or peripheral vascular disease. On
November 24, 2008, the Company filed a motion for an order
that the proceeding no longer continue as a representative
proceeding. During a hearing on December 5, 2008, the court
dismissed that motion and, on January 9, 2009, issued its
reasons for that decision. On February 17, 2009, the
Companys motion for leave to appeal that decision was
denied and the parties were directed to prepare proposed lists
of issues to be tried.
33
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) may 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-insurance.
This insurance provides coverage for legal defense costs and
potential damage amounts in connection with the Vioxx
Product Liability Lawsuits. Through an arbitration
proceeding and negotiated settlements, the Company received an
aggregate of approximately $590 million in product
liability insurance proceeds relating to the Vioxx
Product Liability Lawsuits, plus approximately
$45 million in fees and interest payments. The Company has
no additional insurance for 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.
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 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. This investigation
includes subpoenas for witnesses to appear before a grand jury.
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, on May 20, 2008, the Company
reached civil settlements with Attorneys General from 29
states and the District of Columbia to fully resolve previously
disclosed investigations under state consumer protection laws
related to past activities for Vioxx. As part of the
civil resolution of these investigations, Merck paid a total of
$58 million to be divided among the 29 states and the
District of Columbia. The agreement also includes compliance
measures that supplement policies and procedures previously
established by the Company.
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 more than 95% 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. In 2007, as a result of
entering into
34
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 two U.S. Vioxx
Product Liability Lawsuits will be tried in 2009. Except
with respect to the product liability trial scheduled to be held
in Australia, the Company cannot predict the timing of any other
trials related to the Vioxx Litigation. The Company
believes that it has meritorious defenses to the Vioxx
Lawsuits and will vigorously defend against them. In view of
the inherent difficulty of predicting the outcome of litigation,
particularly where there are many claimants and the claimants
seek indeterminate damages, the Company is unable to predict the
outcome of these matters, and at this time cannot reasonably
estimate the possible loss or range of loss with respect to the
Vioxx Lawsuits not included in the Settlement Program.
The Company has not established any reserves for any potential
liability relating to the Vioxx Lawsuits not included in
the Settlement Program or the Vioxx Investigations. 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, 2007, the Company had an
aggregate reserve of approximately $5.372 billion
(theVioxx Reserve) for the Settlement Program
and the Companys future legal defense costs related to the
Vioxx Litigation.
During 2008, the Company spent approximately $305 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 fourth quarter, the Company
recorded a charge of $62 million solely for its future
legal defense costs related to the Vioxx Litigation. In
addition, in the fourth quarter the Company paid an additional
$250 million into the settlement funds in connection with
the Settlement Program after having paid $500 million into
the settlement funds in the third quarter. Consequently, as of
December 31, 2008, the aggregate amount of the Vioxx
Reserve was approximately $4.379 billion. In adding to
the Vioxx Reserve solely for its future legal defense
costs, the Company considered the same factors that it
considered when it previously established reserves for the
Vioxx Litigation. Some of the significant factors
considered in the review of the Vioxx Reserve were as
follows: the actual costs incurred by the Company; the
development of the Companys legal defense strategy and
structure in light of the scope of the Vioxx Litigation,
including the Settlement Agreement and the expectation that
certain lawsuits will continue to be pending; the number of
cases being brought against the Company; the costs and outcomes
of completed trials and the most current information regarding
anticipated timing, progression, and related costs of pre-trial
activities and trials in the Vioxx Litigation. The amount
of the Vioxx Reserve as of December 31, 2008,
allocated solely to defense costs represents the Companys
best estimate of the minimum amount of defense costs to be
incurred in connection with the remaining aspects of the
Vioxx Litigation; however, events such as additional
trials in the Vioxx Litigation and other events that
could arise in the course of the Vioxx Litigation could
affect the ultimate amount of defense costs to be incurred by
the Company.
The Company will continue to monitor its legal defense costs and
review the adequacy of the associated reserves and may determine
to increase the Vioxx Reserve at any time in the future
if, based upon the factors set forth, it believes it would be
appropriate to do so.
Other
Product Liability Litigation
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, 2008, approximately 779 cases, which include
approximately 1,158 plaintiff groups had been filed and were
pending against Merck in either federal or state court,
including one case which seeks class action certification, as
well as damages
and/or
medical monitoring. In these actions, plaintiffs allege, among
other things, that they have suffered osteonecrosis of the jaw,
generally subsequent to invasive dental procedures, such as
tooth extraction or dental implants
and/or
delayed healing, in association with the use of Fosamax.
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
35
United States District Court for the Southern District of New
York. As a result of the JPML order, approximately 645 of the
cases are before Judge Keenan. Judge Keenan has issued a Case
Management Order (and various amendments thereto) setting forth
a schedule governing the proceedings which focused primarily
upon resolving the class action certification motions in 2007
and completing fact discovery in an initial group of 25 cases by
October 1, 2008. Briefing and argument on plaintiffs
motions for certification of medical monitoring classes were
completed in 2007 and Judge Keenan issued an order denying the
motions on January 3, 2008. On January 28, 2008, Judge
Keenan issued a further order dismissing with prejudice all
class claims asserted in the first four class action lawsuits
filed against Merck that sought personal injury damages
and/or
medical monitoring relief on a class wide basis. In October
2008, Judge Keenan issued an order requiring that Daubert
motions be filed in May 2009 and scheduling trials in the
first three cases in the MDL for August 2009, October 2009, and
January 2010, respectively. A trial is scheduled in Alabama
state court later in 2009.
In addition, in July 2008, an application was made by the
Atlantic County Superior Court of New Jersey requesting that all
of the Fosamax cases pending in New Jersey be considered
for mass tort designation and centralized management before one
judge in New Jersey. On October 6, 2008, the New Jersey
Supreme Court ordered that all pending and future actions filed
in New Jersey arising out of the use of Fosamax and
seeking damages for existing dental and jaw-related injuries,
including osteonecrosis of the jaw, but not solely seeking
medical monitoring, be designated as a mass tort for centralized
management purposes before Judge Higbee in Atlantic County
Superior Court. As a result of the New Jersey Supreme
Courts order, approximately 100 cases were coordinated as
of December 31, 2008 before Judge Higbee, who is expected
to begin setting various case management deadlines during the
first quarter of 2009.
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. During
2008, the Company spent approximately $34 million and added
$40 million to its reserve. Consequently, as of
December 31, 2008, the Company had a reserve of
approximately $33 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 the completion of the
first three federal trials discussed above. 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.
Fifty of the county cases have been consolidated in New York
state court. The Company was dismissed from the Suffolk County
case, which was the first of the New York county cases to be
filed. In addition to the New York county cases, as of
December 31, 2008, the Company was a defendant in state
cases brought by the Attorneys General of eleven states,
36
all of which are being defended. In February 2009, the Kansas
Attorney General filed suit against Merck and several other
manufacturers. Additionally, the Attorney General of Arizona
voluntarily dismissed Merck from its case in February 2009. The
court in the AWP cases pending in Hawaii listed Merck and others
to be set for trial in mid-2010.
Governmental
Proceedings
As previously disclosed, in February 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. In
connection with these settlements, as previously disclosed,
Merck entered into a Corporate Integrity Agreement
(CIA) with the U.S. Department of Health and Human
Services Office of Inspector General (HHS-OIG) for a
five-year term. The CIA requires, among other things, that Merck
maintain its ethics training program and policies and procedures
governing promotional practices and Medicaid price reporting.
Further, as required by the CIA, Merck has retained an
Independent Review Organization (IRO) to conduct a
systems review of its promotional policies and procedures and to
conduct, on a sample basis, transactional reviews of
Mercks promotional programs and certain Medicaid pricing
calculations. Merck is also required to provide regular reports
and certifications to the HHS-OIG regarding its compliance with
the CIA. The IRO is currently conducting the required reviews.
Merck is scheduled to submit its first Annual Report to the
HHS-OIG in May 2009.
Vytorin/Zetia
Litigation
As previously disclosed, the Company and its joint venture
partner, Schering-Plough, have received several letters
addressed to both companies from the House Committee on Energy
and Commerce, its Subcommittee on Oversight and Investigations
(O&I), and the Ranking Minority Member of the
Senate Finance Committee, collectively seeking a combination of
witness interviews, documents and information on a variety of
issues related to the ENHANCE clinical trial, the sale and
promotion of Vytorin, as well as sales of stock by
corporate officers. In addition, since August 2008, the
companies have received three additional letters from O&I,
including one dated February 19, 2009, seeking certain
information and documents related to the SEAS clinical trial. As
previously disclosed, the companies have each received subpoenas
from the New York and New Jersey State Attorneys General Offices
and a letter from the Connecticut Attorney General seeking
similar information and documents. In addition, the Company has
received five Civil Investigative Demands (CIDs)
from a multistate group of 35 State Attorneys General who are
jointly investigating whether the companies violated state
consumer protection laws when marketing Vytorin. Finally,
in September 2008, the Company received a letter from the Civil
Division of the DOJ informing it that the DOJ is investigating
whether the companies conduct relating to the promotion of
Vytorin caused false claims to be submitted to federal
health care programs. The Company is cooperating with these
investigations and working with Schering-Plough to respond to
the inquiries. In addition, the Company has become aware of or
been served with approximately 145 civil class action lawsuits
alleging common law and state consumer fraud claims in
connection with the MSP Partnerships sale and promotion of
Vytorin and Zetia. Certain of those lawsuits
allege personal injuries
and/or seek
medical monitoring. These actions, which have been filed in or
transferred to federal court, are coordinated in a multidistrict
litigation in the U.S. District Court for the District
Court of New Jersey before District Judge Dennis M. Cavanaugh.
The parties are presently engaged in motions practice and
briefing.
Also, as previously disclosed, on April 3, 2008, a Merck
shareholder filed a putative class action lawsuit in federal
court in the Eastern District of Pennsylvania alleging that
Merck and its Chairman, President and Chief Executive Officer,
Richard T. Clark, violated the federal securities laws. This
suit has since been withdrawn and
re-filed in
the District of New Jersey and has been consolidated with
another federal securities lawsuit under the caption In re
Merck & Co., Inc. Vytorin Securities
Litigation. An amended consolidated complaint was filed on
October 6, 2008 and names as defendants Merck;
Merck/Schering-Plough Pharmaceuticals, LLC; and certain of the
Companys officers and directors. Specifically, the
complaint alleges that Merck delayed releasing unfavorable
results of a clinical study regarding the efficacy of Vytorin
and that Merck made false and misleading statements about
expected earnings, knowing that once the results of the
Vytorin study were released, sales of Vytorin
would decline and Mercks earnings would suffer. On
April 22, 2008, a member of a Merck ERISA plan filed a
putative
37
class action lawsuit against the Company and certain of its
officers and directors alleging they breached their fiduciary
duties under ERISA. Since that time, there have been other
similar ERISA lawsuits filed against the Company in the District
of New Jersey, and all of those lawsuits have been consolidated
under the caption In re Merck & Co., Inc. Vytorin
ERISA Litigation. An amended consolidated complaint was
filed on February 5, 2009, and names as defendants Merck
and various members of Mercks Board of Directors and
members of committees of Mercks Board of Directors.
Plaintiffs allege that the ERISA plans investment in
Company stock was imprudent because the Companys earnings
are dependent on the commercial success of its cholesterol drug
Vytorin and that defendants knew or should have known
that the results of a scientific study would cause the medical
community to turn to less expensive drugs for cholesterol
management. The Company intends to defend the lawsuits referred
to in this section vigorously. Unfavorable outcomes resulting
from the government investigations or the civil litigation could
have a material adverse effect on the Companys financial
position, liquidity and results of operations.
In November 2008, the individual shareholder who had previously
delivered a letter to the Companys Board of Directors
demanding that the Board take legal action against the
responsible individuals to recover the amounts paid by the
Company in 2007 to resolve certain governmental investigations
delivered another letter to the Board demanding that the Board
or a subcommittee thereof commence an investigation into the
matters raised by various civil suits and governmental
investigations relating to Vytorin.
Vaccine
Litigation
As previously disclosed, the Company is a party to individual
and class action product liability lawsuits and claims in the
United States involving pediatric vaccines (e.g., hepatitis B
vaccine) that contained thimerosal, a preservative used in
vaccines. Merck has not distributed thimerosal-containing
pediatric vaccines in the United States since the fall of
2001. As of December 31, 2008, there were approximately 230
thimerosal related lawsuits pending in which the Company is a
defendant, although the vast majority of those lawsuits are not
currently active. Other defendants include other vaccine
manufacturers who produced pediatric vaccines containing
thimerosal as well as manufacturers of thimerosal. In these
actions, the plaintiffs allege, among other things, that they
have suffered neurological injuries as a result of exposure to
thimerosal from pediatric vaccines. There are no cases currently
scheduled for trial. The Company will defend against these
lawsuits; however, it is possible that unfavorable outcomes
could have a material adverse effect on the Companys
financial position, liquidity and results of operations.
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 5,000 cases
pending in the Vaccine Court involving allegations that
thimerosal-containing vaccines
and/or the
M-M-R II vaccine cause autism spectrum disorders. Not all
of the thimerosal-containing vaccines involved in the Vaccine
Court proceeding are Company vaccines. The Company is the sole
source of the M-M-R II vaccine domestically. The Special
Masters presiding over the Vaccine Court proceedings held
hearings in three test cases involving the theory that the
combination of M-M-R II vaccine and thimerosal in
vaccines causes autism spectrum disorders. On February 12,
2009, the Special Masters issued decisions in each of those
cases, finding that the theory was unsupported by valid
scientific evidence and that the petitioners in the three cases
were therefore not entitled to compensation. The Special Masters
have held similar hearings in three different test cases
involving the theory that thimerosal in vaccines alone causes
autism spectrum disorders. Decisions have not been issued in
this second set of test cases. The Special Masters had
previously indicated that they would hold similar hearings
involving the theory that M-M-R II alone causes autism
spectrum disorders, but they have stated that they no longer
intend to do so. The Vaccine Court has indicated that it intends
to
38
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,
Nexium, Singulair, Primaxin and Emend prior to
the expiration of the Companys (and AstraZenecas in
the case of Nexium) patents concerning these products. In
addition, an ANDA has been submitted to the FDA seeking to
market in the United States a generic form of Zetia prior
to the expiration of Schering-Ploughs patent concerning
that product. The generic companies ANDAs generally
include allegations of non-infringement, invalidity and
unenforceability of the patents. The Company has filed patent
infringement suits in federal court against companies filing
ANDAs for generic alendronate (Fosamax),
montelukast (Singulair), imipenem/cilastatin
(Primaxin) and AstraZeneca and the Company have filed
patent infringement suits in federal court against companies
filing ANDAs for generic esomeprazole (Nexium).
Also, the Company and Schering-Plough have filed 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 until October 2010 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 (imipenem/cilastatin).
The lawsuit asserted infringement on Mercks patent which
is due to expire on September 15, 2009. In July 2008, Merck
and Ranbaxy entered into an agreement pursuant to which Ranbaxy
can begin to market in the United States a generic form of
imipenem/cilastatin on September 1, 2009.
As previously disclosed, in February 2007, the Company received
a notice from 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 until August 2009 or until an
adverse court decision, if any, whichever may occur earlier. A
trial in this matter commenced on February 23, 2009.
As previously disclosed, in January 2005, the U.S. Court of
Appeals for the Federal Circuit in Washington, DC 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 and Fosamax Plus D
lost marketing exclusivity in the United States in 2008. As
a result of these events, the Company is experiencing
significant declines in Fosamax and Fosamax Plus D
U.S. sales. Similarly, in most major foreign markets
the basic use patent covering alendronate expired in 2008 and
generic products are being sold.
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. In October
2008, the Federal Court of Canada issued a decision awarding
Apotex its lost profits for its generic alendronate product for
the period of time that it was held off the market due to
Mercks lawsuit. The Company has appealed this decision.
39
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. The Company has sued multiple parties in
European countries asserting its European patent covering
once-weekly dosing of Fosamax. Oppositions have been
filed in the EPO against this patent. A hearing in that
proceeding is scheduled for March 2009.
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.
In October 2008, the U.S. patent for dorzolamide, covering
both Trusopt and Cosopt, expired, after which the
Company experienced a significant decline in U.S. sales of these
products. The Company is involved in litigation proceedings of
the corresponding patents in Canada and Great Britain.
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. In November 2005, the Company and AstraZeneca
sued Ranbaxy in the United States District Court in New Jersey.
As previously disclosed, AstraZeneca, Merck and Ranbaxy have
entered into a settlement agreement which provides that Ranbaxy
will not bring its generic esomeprazole product to market in the
United States until May 27, 2014. The Company and
AstraZeneca each received a CID from the United States Federal
Trade Commission (the FTC) in July 2008 regarding
the settlement agreement with Ranbaxy. The Company is
cooperating with the FTC in responding to this CID.
The Company and AstraZeneca received notice in January 2006 that
IVAX Pharmaceuticals, Inc. (IVAX), subsequently
acquired by Teva, had filed an ANDA for esomeprazole magnesium.
The ANDA contains Paragraph IV challenges to patents on
Nexium. In March 2006, the Company and AstraZeneca sued
Teva in the United States District Court in New Jersey. In
January 2008, the Company and AstraZeneca sued
Dr. Reddys Laboratories (Dr.
Reddys) in the District Court in New Jersey based on
Dr. Reddys filing of an ANDA for esomeprazole
magnesium. A trial has been scheduled for January 2010 with
respect to both IVAXs and Dr. Reddys ANDAs. In
addition, the Company and AstraZeneca received notice in
December 2008 that Sandoz Inc. (Sandoz) had filed an
ANDA for esomeprazole magnesium. The ANDA contains
Paragraph IV challenges to patents on Nexium. In
January 2009, the Company and AstraZeneca sued Sandoz in the
District Court in New Jersey based on Sandozs filing of an
ANDA for esomeprazole magnesium.
In January 2009, the Company received notice that an ANDA was
filed with the FDA for aprepitant which contained a
Paragraph IV challenge to patents on Emend. The
Company is evaluating the information provided with the notice
to determine what action should be taken.
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 and Company (du
Pont). The Company and du Pont have filed patent
infringement proceedings against various companies in Portugal,
Spain, Norway and Austria.
Other
Litigation
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 in 2007 to resolve
certain governmental investigations.
As previously disclosed, prior to the spin-off of Medco Health
Solutions, Inc. (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,
40
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. In December 2005, the appellate court
issued a decision vacating the District Courts judgment
and remanding the cases to the District Court to allow the
District Court to resolve certain jurisdictional issues. A
hearing was held to address such issues in February 2006. The
District Court issued a ruling in August 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. In
October 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.
The District Court preliminarily approved the amended settlement
in May 2008. However, plaintiffs that had initially opted out of
the settlement class filed objections to the settlement. The
District Court ordered briefing on the objections and heard
argument in October 2008. The District Court has not yet issued
its ruling on those objections.
After the spin-off of Medco Health, Medco Health assumed
substantially all of the liability exposure for the matters
discussed in the foregoing three 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
41
Company has taken an active role in identifying and providing
for these costs and such amounts do not include any reduction
for anticipated recoveries of cleanup costs from former site
owners or operators or other recalcitrant potentially
responsible parties.
As previously disclosed, approximately 2,200 plaintiffs have
filed an amended complaint against 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 personal injury, diminution
of property value, medical monitoring and other alleged real and
personal property damage associated with groundwater and soil
contamination found at the site of a former 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.
Executive
Officers of the Registrant (ages as of February 1,
2009)
RICHARD T. CLARK Age 62
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
ADELE D. AMBROSE Age 52
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)
JOHN CANAN Age 52
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
CELIA A. COLBERT Age 52
January, 2008 Senior Vice President, Secretary
(since September, 1993) and Assistant General Counsel
(since November, 1993) Responsible for Corporate
Secretary function and Corporate Staff Legal Groups, functional
responsibility for Office of Ethics and Compliance.
WILLIE A. DEESE Age 53
January, 2008 Executive Vice President and
President, Merck Manufacturing Division
(MMD) responsible for the Companys
global manufacturing, procurement, and distribuion and logistics
functions
May, 2005 President, MMD responsible for
the Companys global manufacturing, procurement, and
operational excellence functions
42
January, 2004 Senior Vice President, Global
Procurement
KENNETH C. FRAZIER Age 54
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 54
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 52
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 50
January, 2008 Executive Vice President and
President, Merck Research Laboratories (since January,
2003) responsible for the Companys research
and development efforts worldwide
BRUCE N. KUHLIK Age 52
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
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 44
February, 2007 Vice President and
Treasurer responsible for the Companys
treasury function
43
January, 2004 Assistant Treasurer, Global Capital
Markets responsible for managing the Companys
investment and financing portfolios and the treasury share
repurchase program
MARGARET G. MCGLYNN Age 49
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 51
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 50
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
ADAM H. SCHECHTER Age 44
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
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 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
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
|
|
|
|
|
2008
|
|
$
|
1.52
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
2007
|
|
$
|
1.52
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
Common
Stock Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
4th Q
|
|
|
3rd Q
|
|
|
2nd Q
|
|
|
1st Q
|
|
|
|
|
High
|
|
$
|
32.46
|
|
|
$
|
38.90
|
|
|
$
|
42.24
|
|
|
$
|
61.18
|
|
Low
|
|
$
|
22.82
|
|
|
$
|
30.34
|
|
|
$
|
34.49
|
|
|
$
|
36.82
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
61.62
|
|
|
$
|
53.81
|
|
|
$
|
55.14
|
|
|
$
|
46.55
|
|
Low
|
|
$
|
51.44
|
|
|
$
|
48.11
|
|
|
$
|
44.52
|
|
|
$
|
42.35
|
|
|
As of January 31, 2009, there were approximately 165,169
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, 2008. 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)
|
|
|
247,047,953
|
(2)
|
|
$
|
51.57
|
|
|
|
126,830,385
|
|
Equity compensation plans not approved by security
holders(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
247,047,953
|
|
|
$
|
51.57
|
|
|
|
126,830,385
|
|
|
|
|
(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. |
45
|
|
|
(2) |
|
Excludes approximately
6,292,164 shares of restricted stock units and 3,242,796
performance share units (assuming maximum payouts) under the
2004 and 2007 Incentive Stock Plans. Also excludes
268,723 shares of phantom stock deferred under the
Merck & Co., Inc. Deferral 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 (2,643,159 as of
December 31, 2008). 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 603,316 shares of
Merck Common Stock may be purchased under the Assumed Plans, at
a weighted average exercise price of $22.59. 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, 2008. 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
|
|
|
2008/2003
|
|
|
|
Period Value
|
|
|
CAGR**
|
|
|
MERCK
|
|
$
|
81
|
|
|
|
−4
|
%
|
DJUSPR
|
|
|
88
|
|
|
|
−2
|
|
S&P 500
|
|
|
90
|
|
|
|
−2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
MERCK
|
|
|
|
100.00
|
|
|
|
|
72.36
|
|
|
|
|
75.30
|
|
|
|
|
107.42
|
|
|
|
|
147.54
|
|
|
|
|
80.69
|
|
DJUSPR
|
|
|
|
100.00
|
|
|
|
|
91.72
|
|
|
|
|
90.20
|
|
|
|
|
103.18
|
|
|
|
|
107.79
|
|
|
|
|
88.23
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
110.87
|
|
|
|
|
116.31
|
|
|
|
|
134.66
|
|
|
|
|
142.05
|
|
|
|
|
89.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Assumes that the value of the
investment in Company Common Stock and each index was $100 on
December 31, 2003 and that all dividends were
reinvested. |
|
|
|
** |
|
Compound Annual Growth
Rate |
47
Issuer purchases of equity securities for the three month period
ended December 31, 2008 are as follows:
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
($ 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, 2008
|
|
7,241,000
|
|
$28.95
|
|
7,241,000
|
|
$
|
2,372.7
|
|
November 1
November 30, 2008
|
|
0
|
|
N/A
|
|
0
|
|
$
|
2,372.7
|
|
December 1
December 31, 2008
|
|
0
|
|
N/A
|
|
0
|
|
$
|
2,372.7
|
|
Total
|
|
7,241,000
|
|
$28.95
|
|
7,241,000
|
|
$
|
2,372.7
|
|
|
|
|
(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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008(1)
|
|
|
2007(2)
|
|
|
2006(3)
|
|
|
2005(4)
|
|
|
2004(5)
|
|
|
|
|
Results for Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
$23,850.3
|
|
|
|
$24,197.7
|
|
|
|
$22,636.0
|
|
|
|
$22,011.9
|
|
|
|
$22,972.8
|
|
Materials and production costs
|
|
|
5,582.5
|
|
|
|
6,140.7
|
|
|
|
6,001.1
|
|
|
|
5,149.6
|
|
|
|
4,965.7
|
|
Marketing and administrative expenses
|
|
|
7,377.0
|
|
|
|
7,556.7
|
|
|
|
8,165.4
|
|
|
|
7,155.5
|
|
|
|
7,238.7
|
|
Research and development expenses
|
|
|
4,805.3
|
|
|
|
4,882.8
|
|
|
|
4,782.9
|
|
|
|
3,848.0
|
|
|
|
4,010.2
|
|
Restructuring costs
|
|
|
1,032.5
|
|
|
|
327.1
|
|
|
|
142.3
|
|
|
|
322.2
|
|
|
|
107.6
|
|
Equity income from affiliates
|
|
|
(2,560.6
|
)
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
|
)
|
|
|
(1,717.1
|
)
|
|
|
(1,008.2
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
-
|
|
|
|
4,850.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other (income) expense, net
|
|
|
(2,194.2
|
)
|
|
|
46.2
|
|
|
|
(382.7
|
)
|
|
|
(110.2
|
)
|
|
|
(344.0
|
)
|
Income before taxes
|
|
|
9,807.8
|
|
|
|
3,370.7
|
|
|
|
6,221.4
|
|
|
|
7,363.9
|
|
|
|
8,002.8
|
|
Taxes on income
|
|
|
1,999.4
|
|
|
|
95.3
|
|
|
|
1,787.6
|
|
|
|
2,732.6
|
|
|
|
2,172.7
|
|
Net income
|
|
|
7,808.4
|
|
|
|
3,275.4
|
|
|
|
4,433.8
|
|
|
|
4,631.3
|
|
|
|
5,830.1
|
|
Basic earnings per common share
|
|
|
$3.66
|
|
|
|
$1.51
|
|
|
|
$2.04
|
|
|
|
$2.11
|
|
|
|
$2.63
|
|
Earnings per common share assuming dilution
|
|
|
$3.64
|
|
|
|
$1.49
|
|
|
|
$2.03
|
|
|
|
$2.10
|
|
|
|
$2.62
|
|
Cash dividends declared
|
|
|
3,250.4
|
|
|
|
3,310.7
|
|
|
|
3,318.7
|
|
|
|
3,338.7
|
|
|
|
3,329.1
|
|
Cash dividends paid per common share
|
|
|
$1.52
|
|
|
|
$1.52
|
|
|
|
$1.52
|
|
|
|
$1.52
|
|
|
|
$1.49
|
|
Capital expenditures
|
|
|
1,298.3
|
|
|
|
1,011.0
|
|
|
|
980.2
|
|
|
|
1,402.7
|
|
|
|
1,726.1
|
|
Depreciation
|
|
|
1,445.1
|
|
|
|
1,752.4
|
|
|
|
2,098.1
|
|
|
|
1,544.2
|
|
|
|
1,258.7
|
|
|
|
Year-End Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
$4,986.2
|
|
|
|
$2,787.2
|
|
|
|
$2,507.5
|
|
|
|
$7,806.9
|
|
|
|
$1,688.8
|
|
Property, plant and equipment, net
|
|
|
11,999.6
|
|
|
|
12,346.0
|
|
|
|
13,194.1
|
|
|
|
14,398.2
|
|
|
|
14,713.7
|
|
Total assets
|
|
|
47,195.7
|
|
|
|
48,350.7
|
|
|
|
44,569.8
|
|
|
|
44,845.8
|
|
|
|
42,572.8
|
|
Long-term debt
|
|
|
3,943.3
|
|
|
|
3,915.8
|
|
|
|
5,551.0
|
|
|
|
5,125.6
|
|
|
|
4,691.5
|
|
Stockholders equity
|
|
|
18,758.3
|
|
|
|
18,184.7
|
|
|
|
17,559.7
|
|
|
|
17,977.7
|
|
|
|
17,349.3
|
|
|
|
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income as a % of sales
|
|
|
32.7
|
%
|
|
|
13.5
|
%
|
|
|
19.6
|
%
|
|
|
21.0
|
%
|
|
|
25.4
|
%
|
Net income as a % of average total assets
|
|
|
16.3
|
%
|
|
|
7.0
|
%
|
|
|
9.9
|
%
|
|
|
10.6
|
%
|
|
|
14.0
|
%
|
|
|
Year-End Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding (millions)
|
|
|
2,135.8
|
|
|
|
2,170.5
|
|
|
|
2,177.6
|
|
|
|
2,197.0
|
|
|
|
2,219.0
|
|
Average common shares outstanding assuming dilution (millions)
|
|
|
2,145.3
|
|
|
|
2,192.9
|
|
|
|
2,187.7
|
|
|
|
2,200.4
|
|
|
|
2,226.4
|
|
Number of stockholders of record
|
|
|
165,700
|
|
|
|
173,000
|
|
|
|
184,200
|
|
|
|
198,200
|
|
|
|
216,100
|
|
Number of employees
|
|
|
55,200
|
|
|
|
59,800
|
|
|
|
60,000
|
|
|
|
61,500
|
|
|
|
62,600
|
|
|
|
|
(1)
|
Amounts for 2008 include a gain
on distribution from AstraZeneca LP, a gain related to the sale
of the Companys remaining worldwide rights to
Aggrastat, the
favorable impact of certain tax items, the impact of
restructuring actions, additional legal defense costs and an
expense for a contribution to the Merck Company Foundation.
|
(2)
|
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.
|
(3)
|
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.
|
(4)
|
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.
|
(5)
|
Amounts for 2004 include the
impact of the withdrawal of
Vioxx, Vioxx legal
defense costs and restructuring actions.
|
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 and Infectious Diseases
segment. The Pharmaceutical segment includes human health
pharmaceutical products marketed either directly by Merck 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
and Infectious Diseases segment includes human health vaccine
and infectious disease products marketed either directly by
Merck or, in the case of vaccines, also through a joint venture.
Vaccine 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.
Infectious disease products consist of therapeutic agents for
the treatment of infection sold primarily to drug wholesalers
and retailers, hospitals and government agencies. 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 2008, the Company continued to address business
challenges in the midst of an evolving pharmaceutical industry
environment. Revenue declined by 1% in 2008 driven largely by
lower sales of Fosamax for the treatment and prevention
of osteoporosis. Fosamax and Fosamax Plus D lost
market exclusivity for substantially all formulations in the
United States in February 2008 and April 2008, respectively, and
as a result the Company is experiencing a significant decline in
sales in the United States within the Fosamax franchise.
Also contributing to the decline were lower sales of Zocor,
the Companys statin for modifying cholesterol which
lost U.S. market exclusivity in 2006. Partially offsetting these
declines were higher sales of Januvia and Janumet
for the treatment of type 2 diabetes and Isentress,
an antiretroviral therapy for the treatment of HIV infection.
To address the business and industry challenges that Merck
faces, the Company remains focused on innovation and customer
value in order to drive the growth of its business and help
position Merck for future success.
The Company has made significant progress with re-engineering
its operations through research and development initiatives, the
roll-out of a new commercial model and the continuation of
Mercks supply strategy. These activities should enable the
Company to optimize its product portfolio and invest in growth
opportunities, such as emerging markets, Merck BioVentures and
business development.
Merck continues its efforts to diversify the Companys
scientific portfolio both through internal programs and external
research collaborations. The Company is focused on developing
novel,
best-in-class
or follow-on treatments for patients in primary care, specialty
care, and hospital settings. Additionally, Merck Research
Laboratories is pursuing a portfolio of treatment modalities
that not only includes small molecules and vaccines, but also
biologics, peptides and RNA interference (RNAi).
Further, Merck is moving to diversify its portfolio by creating
a new division, Merck BioVentures, which leverages a unique
technology platform for both follow-on and novel biologics.
The Company has numerous active clinical programs across the
Companys major research franchises: bone, respiratory,
immunology and endocrine; cardiovascular; diabetes and obesity;
infectious diseases; neuroscience; oncology and vaccines. The
Company currently has nine candidates in Phase III clinical
development and anticipates submitting two New Drug Applications
(NDA) with the U.S. Food and Drug
Administration (FDA) with respect to two of the
candidates in 2009: MK-0974, telcagepant, an investigational
compound for the treatment of migraines, and MK-7418,
rolofylline, an investigational compound for the treatment of
acute heart failure. In addition, the Company anticipates
submitting an NDA in 2009 for MK-0653C, ezetimibe combined with
50
atorvastatin, an investigational medication for the treatment of
dyslipidemia being developed by the Merck/Schering-Plough joint
venture. Also, the Company anticipates regulatory action in 2009
on two supplemental filings that have been submitted to the FDA:
one for Gardasil, Mercks HPV vaccine, for use in
males; and one for Isentress, a
first-in-class
integrase inhibitor for the treatment of HIV-1 infection, for an
expanded indication for use in treatment-naïve patients.
On the commercial side, the Company is rolling out a more
customer-centric selling model that is designed to provide a
competitive advantage, help build trust with customers, and
improve patient outcomes. The strategy employs the use of new
marketing technologies to complement a new, more
customer-centered approach; and moves away from the traditional
frequency-based sales and marketing approach; it also creates
efficiencies by eliminating redundancies in core functions and
across the sales organization.
On the manufacturing side, Merck has made significant progress
in the three years since it began re-engineering to create a
lean, flexible, cost-effective capability. The Company continues
to address its manufacturing issues and it is working to build
additional capacity in vaccines and biologics, as well as to
support Mercks expansion into emerging markets. To assist
this goal, the Company is shifting investments from developed
markets into emerging markets commensurate with the size and
strategic importance of the opportunity.
In October 2008, the Company announced a global restructuring
program (the 2008 Restructuring Program) to reduce
its cost structure, increase efficiency, and enhance
competitiveness. As discussed above, Merck is rolling out a new,
more customer-centric selling model. Additionally, the Company
will make greater use of outside technology resources,
centralize common sales and marketing activities, and
consolidate and streamline its operations. Mercks
manufacturing division will further focus its capabilities on
core products and outsource non-core manufacturing. Also, Merck
is expanding its access to worldwide external science through a
basic research global operating strategy, which is designed to
provide a sustainable pipeline and is focused on translating
basic research productivity into late-stage clinical success. To
increase efficiencies, basic research operations will
consolidate work in support of a given therapeutic area into one
of four locations. This will provide a more efficient use of
research facilities and result in the closure of three basic
research sites located in Tsukuba, Japan; Pomezia, Italy; and
Seattle by the end of 2009. As part of the 2008 Restructuring
Program, the Company expects to eliminate approximately 7,200
positions 6,800 active employees and 400
vacancies across all areas of the Company worldwide
by the end of 2011, approximately 1,750 of which the Company
eliminated in 2008. About 40% of the total reductions will occur
in the United States. As part of the 2008 Restructuring Program,
the Company is streamlining management layers by reducing its
total number of senior and mid-level executives globally by
approximately 25%. The Company, however, continues to hire new
employees as the business requires. The 2008 Restructuring
Program is expected to be completed by the end of 2011 with the
total pretax costs estimated to be $1.6 billion to
$2.0 billion. In 2008, the Company recorded pretax
restructuring costs of $921.3 million related to the 2008
Restructuring Program. The Company estimates that two-thirds of
the cumulative pretax costs will result in future cash outlays,
primarily from employee separation expense. Approximately
one-third of the cumulative pretax costs are non-cash, relating
primarily to the accelerated depreciation of facilities to be
closed or divested. Merck expects the 2008 Restructuring Program
to yield cumulative pretax savings of $3.8 billion to
$4.2 billion from 2008 to 2013.
During 2008, in connection with certain transactions with
AstraZeneca LP (AZLP), the Company recorded an
aggregate pretax gain of $2.2 billion which is included in
Other (income) expense, net and received net proceeds from AZLP
of $2.6 billion. See Note 8 to the consolidated
financial statements for further information.
Earnings per common share (EPS) assuming dilution
for 2008 were $3.64, including the impact of the gain on
distribution from AZLP of $0.66 per share and restructuring
costs of $(0.44) per share. In addition, EPS in 2008 reflects
the favorable impact of certain tax items. 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.
51
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. These proposals
may include removing the current legal prohibition against the
Secretary of the Health and Human Services intervening in price
negotiations between Medicare drug benefit program plans and
pharmaceutical companies. They may also include mandating the
payment of rebates for some or all of the pharmaceutical
utilization in Medicare drug benefit plans. In addition,
Congress may again consider proposals to allow, under certain
conditions, the importation of medicines from other countries.
In addressing cost-containment pressure, the Company has made a
continuing effort to demonstrate that its medicines provide
value to patients and those who pay for health care. In
addition, pricing flexibility across the Companys product
portfolio has encouraged growing use of its medicines and
mitigated the effects of increasing cost pressures.
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. 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.
In order to advance the related policy debate, the EC launched
the High Level Pharmaceutical Forum (HLPF)
during the period 2005 through 2008. The initiative aimed 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 was 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 was actively engaged with the EC and other
stakeholders and was broadly in agreement with the
recommendations from the HLPF.
In January 2008, the EC launched a sector inquiry in the
pharmaceutical markets under the rules of EU competition law. As
part of this inquiry, the Companys offices in Germany were
inspected by the authorities beginning in January 2008. The
Preliminary Report of the EC was issued on November 28,
2008, in which the EC stated it had confirmed its original
hypothesis that competition in the pharmaceutical sector may be
restricted or distorted, as indicated by a decline in innovation
measured by the number of novel medicines reaching the market,
and by alleged instances of delayed market entry of generic
medicines. The public consultation period with respect to the
Preliminary Report expired on January 31, 2009, and the EC
has issued further inquiries in respect of the subject of the
investigation. The EC has not alleged that the Company or any of
its subsidiaries have engaged in any unlawful practices. The
final report is planned for later in 2009. The Company is
cooperating with the EC in this sector inquiry.
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.
52
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 2008, approximately 725,000 people living with
HIV and AIDS in 125 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.
In October 2008, Merck announced that RotaTeq has been
awarded pre-qualification status by the World Health
Organization (WHO). WHO pre-qualification allows for
expanded access to RotaTeq and provides a greater
opportunity to help protect millions of infants from rotavirus
gastroenteritis. Because RotaTeq is pre-qualified by the
WHO, the vaccine is eligible for procurement by the Pan American
Health Organization, UNICEF and other United Nations
agencies for use in national vaccination programs. RotaTeq
is the only
ready-to-use
oral liquid rotavirus vaccine to receive WHO pre-qualification.
Merck has committed to providing RotaTeq to the Global
Alliance for Vaccines and Immunization-eligible countries at
prices at which it does not profit.
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.
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, Inc. (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 continues and the costs have
not been and are 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
developing a new class of medicines based on 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 were 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
continues and the costs have not been and are not expected to be
material to the Companys research and development
expenses. The acquisition of Sirna has increased 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.
53
In June 2006, Merck acquired GlycoFi, Inc. (GlycoFi)
a privately-held biotechnology company 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.
Operating
Results
Sales
Worldwide sales totaled $23.9 billion for 2008, a decline
of 1% compared with 2007, primarily attributable to a 4% volume
decrease, partially offset by a 3% favorable effect from foreign
exchange. The revenue decline over 2007 largely reflects lower
sales of Fosamax for the treatment and prevention of
osteoporosis. Fosamax and Fosamax Plus D lost
market exclusivity for substantially all formulations in the
United States in February 2008 and April 2008, respectively.
Also contributing to the decline were lower sales of Zocor,
the Companys statin for modifying cholesterol which
lost U.S. market exclusivity in 2006, lower sales of
Vasotec/Vaseretic for the treatment of hypertension
and/or heart
failure which lost patent protection in certain foreign markets
and lower sales of certain vaccines, including hepatitis and
Haemophilus influenzae type b (HIB) vaccines.
Partially offsetting these declines were higher sales of
Januvia and Janumet for the treatment of type 2
diabetes, Isentress, an antiretroviral therapy for the
treatment of HIV infection, Cozaar/Hyzaar for the
treatment of hypertension, RotaTeq, a vaccine to help
protect against rotavirus gastroenteritis in infants and
children, and Singulair, a medicine indicated for the
chronic treatment of asthma and the relief of symptoms of
allergic rhinitis.
Domestic sales declined 9% compared with 2007, while foreign
sales rose 10%. Foreign sales represented 44% of total sales in
2008. The domestic sales decline was largely driven by lower
sales of Fosamax and Fosamax Plus D, vaccines and
Singulair, partially offset by higher sales of
Januvia, Janumet and Isentress. Foreign sales
growth reflects the strong performance of Januvia, Janumet,
Singulair, Cozaar/Hyzaar and Isentress, partially
offset by lower sales of Vasotec/Vaseretic and
Zocor.
Worldwide sales for 2007 increased 7% in total compared with
2006 reflecting a 4% volume increase, a 2% favorable effect from
foreign exchange and a less than 1% favorable effect from price
changes. Sales growth was primarily driven by growth of the
Companys vaccines, including Gardasil, a vaccine to
help prevent cervical, vulvar and vaginal cancers, precancerous
or dysplastic lesions, and genital warts caused by HPV types 6,
11, 16 and 18, Varivax, a vaccine to help prevent
chickenpox, RotaTeq and Zostavax, a vaccine to
help prevent shingles (herpes zoster). Also contributing to
sales growth during this period was strong performance of
Singulair, higher sales of Januvia and sales of
Janumet, as well as increased sales of
Cozaar/Hyzaar. Sales growth was partially offset by lower
sales of Zocor and Proscar, a urology product for
the treatment of symptomatic benign prostate enlargement.
Mercks U.S. market exclusivity for Proscar
expired in June 2006. Also offsetting sales growth in 2007
were lower revenues from the Companys relationship with
AZLP and lower sales of Fosamax and Fosamax Plus
D. Foreign sales represented 39% of total sales for 2007.
54
Sales(1)
of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Pharmaceutical:
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair
|
|
$
|
4,336.9
|
|
|
$
|
4,266.3
|
|
|
$
|
3,579.0
|
|
Cozaar/Hyzaar
|
|
|
3,557.7
|
|
|
|
3,350.1
|
|
|
|
3,163.1
|
|
Fosamax
|
|
|
1,552.7
|
|
|
|
3,049.0
|
|
|
|
3,134.4
|
|
Januvia
|
|
|
1,397.1
|
|
|
|
667.5
|
|
|
|
42.9
|
|
Cosopt/Trusopt
|
|
|
781.2
|
|
|
|
786.8
|
|
|
|
697.1
|
|
Zocor
|
|
|
660.1
|
|
|
|
876.5
|
|
|
|
2,802.7
|
|
Maxalt
|
|
|
529.2
|
|
|
|
467.3
|
|
|
|
406.4
|
|
Propecia
|
|
|
429.1
|
|
|
|
405.4
|
|
|
|
351.8
|
|
Arcoxia
|
|
|
377.3
|
|
|
|
329.1
|
|
|
|
265.4
|
|
Vasotec/Vaseretic
|
|
|
356.7
|
|
|
|
494.6
|
|
|
|
547.2
|
|
Janumet
|
|
|
351.1
|
|
|
|
86.4
|
|
|
|
-
|
|
Proscar
|
|
|
323.5
|
|
|
|
411.0
|
|
|
|
618.5
|
|
Emend
|
|
|
263.8
|
|
|
|
204.2
|
|
|
|
130.8
|
|
Other
pharmaceutical(2)
|
|
|
2,278.9
|
|
|
|
2,422.9
|
|
|
|
2,780.5
|
|
Vaccine and infectious disease product sales included in the
Pharmaceutical
segment(3)
|
|
|
2,187.6
|
|
|
|
1,800.5
|
|
|
|
1,315.8
|
|
|
|
Pharmaceutical segment revenues
|
|
|
19,382.9
|
|
|
|
19,617.6
|
|
|
|
19,835.6
|
|
|
|
Vaccines(4)
and Infectious Diseases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gardasil
|
|
|
1,402.8
|
|
|
|
1,480.6
|
|
|
|
234.8
|
|
ProQuad/M-M-R II/Varivax
|
|
|
1,268.5
|
|
|
|
1,347.1
|
|
|
|
820.1
|
|
RotaTeq
|
|
|
664.5
|
|
|
|
524.7
|
|
|
|
163.4
|
|
Zostavax
|
|
|
312.4
|
|
|
|
236.0
|
|
|
|
38.6
|
|
Hepatitis vaccines
|
|
|
148.3
|
|
|
|
279.9
|
|
|
|
248.5
|
|
Other vaccines
|
|
|
354.6
|
|
|
|
409.9
|
|
|
|
354.0
|
|
Primaxin
|
|
|
760.4
|
|
|
|
763.5
|
|
|
|
704.8
|
|
Cancidas
|
|
|
596.4
|
|
|
|
536.9
|
|
|
|
529.8
|
|
Isentress
|
|
|
361.1
|
|
|
|
41.3
|
|
|
|
-
|
|
Crixivan/Stocrin
|
|
|
275.1
|
|
|
|
310.2
|
|
|
|
327.3
|
|
Invanz
|
|
|
265.0
|
|
|
|
190.2
|
|
|
|
139.2
|
|
Other infectious disease
|
|
|
15.5
|
|
|
|
1.7
|
|
|
|
-
|
|
Vaccine and infectious disease product sales included in the
Pharmaceutical
segment(3)
|
|
|
(2,187.6
|
)
|
|
|
(1,800.5
|
)
|
|
|
(1,315.8
|
)
|
|
|
Vaccines and Infectious Diseases segment revenues
|
|
|
4,237.0
|
|
|
|
4,321.5
|
|
|
|
2,244.7
|
|
|
|
Other segment
revenues(5)
|
|
|
81.8
|
|
|
|
162.0
|
|
|
|
162.1
|
|
|
|
Total segment revenues
|
|
|
23,701.7
|
|
|
|
24,101.1
|
|
|
|
22,242.4
|
|
|
|
Other(6)
|
|
|
148.6
|
|
|
|
96.6
|
|
|
|
393.6
|
|
|
|
|
|
$
|
23,850.3
|
|
|
$
|
24,197.7
|
|
|
$
|
22,636.0
|
|
|
|
|
(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
$1.6 billion, $1.7 billion and $1.8 billion in
2008, 2007 and 2006, respectively. In 2006, other pharmaceutical
also reflects certain supply sales, including supply sales
associated with the Companys arrangement with
Dr. Reddys Laboratories for the sale of generic
simvastatin.
|
|
(3)
|
Sales of vaccine and infectious disease products by
non-U.S.
subsidiaries are included in the Pharmaceutical segment.
|
|
(4)
|
These amounts do not reflect sales of vaccines sold in most
major European markets through the Companys joint venture,
Sanofi Pasteur MSD, the results of which are reflected in Equity
income from affiliates. These amounts do, however, reflect
supply sales to Sanofi Pasteur MSD.
|
|
(5)
|
Includes other non-reportable human and animal health
segments.
|
|
(6)
|
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.
|
55
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; Januvia and Janumet, for the
treatment of type 2 diabetes; Cosopt and Trusopt,
Mercks largest-selling ophthalmological products;
Zocor, Mercks statin for modifying cholesterol;
Maxalt, an acute migraine product; Propecia, a
product for the treatment of male pattern hair loss; Arcoxia,
for the treatment of arthritis and pain; Proscar, a
urology product for the treatment of symptomatic benign prostate
enlargement; and Emend, for the prevention of
chemotherapy-induced and post-operative nausea and vomiting.
The Companys vaccine and infectious disease products
include Gardasil, a vaccine to help prevent cervical,
vulvar and vaginal cancers, precancerous or dysplastic lesions,
and genital warts caused by HPV types 6, 11, 16 and 18;
Varivax, a vaccine to help prevent chickenpox;
ProQuad, a pediatric combination vaccine against measles,
mumps, rubella and varicella; M-M-R II, a vaccine against
measles, mumps and rubella; RotaTeq, a vaccine to help
protect against rotavirus gastroenteritis in infants and
children; Zostavax, a vaccine to help prevent shingles
(herpes zoster); Primaxin and Cancidas,
anti-bacterial/anti-fungal products; Isentress, Crixivan
and Stocrin, antiretroviral therapies for the
treatment of HIV infection; and Invanz for the
treatment of infection.
Pharmaceutical
Segment Revenues
Sales of the Pharmaceutical segment declined 1% in 2008
primarily due to declines in Fosamax, Zocor and
Vasotec/Vaseretic, partially offset by growth in
Januvia, Janumet and Cozaar/Hyzaar. Sales of the
Pharmaceutical segment declined 1% in 2007 primarily due to
lower sales of Zocor and Proscar post patent
expiration, partially offset by increases in Singulair,
Cozaar/Hyzaar, Januvia and sales of Janumet.
Worldwide sales of Singulair grew 2% reaching
$4.3 billion in 2008 and rose 19% to $4.3 billion in
2007, reflecting the continued demand for asthma and seasonal
and perennial allergic rhinitis medications. Sales performance
in 2008 benefited from higher sales outside the United States,
including volume growth in Europe and Japan and the positive
effect of foreign exchange. Sales in the United States declined
reflecting the impact of the switch of a competing allergic
rhinitis product to over-the-counter status in the United States
in early 2008, the timing and public reaction to the FDA early
communication regarding a very limited number of post-marketing
adverse event reports which created uncertainty in the
marketplace, and smaller spring and fall allergy seasons.
Singulair continues to be the number one prescribed
product in the U.S. respiratory market.
Global sales of Cozaar, and its companion agent Hyzaar
(a combination of Cozaar and hydrochlorothiazide),
increased 6% to $3.6 billion in 2008 and grew 6% to
$3.4 billion in 2007. The increase in 2008 was driven by
strong performance of Hyzaar in Japan (marketed as
Preminent), as well as by the positive effect of foreign
exchange. Cozaar and Hyzaar are among the leading
medicines in the angiotensin receptor blocker class.
Cozaar and Hyzaar will each lose patent protection
in the United States in April 2010. The Company expects
significant declines in U.S. sales of these products after that
time.
Worldwide sales of Fosamax and Fosamax Plus D
declined 49% in 2008 to $1.6 billion and decreased 3%
in 2007 to $3.0 billion. Since substantially all
formulations of these medicines have lost U.S. market
exclusivity, the Company is experiencing significant declines in
sales in the United States within the Fosamax franchise
and the Company expects such declines to continue.
Global sales of Januvia, Mercks dipeptidyl
peptidase-4 (DPP-4) inhibitor, were
$1.4 billion in 2008, $667.5 million in 2007 and
$42.9 million in 2006. Januvia was approved by the
FDA in October 2006 and by the EC in March 2007. Januvia
continues to be the second leading branded oral
anti-diabetic agent in terms of new prescription share in the
United States. DPP-4 inhibitors represent a class of
prescription medications that improve blood sugar control in
patients with type 2 diabetes by enhancing a natural body system
called the incretin system, which helps to regulate glucose by
affecting the beta cells and alpha cells in the pancreas.
In November 2008, new data presented at the 61st Annual
Scientific Meeting of the Gerontological Society of America
showed Januvia significantly reduced blood sugar levels
in elderly patients with type 2 diabetes and was not associated
with hypoglycemia (low blood sugar). In this study of
206 patients aged 65 to 96 years, there
56
were no reports of hypoglycemia in either the Januvia or
the placebo groups. Advanced age contributes to the risk of
hypoglycemia.
Worldwide sales of Janumet, Mercks oral
antihyperglycemic agent that combines sitagliptin (Mercks
DPP-4 inhibitor, Januvia) with metformin in a single
tablet to target all three key defects of type 2 diabetes, were
$351.1 million in 2008 compared with $86.4 million in
2007. Janumet, launched in the United States in April
2007, was approved, as an adjunct to diet and exercise, to
improve blood sugar control in adult patients with type 2
diabetes who are not adequately controlled on metformin or
sitagliptin alone, or in patients already being treated with the
combination of sitagliptin and metformin. In February 2008,
Merck received FDA approval to market Janumet as an
initial treatment for type 2 diabetes when treatment with both
sitagliptin and metformin is appropriate. In July 2008,
Janumet was approved for marketing in the EU, Iceland and
Norway.
Other products experiencing growth in 2008 include Maxalt
to treat acute migraine pain, Emend for the
prevention of chemotherapy-induced and post-operative nausea and
vomiting, Arcoxia for the treatment of arthritis and
pain, and Propecia for male pattern hair loss.
Worldwide sales of Zocor declined 25% in 2008 and 69% in
2007. Zocor lost U.S. market exclusivity in June
2006 and has also lost market exclusivity in many international
markets.
In February 2006, the Company entered into an agreement with
Dr. Reddys Laboratories
(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.
Proscar lost market exclusivity in the United States in
June 2006. Mercks sales of Proscar declined 21% in
2008 and 34% in 2007. The basic patent for Proscar also
covers Propecia, however, Propecia is protected by
additional patents which expire in October 2013.
The patent that provided U.S. market exclusivity for
Cosopt and Trusopt expired in October 2008 and, as
a result, the Company is experiencing significant declines in
U.S. sales of these products.
The patent that provides U.S. market exclusivity for
Primaxin expires in September 2009. After such time, the
Company expects a significant decline in U.S. sales of this
product.
During 2008, the Company divested its remaining ownership of
Aggrastat in foreign markets to Iroko Pharmaceuticals.
Also during 2008, the Company and AZLP entered into an agreement
with Ranbaxy Laboratories Ltd. (Ranbaxy) to settle
patent litigation with respect to esomeprazole (Nexium)
which provides that Ranbaxy will not bring its generic
esomeprazole product to market in the United States until
May 27, 2014. The Company faces other challenges with
respect to outstanding patent infringement matters for
esomeprazole (see Note 10 to the consolidated financial
statements).
In February 2009, the Company formally notified the European
Medicines Agency of its decision to withdraw the application for
Marketing Authorization for vorinostat, a histone deacetylase
inhibitor, for treatment of patients with advanced stage,
refratory cutaneous T-cell lymphoma (CTCL).
Vorinostat, which is marketed as Zolinza in the United
States, was granted orphan drug designation by the EC for the
treatment of CTCL in 2004.
Vaccines
and Infectious Diseases Segment Revenues
Sales of the Vaccines and Infectious Diseases segment were
$4.2 billion in 2008, $4.3 billion in 2007 and
$2.2 billion in 2006. The decline in 2008 was primarily due
to lower sales of Gardasil, hepatitis vaccines, other
viral vaccines, which include Varivax, M-M-R II and
ProQuad, HIB vaccines and lower sales of Primaxin.
These declines were partially offset by growth in Isentress,
RotaTeq and Zostavax. The increase in 2007 was
primarily driven by the strong performance of Gardasil,
as well as by Varivax, RotaTeq and Zostavax.
The following discussion of vaccine and infectious disease
products includes total vaccine and infectious disease product
sales, the majority of which are included in the Vaccines and
Infectious Diseases segment and the remainder, representing
sales of these products by
non-U.S. subsidiaries,
are included in the Pharmaceutical
57
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 (see Selected Joint Venture and
Affiliate Information below). Supply sales to SPMSD,
however, are reflected in Vaccines and Infectious Diseases
segment revenues.
Worldwide sales of the Companys cervical cancer vaccine
Gardasil, as recorded by Merck, were $1.4 billion in
2008, $1.5 billion in 2007 and $234.8 million in 2006.
Gardasil was approved by the FDA in June 2006 and is the
worlds top-selling HPV vaccine and only HPV vaccine
available for use in the United States. In September 2008, the
FDA approved Gardasil for the prevention of vulvar and
vaginal cancers caused by HPV types 16 and 18. Gardasil
currently is indicated for girls and women 9 through
26 years of age for the prevention of cervical, vulvar and
vaginal cancers, precancerous or dysplastic lesions, and genital
warts caused by HPV types 6, 11, 16 and 18. Sales performance in
2008 reflects lower sales domestically, partially offset by
growth outside the United States. Sales growth outside the
United States was aided by the adoption of school-based programs
in all Canadian provinces. The decline in the United States was
affected by two factors. First, because of strong launch uptake,
a significant portion of the 11 to 18 year old eligible
population has already been vaccinated. As a result, despite
continued strong vaccination rates in this population, the
number of total vaccinations has declined. Secondly, the number
of total vaccinations in the 19 to 26 year old age group
has declined as compared with 2007. Sales in 2007 include
initial purchases by many states through the U.S. Centers
for Disease Control and Prevention (CDC) Vaccines
for Children program. The Company is a party to certain third
party license agreements with respect to Gardasil
(including a cross-license and settlement agreement with
GlaxoSmithKline). As a result of these agreements, the Company
pays royalties on worldwide Gardasil sales of
approximately 24% to 26% in the aggregate, which are included in
Materials and production costs.
In January 2009, the FDA issued a second complete response
letter regarding the supplemental biologics license application
(sBLA) for the use of Gardasil in women
ages 27 though 45. The agency completed its review of the
response that Merck provided in July 2008 to the FDAs
first complete response letter issued in June 2008 and has
recommended that Merck submit additional data when the
48 month study has been completed. The initial sBLA
included data collected through an average of 24 months
from enrollment into the study, which is when the number of
pre-specified endpoints had been met. Following a review of the
final results of the study, Merck anticipates providing a
response to the FDA in the fourth quarter of 2009. The letter
does not affect current indications for Gardasil in
females ages 9 through 26 nor does the letter relate to the
sBLA that was submitted in December 2008 for the use of
Gardasil in males.
In November 2008, data presented at the European Research
Organization on Genital Infection and Neoplasia International
Multidisciplinary Conference showed that Gardasil
prevented 90% of external genital lesions caused by HPV
types 6, 11, 16 and 18 in a pivotal Phase III study in men
aged 16 to 26. These are the only data evaluating efficacy of
any HPV vaccine in preventing disease in males. The initial
planned analysis of this study, an analysis of male study
participants aged 16 to 26 who had not been infected with at
least one of the four HPV types before the start of the study
through one month after receiving their third dose of the
vaccine or placebo, has been completed. This analysis was
predetermined in the study protocol to be conducted after at
least 32 cases of external genital lesions were observed. The
study is ongoing, and additional data will be submitted to
global regulatory agencies once available. Merck submitted an
sBLA for Gardasil in December 2008 which has been
accepted by the FDA for the use of Gardasil in boys and
men ages 9 to 26 for the prevention of external genital
lesions caused by HPV types 6, 11, 16 and 18. Other regulatory
submissions around the world will occur as planned.
RotaTeq achieved worldwide sales as recorded by Merck of
$664.5 million in 2008, $524.7 million in 2007 and
$163.4 million in 2006. The increases in 2008 and 2007 were
primarily driven by the continued uptake in the United States
and successful launches around the world. The FDA approved
RotaTeq in February 2006. Sales in 2008 included
purchases of $54 million in 2008 and $78 million in
2007 to support the CDC stockpile. The Company anticipates that
domestic sales in 2009 will be impacted by the recent launch of
a competing product.
As previously disclosed, the Company has resolved an issue
related to the bulk manufacturing process for the Companys
varicella zoster virus (VZV)-containing vaccines.
The Company is manufacturing bulk varicella and is producing
doses of Varivax and Zostavax. The Company has
received regulatory approvals in the United States and certain
other markets to increase its manufacturing capacity for
VZV-containing vaccines. The Company is working to ensure
adequate market supply and continued sufficient inventory of
Varivax and to clear back orders
58
and build stable supply and inventory for Zostavax.
ProQuad, one of the VZV-containing vaccines, is currently
not available for ordering; however, orders have been
transitioned, as appropriate, to M-M-R II and
Varivax. Total sales as recorded by Merck for ProQuad
were $9.5 million in 2008, $264.4 million in 2007
and $234.8 million in 2006. Merck anticipates that
ProQuad will not return to the U.S. market in 2009.
Mercks sales of Varivax were $924.6 million in
2008, $854.9 million in 2007 and $327.9 million in
2006. Varivax is the only vaccine available in the United
States to help protect against chickenpox due to the
unavailability of ProQuad. In 2007, Varivax
benefited from the Advisory Committee on Immunization
Practices June 2006 second dose recommendation. Mercks
sales of M-M-R II were $334.4 million in 2008,
$227.8 million in 2007 and $257.3 million in 2006.
Sales of Varivax and M-M-R II were affected by the
unavailability of ProQuad. Combined sales of ProQuad,
M-M-R II and Varivax declined in 2008 compared with
2007.
Sales of Zostavax recorded by Merck were
$312.4 million in 2008, $236.0 million in 2007 and
$38.6 million in 2006. Sales in 2008 and 2007 were impacted
by bulk vaccine supply issues that caused delays in the
fulfillment of customer orders. The Company cleared the majority
of backorders in December 2008. The Company expects to clear
backorders that remained at the end of the year in the first
quarter of 2009 and to return to normal shipping times in
mid-2009. Once the backorders are resolved, the Company expects
to have adequate supply to meet anticipated customer demand for
the remainder of 2009. The Company currently anticipates
launching Zostavax outside the United States after 2009.
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.
The Company has been working to resolve manufacturing issues
related to its HIB-containing vaccines, PedvaxHIB and
Comvax since December 2007. The Company has resolved the
original issue related to equipment sterilization, but has
identified other unrelated manufacturing process changes that
will require a regulatory filing. Merck anticipates that
PedvaxHIB and Comvax will return to the
U.S. market in mid-to-late 2009. Timing of product
availability outside the United States is dependent upon local
regulatory requirements.
The pediatric formulation of Vaqta, a vaccine against
hepatitis A, became available again in December of 2008 and the
Company anticipates the adult formulation may be available in
the second half of 2009. Outside of the United States, the
supply of Vaqta is limited and availability will vary by
region. In addition, doses of the adult and dialysis
formulations of the Companys hepatitis B vaccine,
Recombivax HB, will be depleted during the first quarter
of 2009 after which time they will be unavailable in the United
States for the remainder of the year. The pediatric/adolescent
formulation of Recombivax HB is expected to experience
intermittent backorders in the United States throughout
2009. Merck expects supplies of the pediatric/adolescent
formulation of Recombivax HB to be limited throughout
2009 and the Company does not expect to return to full supply of
the pediatric/adolescent formulation of Recombivax HB
until some time in 2010.
Sales of Isentress were $361.1 million in 2008 and
$41.3 million in 2007. In October 2007, the FDA granted
Isentress accelerated approval for use in combination
with other antiretroviral agents for the treatment of HIV-1
infection in treatment-experienced adult patients who have
evidence of viral replication and HIV-1 strains resistant to
multiple antiretroviral agents. Isentress is the first
medicine to be approved in the class of antiretroviral drugs
called integrase inhibitors. Isentress works by
inhibiting the insertion of HIV DNA into human DNA by the
integrase enzyme. Inhibiting integrase from performing this
essential function limits the ability of the virus to replicate
and infect new cells. In January 2009, the FDA granted
traditional approval to Isentress following review of the
48 week data from the BENCHMRK 1 & 2 clinical trials.
Merck is also conducting Phase III clinical trials of
Isentress in the treatment-naïve (previously
untreated) HIV population. In December 2008, Merck announced
that the FDA had accepted the supplemental New Drug Application
(sNDA) filing for Isentress tablets for
standard review. The Company is seeking U.S. marketing
approval of Isentress in combination with other HIV
medicines for treatment in adult patients who are previously
untreated (naïve) for HIV. Merck expects FDA action in July
2009.
In February 2009, data on several Phase III Isentress
studies were presented at the 16th Conference on
Retroviruses and Opportunistic Infections in Montreal, Canada.
In new subgroup analyses of a Phase III study (STARTMRK)
that compared Isentress to efavirenz (one of the leading
antiretrovirals prescribed for previously untreated
(treatment-naïve) HIV-infected patients), Isentress
was found to be as effective as efavirenz at
59
suppressing viral load and provided improvements in immune
system function across a broad spectrum of patient
subpopulations through 48 weeks. The use of Isentress
in previously untreated HIV-infected patients is an
investigational use of the drug. Both medicines were taken in
combination with tenofovir/emtricitabine. In addition, results
from two Phase III studies (SWITCHMRK-1 and -2) evaluating
the effect of switching patients whose HIV is controlled on a
lopinavir/ritonavir-based regimen to a regimen containing
Isentress tablets showed that Isentress
significantly improved total cholesterol, triglycerides and
non-HDL-cholesterol. The study also showed that Isentress
did not demonstrate non-inferior virologic efficacy at
maintaining viral load suppression. As a result of the viral
load findings in these trials, Merck discontinued these two
studies.
Other Vaccines and Infectious Diseases segment products
experiencing growth in 2008 include Invanz for the
treatment of infection and Cancidas, an anti-fungal product.
In 2008, the FDA approved an expanded label for Cancidas,
which makes it the first and only echinocandin therapy approved
in the United States for the treatment of pediatric patients
aged three months to 17 years with indicated fungal
infections.
Costs,
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
|
Materials and production
|
|
$
|
5,582.5
|
|
|
|
−9
|
%
|
|
$
|
6,140.7
|
|
|
|
2
|
%
|
|
$
|
6,001.1
|
|
Marketing and administrative
|
|
|
7,377.0
|
|
|
|
−2
|
%
|
|
|
7,556.7
|
|
|
|
−7
|
%
|
|
|
8,165.4
|
|
Research and development
|
|
|
4,805.3
|
|
|
|
−2
|
%
|
|
|
4,882.8
|
|
|
|
2
|
%
|
|
|
4,782.9
|
|
Restructuring costs
|
|
|
1,032.5
|
|
|
|
*
|
|
|
|
327.1
|
|
|
|
*
|
|
|
|
142.3
|
|
Equity income from affiliates
|
|
|
(2,560.6
|
)
|
|
|
−14
|
%
|
|
|
(2,976.5
|
)
|
|
|
30
|
%
|
|
|
(2,294.4
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
-
|
|
|
|
*
|
|
|
|
4,850.0
|
|
|
|
-
|
|
|
|
-
|
|
Other (income) expense, net
|
|
|
(2,194.2
|
)
|
|
|
*
|
|
|
|
46.2
|
|
|
|
*
|
|
|
|
(382.7
|
)
|
|
|
|
|
$
|
14,042.5
|
|
|
|
−33
|
%
|
|
$
|
20,827.0
|
|
|
|
27
|
%
|
|
$
|
16,414.6
|
|
|
Materials
and Production
In 2008, materials and production costs declined 9% compared
with a 1% decline in sales primarily reflecting lower
restructuring costs. Included in materials and production costs
in 2008 were $123.2 million of restructuring costs related
to both the 2008 and 2005 Restructuring Programs comprised of
$88.7 million of accelerated depreciation associated with
the planned sale or closure of certain of the Companys
manufacturing facilities and $34.5 million of other costs,
primarily asset write-offs. This compares with restructuring
costs of $483.1 million in 2007 representing
$460.6 million of accelerated depreciation and
$22.5 million of asset impairments. (See Note 3 to the
consolidated financial statements.)
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 2005 Restructuring Program which were
$483.1 million in 2007 compared with $736.4 million in
2006.
Gross margin was 76.6% in 2008 compared with 74.6% in 2007 and
73.5% in 2006. The restructuring charges noted above had an
unfavorable impact of 0.5 percentage points in 2008,
2.0 percentage points in 2007 and 3.3 percentage
points in 2006. Gross margin in 2008 reflects changes in product
mix, including the decline in Fosamax and Fosamax Plus
D sales as a result of the loss of U.S. market
exclusivity in 2008, and manufacturing efficiencies. Gross
margin in 2007 reflects a slight unfavorable impact from changes
in product mix and the positive impact of manufacturing
efficiencies. 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.
Marketing
and Administrative
Marketing and administrative expenses declined 2% in 2008 and 7%
in 2007. Marketing and administrative expenses in 2008, 2007 and
2006 included $62 million, $280 million and
$673 million, respectively, of
60
additional reserves solely for future Vioxx legal defense
costs. Expenses in 2008 and 2006 also reflect $40 million
and $48 million, respectively, of additional reserves
solely for future legal defense costs for Fosamax
litigation. 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 and Fosamax-related matters). In
addition to lower expenses for future legal defense costs, the
decline in marketing and administrative expenses in 2008 and
2007 also reflect the Companys efforts to reduce its cost
base. The Company has incurred separation costs associated with
sales force reductions that are reflected in Restructuring costs
as discussed below.
Research
and Development
Research and development expenses declined 2% in 2008 compared
with 2007. Expenses in 2008 reflect $128.4 million of costs
related to the closure or sale of research facilities in
connection with the 2008 Restructuring Program, substantially
all of which represent accelerated depreciation. Expenses in
2007 reflect $325.1 million of acquired research expense
related to the NovaCardia acquisition. Research and development
expenses in 2008 compared with 2007 reflect an increase in
development spending in support of the continued advancement of
the research pipeline.
Research and development expenses increased 2% in 2007 compared
with 2006 reflecting 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
compared with acquired research expense of $762.5 million
in 2006 related to the acquisitions of Sirna and GlycoFi. 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 2005
Restructuring Program.
During 2008, the Company continued the advancement of drug
candidates through the pipeline. The Companys research
pipeline chart is included in Item 1.
Business Research and Development
above.
On January 25, 2008, the FDA approved Emend
(fosaprepitant dimeglumine) for Injection, 115 mg, for
the prevention of chemotherapy-induced nausea and vomiting.
Emend for Injection provides a new option for day one, as
a substitute for Emend (125 mg) taken orally, as
part of the recommended
three-day
regimen. 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.
The Company currently has nine drug candidates in Phase III
development and anticipates making NDA filings with respect to
two of the candidates in 2009 as noted below. Additionally, the
Company anticipates filing an NDA with the FDA in 2009 for
MK-0653C, an investigational medication combining ezetimibe with
atorvastatin for the treatment of dyslipidemia being developed
by the Merck/Schering-Plough joint venture.
The Company continues to anticipate filing an NDA with the FDA
in 2009 for MK-7418, rolofylline, a potential
first-in-class
selective adenosine A1 antagonist, which is an investigational
drug being evaluated for the treatment of acute heart failure.
In March 2008, the results of a Phase III pilot
dose-ranging study of patients hospitalized with acute heart
failure syndrome and renal impairment treated with rolofylline
were presented at the annual Scientific Session of the American
College of Cardiology. Rolofylline administered with intravenous
(IV) loop diuretics was associated with improved
dyspnea (shortness of breath) and preserved renal function
compared to treatment with placebo and IV diuretics. In
addition, in a post-hoc analysis, treatment with rolofylline was
associated with a trend towards reduced
60-day
mortality or hospital re-admission for cardiovascular or renal
causes. Rolofylline increases renal blood flow and urine
production by blocking adenosine-mediated vasoconstriction of
the afferent arterioles of the kidneys and inhibiting salt and
water reabsorption by the kidney. In this small pilot study, the
rates of adverse events seen across treatment groups were
similar. The confirmatory Phase III studies with
rolofylline 30 mg are underway.
The Company also continues to anticipate filing an NDA with the
FDA in 2009 for MK-0974, telcagepant, an investigational oral
calcitonin gene-related peptide receptor (CGRP)
antagonist, which represents a new mechanism for the treatment
of migraine. In September 2008, Merck announced that in a
Phase III clinical trial telcagepant significantly relieved
moderate-to-severe migraine attacks, including migraine pain and
migraine-
61
associated symptoms, compared to placebo. The data were
presented in London, England at the European Headache/Migraine
Trust International Congress. The reported findings are
from a worldwide, multicenter, randomized, placebo-controlled
clinical trial in adult patients with acute migraine. Also in
June 2008, Merck presented data at the American Headache Society
annual meeting from a Phase III clinical trial which showed
telcagepant significantly improved relief of migraine pain and
migraine-associated symptoms two hours after dosing compared to
placebo. In addition, the efficacy results for telcagepant
300 mg were similar to the highest recommended dose of
zolmitriptan, an approved migraine therapy, with a lower
incidence of adverse events associated with telcagepant in this
study. This trial is part of an ongoing Phase III program
evaluating telcagepant. There were no reports of serious adverse
events in the telcagepant or zolmitriptan treatment arms.
Telcagepant is an antagonist of the receptor for CGRP, a potent
neuropeptide thought to play a central role in the underlying
pathophysiology of migraine.
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 2007. A Phase III study (SUCCEED) in
patients with metastatic soft-tissue or bone sarcomas is
underway. The Company continues to anticipate filing an NDA with
the FDA in 2010.
MK-0431C combines Januvia (sitagliptin) with
pioglitazone, another type 2 diabetes therapy. The Company
anticipates filing an NDA with the FDA in 2011.
V503 is a nine-valent HPV vaccine in development to expand
protection against cancer-causing HPV types. The Phase III
clinical program is underway and Merck anticipates filing a
biologics license application (BLA) with the FDA in
2012.
MK-0822, odanacatib, is a highly selective inhibitor of the
cathepsin K enzyme, which is being evaluated for the treatment
of osteoporosis. Osteoporosis is a disease which reduces bone
density and strength and results in an increased risk of bone
fractures. The cathepsin K enzyme is believed to play a central
role in osteoclastic bone resorption, particularly in the
degradation of the protein component of bone. Inhibition of
cathepsin K is a novel approach to the treatment of osteoporosis
that differs from those of currently approved treatments. In
September 2008, two-year data from a Phase IIB study of
odanacatib were reported at the 30th Annual Meeting of the
American Society for Bone and Mineral Research which
demonstrated dose-dependent increases in bone mineral density
(BMD) at the total hip, lumbar spine and femoral
neck fracture sites and decreased indices of bone resorption
compared to placebo in postmenopausal women with low BMD. The
multi-center, double-blind, randomized, placebo-controlled study
evaluated doses of 3, 10, 25 or 50 mg of odanacatib
administered orally, once-weekly and without regard to the
timing of meals or the patients physical position in
postmenopausal women with low BMD for 24 months. The number
of patients experiencing a drug-related adverse experience was
similar between the 50 mg odanacatib group and placebo. The
effect of odanacatib 50 mg on vertebral, hip and
non-vertebral fractures is currently being evaluated in a large,
global Phase III study. Merck continues to anticipate
filing an NDA with the FDA in 2012.
MK-0524A is a drug candidate that combines extended-release
(ER) niacin and a novel flushing inhibitor,
laropiprant. MK-0524A has demonstrated the ability to lower
LDL-cholesterol (LDL-C or bad
cholesterol), raise HDL-cholesterol (HDL-C or
good cholesterol) and lower triglycerides with
significantly less flushing than traditional extended release
niacin alone. High LDL-C, low HDL-C and elevated triglycerides
are risk factors associated with heart attacks and strokes. In
April 2008, Merck received a non-approvable action letter from
the FDA in response to its NDA for MK-0524A. At a meeting to the
discuss the letter, the FDA stated that additional efficacy and
safety data were required and suggested that the Company wait
for the results of the Treatment of HDL to Reduce the Incidence
of Vascular Events (HPS2-THRIVE) cardiovascular
outcomes study, which is expected to be completed in January
2012. Merck anticipates filing an NDA with the FDA for MK-0524A
in 2012. In July 2008, the Company announced that Tredaptive
(also known as MK-0524A) was approved for marketing in the
27 countries of the EU, Iceland and Norway. Tredaptive is
approved for the treatment of dyslipidemia, particularly in
patients with combined mixed dyslipidemia (characterized by
elevated levels of LDL-C and triglycerides and low HDL-C) and in
patients with primary hypercholesterolemia (heterozygous
familial and non-familial). Tredaptive should be used in
patients in combination with statins, when the cholesterol
lowering
62
effects of statin monotherapy is inadequate. Tredaptive
can be used as monotherapy only in patients in whom statins
are considered inappropriate or not tolerated. The launch of
Tredaptive in Europe and other markets has been delayed
due to a manufacturing-related issue. Merck is committed to
quickly resolving the issue and to making Tredaptive
available in Europe as soon as possible. In other countries
around the world, Merck continues to pursue regulatory approvals
for MK-0524A.
MK-0524B is a drug candidate that combines the novel approach to
raising HDL-C and lowering triglycerides from ER niacin combined
with laropiprant with the proven benefits of simvastatin in one
combination product. Merck will not seek approval for MK-0524B
in the United States until it files its complete response
relating to MK-0524A.
MK-0859, anacetrapib, is an inhibitor of the cholesteryl ester
transfer protein that has shown promise in lipid management by
raising HDL-C and reducing LDL-C without raising blood pressure.
A Phase III study was initiated in 2008 and enrollment in a
cardiovascular outcomes study is planned to begin in 2010. The
Company anticipates filing an NDA with the FDA beyond 2014.
In December 2008, the Company terminated its collaboration with
Dynavax Technologies Corporation (Dynavax) for the
development of V270, an investigational hepatitis B vaccine,
which was entered into in 2007. In October 2008, Merck and
Dynavax received notification from the FDA regarding the two
companies response to the agencys request for safety
information relating to the clinical hold on the two
Investigational New Drug (IND) Applications for
V270. In issuing the clinical hold in March 2008, the FDA
requested a review of clinical and safety data including all
available information about a single case of Wegeners
granulomatosis, an uncommon disease in which the blood vessels
are inflamed, reported in a Phase III clinical trial.
Dynavax and Merck had previously provided a response to the FDA
in September 2008. In its October 2008 correspondence, the FDA
advised the companies that the balance of risk versus potential
benefit no longer favored continued clinical evaluation of V270
in healthy adults and children.
In October 2008, Merck announced it will not seek regulatory
approval for taranabant, an investigational medicine, to treat
obesity and has discontinued its Phase III clinical
development program for taranabant for obesity. Available
Phase III data showed that both efficacy and adverse events
were dose related, with greater efficacy and more adverse events
in the higher doses. Therefore, after careful consideration, the
Company determined that the overall profile of taranabant did
not support further development for obesity.
Merck continues to remain focused on augmenting its internal
efforts by capitalizing on growth opportunities that will drive
both near- and long-term growth. During 2008, the Company
completed transactions across a broad range of therapeutic
categories, as well as early-stage technology transactions.
Merck is actively monitoring the landscape for growth
opportunities that meet the Companys strategic criteria.
Highlights from these activities include:
In February 2009, Merck entered into a definitive agreement with
Insmed Inc. (Insmed) to purchase Insmeds
portfolio of follow-on biologic therapeutic candidates and its
commercial manufacturing facilities located in Boulder,
Colorado. Under the terms of the agreement, Merck will pay
Insmed an aggregate of $130 million in cash to acquire all
rights to the Boulder facilities and Insmeds pipeline of
follow-on biologic candidates. Insmeds follow-on biologics
portfolio includes two clinical candidates: INS-19, an
investigational recombinant granulocyte-colony stimulating
factor (G-CSF) that will be evaluated for its
ability to prevent infections in patients with cancer receiving
chemotherapy, and INS-20, a pegylated recombinant G-CSF designed
to allow for less frequent dosing. The agreement provides for
initial payments of up to $10 million for INS-19 and
INS-20. Merck will pay Insmed the remaining balance upon closing
of the transaction, which is expected by the end of the first
quarter of 2009, without any further milestone or royalty
obligations.
In September 2008, Merck and Japan Tobacco Inc. (JT)
signed a worldwide licensing agreement to develop and
commercialize JTT-305, an investigational oral osteoanabolic
(bone growth stimulating) agent for the treatment of
osteoporosis. JTT-305 is an investigational oral calcium sensing
receptor antagonist that is currently being evaluated by JT in
Phase II clinical trials in Japan for its effect on
increasing bone density and is in Phase I clinical trials
outside of Japan. Under the terms of the agreement, Merck gained
worldwide rights, except for Japan,
63
to develop and commercialize JTT-305 and certain other related
compounds. JT received an upfront payment of $85 million,
which the Company recorded as Research and development expense,
and is eligible to receive additional cash payments upon
achievement of certain milestones associated with the
development and approval of a drug candidate covered by the
agreement. JT will also be eligible to receive royalties from
sales of any drug candidates that receive marketing approval.
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 of unmet medical needs, scientific
opportunity and commercial opportunity. Merck is managing its
research and development portfolio across diverse approaches to
discovery and development by balancing investments appropriately
on novel, innovative targets with the potential to have a major
impact on human health, on developing
best-in-class
approaches, and on delivering maximum value of its new medicines
and vaccines through new indications and new formulations.
Another important component of Mercks science-based
diversification is based on expanding the Companys
portfolio of modalities to include not only small molecules and
vaccines, but also biologics, peptides and RNAi. Further, Merck
is moving to diversify its portfolio by creating a new division,
Merck BioVentures, which leverages a unique platform for both
follow-on and novel biologics. The Company will continue to
pursue appropriate external licensing opportunities.
During 2008, the Company began implementing a new model for its
basic research global operating strategy. The new model will
align franchise and function through clear roles and
responsibilities, align resources with disease area priorities
and balance capacity across discovery phases and allow the
Company to act upon those programs with the highest probability
of success. Additionally, the strategy is designed to expand the
Companys access to worldwide external science and
incorporate external research as a key component of the
Companys early discovery pipeline in order to translate
basic research productivity into late-stage clinical success.
The Companys clinical pipeline includes candidates in
multiple disease areas, including anemia, atherosclerosis,
cancer, diabetes, heart failure, hypertension, infectious
diseases, migraine, neurodegenerative diseases, psychiatric
diseases, osteoporosis, 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. A chart reflecting the
Companys current research pipeline as of February 15,
2009 is set forth in Item 1. Business
Research and Development above.
Share-Based
Compensation
The Company recognizes share-based compensation expense pursuant
to Financial Accounting Standards Board (FASB)
Statement No. 123R, Share-Based Payment
(FAS 123R), which requires all share-based
payments to employees be expensed over the requisite service
period based on the grant-date fair value of the awards. Total
pretax share-based compensation expense was $348.0 million
in 2008, $330.2 million in 2007 and $312.5 million in
2006. At December 31, 2008, there was $444.1 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 $1.0 billion, $327.1 million
and $142.3 million for 2008, 2007 and 2006, respectively.
Of the restructuring costs recorded in 2008, $735.5 million
related to the 2008 Restructuring Program and the remainder were
associated with the 2005 Restructuring Program. In 2008, 2007
and 2006, Merck incurred separation costs of $957.3 million
(of which $684.9 million related to the 2008 Restructuring
Program), $251.4 million and $113.7 million,
respectively, associated with actual headcount reductions, as
well as headcount reductions that were probable and could be
reasonably estimated. The Company eliminated 5,800 positions in
2008 (of which 1,750 related to the 2008 Restructuring Program),
2,400 positions in 2007 and 3,700 positions in 2006. 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
64
Companys pension and other postretirement benefit plans
and shutdown costs. 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 2008, the
decline in equity income from affiliates reflects decreased
equity income from the Merck/Schering-Plough partnership and
lower partnership returns from AZLP, partially offset by higher
equity income from Merial Limited (Merial) and
SPMSD. The decrease in equity income from the
Merck/Schering-Plough joint venture is the result of lower
revenues of Vytorin and Zetia following the
announcements of the ENHANCE and SEAS clinical trial results. In
addition, as a result of the termination of the respiratory
joint venture, the Company was obligated to Schering-Plough
Corporation (Schering-Plough) in the amount of
$105 million as specified in the joint venture agreements.
This resulted in a charge of $43 million in the second
quarter of 2008 which was included in equity income from
affiliates. The remaining amount is being amortized over the
remaining patent life of Zetia through 2016. The lower
partnership returns from AZLP are primarily attributable to the
first quarter 2008 partial redemption of Mercks interest
in certain AZLP product rights, which resulted in a reduction of
the priority return and the variable returns which were based,
in part, upon sales of certain former Astra USA, Inc. products.
The higher equity income from Merial primarily reflects higher
sales of biological products. The increase in equity income from
SPMSD is largely attributable to higher sales of Gardasil
in joint venture territories outside of the United States.
In 2007 and 2006, 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 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. Under the Settlement Agreement , 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
(Settlement Program), of which $750 million was
paid into such funds in 2008. 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 2008 was
primarily due to an aggregate gain in 2008 from AZLP of
$2.2 billion (see Note 8 to the consolidated financial
statements), the impact of a $671 million charge in 2007
related to the resolution of certain civil governmental
investigations, and a 2008 gain of $249 million related to
the sale of the Companys remaining worldwide rights to
Aggrastat, partially offset by a $300 million
expense in 2008 for a contribution to the Merck Company
Foundation, an increase in exchange losses of $202 million,
higher recognized losses of $153 million, net, in the
Companys investment portfolio and a $58 million
charge related to the resolution of an investigation into
whether the Company violated consumer protection laws with
respect to the sales and marketing of Vioxx (see
Note 10 to the consolidated financial statements). The
fluctuation in exchange losses (gains) in 2008 from 2007 is
primarily due to the higher cost of foreign currency contracts
due to lower U.S. interest rates and unfavorable impacts of
period-to-period changes in foreign currency exchange rates on
net long or net short foreign currency positions, considering
both net monetary assets and related foreign currency contracts.
The change in Other (income) expense, net during 2007 as
compared with 2006 primarily reflects a $671 million charge
in 2007 related to the resolution of certain civil governmental
investigations partially offset by
65
the favorable impact of gains on sales of assets and product
divestitures, as well as a net gain on the settlements of
certain patent disputes.
Segment
Profits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Pharmaceutical segment profits
|
|
$
|
12,400.4
|
|
|
$
|
13,430.6
|
|
|
$
|
12,476.5
|
|
Vaccines and infectious diseases segment profits
|
|
|
2,798.9
|
|
|
|
2,625.0
|
|
|
|
1,253.1
|
|
Other segment profits
|
|
|
419.3
|
|
|
|
452.7
|
|
|
|
380.7
|
|
Other
|
|
|
(5,810.8
|
)
|
|
|
(13,137.6
|
)
|
|
|
(7,888.9
|
)
|
|
|
Income before income taxes
|
|
$
|
9,807.8
|
|
|
$
|
3,370.7
|
|
|
$
|
6,221.4
|
|
|
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 gain on distribution from AZLP, 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 decreased 8% in 2008 largely
driven by lower sales of Fosamax and Fosamax Plus D,
Zocor and decreased equity income from the
Merck/Schering-Plough joint venture and from AZLP.
Pharmaceutical segment profits increased 8% in 2007 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.
Vaccine and Infectious Diseases segment profits increased 7% in
2008 primarily driven by the continued successful rollout of
Isentress and the strong performance of RotaTeq,
as well as higher equity income from SPMSD. Vaccine and
Infectious Diseases segment profits more than doubled in 2007 as
compared with 2006 driven by the launch of three new vaccines in
the latter part of 2006 and the successful performance of
Varivax.
Taxes on
Income
The Companys effective income tax rate was 20.4% in 2008,
2.8% in 2007 and 28.7% in 2006. The 2008 effective tax rate
reflects a net favorable impact as compared with the statutory
rate of approximately 3 percentage points, which includes
favorable impacts relating to tax settlements that resulted in a
reduction of the Companys liability for unrecognized tax
benefits of approximately $200 million, the realization of
foreign tax credits and the favorable tax impact of foreign
exchange rate changes during the fourth quarter, particularly
the strengthening of the Japanese yen against the US dollar,
partially offset by an unfavorable impact resulting from the
AZLP gain being fully taxable in the United States at a combined
federal and state tax rate of approximately 36.3%. In the first
quarter of 2008, the Company decided to distribute certain prior
years foreign earnings to the United States which will
result in a utilization of foreign tax credits. These foreign
tax credits arose as a result of tax payments made outside of
the United States in prior years that became realizable in the
first quarter based on a change in the Companys decision
to distribute these foreign earnings. The 2007 effective tax
rate reflects the reduction of domestic pretax income primarily
resulting from the U.S. Vioxx Settlement Agreement
charge and the related change in mix of domestic and foreign
pretax income.
66
Net
Income and Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions except per share
amounts)
|
|
2008
|
|
|
Change
|
|
2007
|
|
|
Change
|
|
2006
|
|
|
|
|
Net income
|
|
$
|
7,808.4
|
|
|
*
|
|
$
|
3,275.4
|
|
|
−26%
|
|
$
|
4,433.8
|
|
As a % of sales
|
|
|
32.7
|
%
|
|
|
|
|
13.5
|
%
|
|
|
|
|
19.6
|
%
|
As a % of average total assets
|
|
|
16.3
|
%
|
|
|
|
|
7.0
|
%
|
|
|
|
|
9.9
|
%
|
Earnings per common share assuming dilution
|
|
$
|
3.64
|
|
|
*
|
|
$
|
1.49
|
|
|
−27%
|
|
$
|
2.03
|
|
|
Net
Income and Earnings per Common Share
Net income was $7.8 billion in 2008 compared with
$3.3 billion in 2007 and $4.4 billion in 2006.
Earnings per common share assuming dilution were $3.64 in 2008
compared with $1.49 in 2007 and $2.03 in 2006. The increases in
net income and earnings per share in 2008 as compared with 2007
are primarily attributable to the gain on distribution from AZLP
in 2008 and the impacts in 2007 of the U.S. Vioxx
Settlement Agreement and civil governmental investigations
charges. In addition, the increases reflect the positive impact
of certain tax items, lower acquired research costs and lower
expenses for legal defense costs, partially offset by higher
restructuring costs and lower equity earnings in 2008, as well
as the recognition in 2007 of an insurance arbitration gain. The
declines in net income and earnings per share in 2007 as
compared with 2006 reflect the impact of the U.S. Vioxx
Settlement Agreement charge and civil governmental
investigations charge in 2007, partially offset by lower
expenses for legal defense costs, a gain from an insurance
arbitration award related to Vioxx product liability
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 as compared
with 2006 also reflect revenue growth of vaccines, Singulair
and Januvia, as well as higher equity income from
affiliates. Net income as a percentage of sales was 32.7% in
2008, 13.5% in 2007 and 19.6% in 2006. The changes in the
percentage of sales ratio reflect the same factors discussed
above. Net income as a percentage of average total assets was
16.3% in 2008, 7.0% in 2007 and 9.9% in 2006.
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 (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). Vytorin is the only
combination tablet cholesterol treatment to provide LDL
cholesterol lowering through the dual inhibition of cholesterol
production and absorption.
The cholesterol agreements 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 $300 million of annual Zetia sales, on which
Schering-Plough receives a greater share of profits. Operating
income includes expenses that the Partners have contractually
agreed to share, such as a portion of manufacturing costs,
specifically identified promotion costs (including
direct-to-consumer advertising and direct and identifiable
out-of-pocket promotion) and other agreed upon costs for
specific services such as on-going clinical research, market
support, market research, market expansion, as well as a
specialty sales force and physician education programs. Expenses
incurred in support of the MSP Partnership but not shared
between the
67
Partners, such as marketing and administrative expenses
(including certain sales force costs), as well as certain
manufacturing costs, are not included in Equity income from
affiliates. However, these costs are reflected in the overall
results of the Company. Certain research and development
expenses are generally shared equally by the Partners, after
adjusting for earned milestones.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Vytorin
|
|
$
|
2,360.0
|
|
|
$
|
2,779.1
|
|
|
$
|
1,955.3
|
|
Zetia
|
|
|
2,201.1
|
|
|
|
2,407.1
|
|
|
|
1,928.8
|
|
|
|
|
|
$
|
4,561.1
|
|
|
$
|
5,186.2
|
|
|
$
|
3,884.1
|
|
|
Global sales of Vytorin declined 15% in 2008 and grew 42%
in 2007. Global sales of Zetia decreased 9% in 2008 and
increased 25% in 2007. Following the announcements of the
ENHANCE and SEAS clinical trial results (which are discussed
below), sales of Vytorin and Zetia declined in
2008.
As previously disclosed, in January 2008, the Company announced
the results of the Effect of Combination Ezetimibe and High-Dose
Simvastatin vs. Simvastatin Alone on the Atherosclerotic Process
in Patients with Heterozygous Familial Hypercholesterolemia
(ENHANCE) clinical trial, an imaging trial in
720 patients with heterozygous familial
hypercholesterolemia, a rare genetic condition that causes very
high levels of LDL bad cholesterol and greatly
increases the risk for premature coronary artery disease. As
previously reported, despite the fact that ezetimibe/simvastatin
10/80 mg (Vytorin) significantly lowered LDL
bad cholesterol more than simvastatin 80 mg
alone, there was no significant difference between treatment
with ezetimibe/simvastatin and simvastatin alone on the
pre-specified primary endpoint, a change in the thickness of
carotid artery walls over two years as measured by ultrasound.
There also were no significant differences between treatment
with ezetimibe/simvastatin and simvastatin on the four
pre-specified key secondary endpoints: percent of patients
manifesting regression in the average carotid artery
intima-media thickness (CA IMT); proportion of
patients developing new carotid artery plaques >1.3 mm;
changes in the average maximum CA IMT; and changes in the
average CA IMT plus in the average common femoral artery IMT. In
ENHANCE, when compared to simvastatin alone,
ezetimibe/simvastatin significantly lowered LDL bad
cholesterol, as well as triglycerides and C-reactive protein
(CRP). Ezetimibe/simvastatin is not indicated for
the reduction of CRP. In the ENHANCE study, the overall safety
profile of ezetimibe/simvastatin was generally consistent with
the product label. The ENHANCE study was not designed nor
powered to evaluate cardiovascular clinical events. The Improved
Reduction in High-Risk Subjects Presenting with Acute Coronary
Syndrome (IMPROVE-IT) trial is underway and is
designed to provide cardiovascular outcomes data for
ezetimibe/simvastatin in patients with acute coronary syndrome.
No incremental benefit of ezetimibe/simvastatin on
cardiovascular morbidity and mortality over and above that
demonstrated for simvastatin has been established. In March
2008, the results of ENHANCE were reported at the annual
Scientific Session of the American College of Cardiology.
On July 21, 2008, efficacy and safety results from the
Simvastatin and Ezetimibe in Aortic Stenosis (SEAS)
study were announced. SEAS was designed to evaluate whether
intensive lipid lowering with Vytorin
10/40 mg
would reduce the need for aortic valve replacement and the risk
of cardiovascular morbidity and mortality versus placebo in
patients with asymptomatic mild to moderate aortic stenosis who
had no indication for statin therapy. Vytorin failed to
meet its primary end point for the reduction of major
cardiovascular events. There also was no significant difference
in the key secondary end point of aortic valve events; however,
there was a reduction in the group of patients taking Vytorin
compared to placebo in the key secondary end point of
ischemic cardiovascular events. Vytorin is not indicated
for the treatment of aortic stenosis. No incremental benefit of
Vytorin on cardiovascular morbidity and mortality over
and above that demonstrated for simvastatin has been
established. In the study, patients in the group who took
Vytorin 10/40 mg had a higher incidence of cancer
than the group who took placebo. There was also a nonsignificant
increase in deaths from cancer in patients in the group who took
Vytorin versus those who took placebo. Cancer and cancer
deaths were distributed across all major organ systems. The
Company believes the cancer finding in SEAS is likely to be an
anomaly that, taken in light of all the available data, does not
support an association with Vytorin. In August 2008, the
FDA announced that it was investigating the results from the
SEAS trial. In this announcement, the FDA also cited interim
data from two large ongoing
68
cardiovascular trials of Vytorin the Study of
Heart and Renal Protection (SHARP) and the
IMPROVE-IT clinical trials in which there was no
increased risk of cancer with the combination of simvastatin
plus ezetimibe. The SHARP trial is expected to be completed in
2010. The IMPROVE-IT trial is scheduled for completion around
2012. The FDA determined that, as of that time, these findings
in the SEAS trial plus the interim data from ongoing trials
should not prompt patients to stop taking Vytorin or any
other cholesterol lowering drug.
The Company, through the MSP Partnership, is committed to
working with regulatory agencies to further evaluate the
available data and interpretations of those data; however, the
Company does not believe that changes in the clinical use of
Vytorin are warranted.
See Note 10 to the consolidated financial statements for
information with respect to litigation involving the Partners
and the MSP Partnership related to the sale and promotion of
Zetia and Vytorin.
The respiratory therapeutic agreements provided 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.
During 2008, the Partners received a not-approvable letter from
the FDA for the proposed fixed combination of
loratadine/montelukast and subsequently announced the withdrawal
of the NDA for the combination tablet. The companies also
terminated the respiratory joint venture. This action had no
impact on the business of the cholesterol joint venture. As a
result of the termination of the respiratory joint venture, the
Company was obligated to Schering-Plough in the amount of
$105 million as specified in the joint venture agreements.
This resulted in a charge of $43 million during the second
quarter of 2008 which was included in Equity income from
affiliates. The remaining amount is being amortized over the
remaining patent life of Zetia through 2016.
The results from the Companys interest in the MSP
Partnership are recorded in Equity income from affiliates. Merck
recognized equity income of $1.5 billion in 2008,
$1.8 billion in 2007 and $1.2 billion in 2006.
The financial statements of the MSP Partnership are included in
Item 15. (a) (2) Financial Statement
Schedules below.
AstraZeneca
LP
In 1982, Merck entered into an agreement with Astra AB
(Astra) to develop and market Astras products
under a royalty-bearing license. In 1993, the Companys
total sales of Astra products reached a level that triggered the
first step in the establishment of a joint venture business
carried on by Astra Merck Inc. (AMI), in which Merck
and Astra each owned a 50% share. This joint venture, formed in
1994, developed and marketed most of Astras new
prescription medicines in the United States including
Prilosec, the first of a class of medications known as
proton pump inhibitors, which slows the production of acid from
the cells of the stomach lining.
In 1998, Merck and Astra completed the restructuring of the
ownership and operations of the joint venture whereby the
Company acquired Astras interest in AMI, renamed KBI Inc.
(KBI), and contributed KBIs operating assets
to a new U.S. limited partnership, Astra Pharmaceuticals
L.P. (the Partnership), in exchange for a 1% limited
partner interest. Astra contributed the net assets of its wholly
owned subsidiary, Astra USA, Inc., to the Partnership in
exchange for a 99% general partner interest. The Partnership,
renamed AstraZeneca LP (AZLP) upon Astras 1999
merger with Zeneca Group Plc (the AstraZeneca
merger), became the exclusive distributor of the products
for which KBI retained rights.
While maintaining a 1% limited partner interest in AZLP, Merck
has consent and protective rights intended to preserve its
business and economic interests, including restrictions on the
power of the general partner to make certain distributions or
dispositions. Furthermore, in limited events of default,
additional rights will be granted to the Company, including
powers to direct the actions of, or remove and replace, the
Partnerships chief executive officer and chief financial
officer. Merck earns ongoing revenue based on sales of current
and future KBI products and such revenue was $1.6 billion,
$1.7 billion and $1.8 billion in 2008, 2007 and 2006,
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
69
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 $598.4 million,
$820.1 million and $783.7 million in 2008, 2007 and
2006, respectively. The AstraZeneca merger triggered a partial
redemption in March 2008 of Mercks interest in certain
AZLP product rights. Upon this redemption, Merck received
$4.3 billion from AZLP. This amount was 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). Merck recorded a
$1.5 billion pretax gain on the partial redemption in 2008.
The partial redemption of Mercks interest in the product
rights did not result in a change in Mercks 1% limited
partner interest.
In conjunction with the 1998 restructuring, Astra purchased an
option (the Asset Option) for a payment of
$443.0 million, which was recorded as deferred income, to
buy 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 would not exercise the Asset Option, thus the
$443.0 million remains deferred. In addition, in 1998, the
Company granted Astra an option (the Shares Option)
to buy Mercks common stock interest in KBI and, therefore,
Mercks interest in Nexium and Prilosec,
exercisable two years after Astras exercise of the Asset
Option. Astra can also exercise the Shares Option in 2017 or if
combined annual sales of the two products fall below a minimum
amount provided, in each case, only so long as
AstraZenecas Asset Option has been exercised in 2010. The
exercise price for the Shares Option is based on the net present
value of estimated future net sales of Nexium and
Prilosec as determined at the time of exercise, subject
to certain
true-up
mechanisms.
The AstraZeneca merger constituted a Trigger Event under the KBI
restructuring agreements. As a result of the merger, in exchange
for Mercks relinquishment of rights to future Astra
products with no existing or pending U.S. patents at the
time of the merger, Astra paid $967.4 million (the
Advance Payment). The Advance Payment was deferred
as it remained subject to a
true-up
calculation (the
True-Up
Amount) that was directly dependent on the fair market
value in March 2008 of the Astra product rights retained by the
Company. The calculated
True-Up
Amount of $243.7 million was returned to AZLP in March 2008
and Merck recognized a pretax gain of $723.7 million
related to the residual Advance Payment balance.
Under the provisions of the KBI restructuring agreements,
because a Trigger Event has occurred, the sum of the Limited
Partner Share of Agreed Value, the Appraised Value and the
True-Up
Amount was guaranteed to be a minimum of $4.7 billion.
Distribution of the Limited Partner Share of Agreed Value less
payment of the
True-Up
Amount resulted in cash receipts to Merck of $4.0 billion
and an aggregate pretax gain of $2.2 billion which is
included in Other (income) expense, net. AstraZenecas
purchase of Mercks interest in the Non-PPI Products is
contingent upon the exercise of the Asset Option by AstraZeneca
in 2010 and, therefore, payment of the Appraised Value may or
may not occur. Also, in March 2008, the $1.38 billion
outstanding loan from Astra plus interest through the redemption
date was settled. As a result of these transactions, the Company
received net proceeds from AZLP of $2.6 billion.
Merial
Limited
In 1997, Merck and Rhône-Poulenc S.A. (now Sanofi-Aventis
S.A.) combined their animal health businesses to
form Merial Limited (Merial), a fully
integrated animal health company, which is a stand-alone joint
venture, 50% owned by each party. Merial provides a
comprehensive range of pharmaceuticals and vaccines to enhance
the health, well-being and performance of a wide range of animal
species.
70
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Fipronil products
|
|
$
|
1,053.0
|
|
|
$
|
1,033.3
|
|
|
$
|
886.9
|
|
Biological products
|
|
|
789.7
|
|
|
|
674.9
|
|
|
|
600.7
|
|
Avermectin products
|
|
|
511.8
|
|
|
|
478.4
|
|
|
|
468.7
|
|
Other products
|
|
|
288.2
|
|
|
|
262.2
|
|
|
|
238.4
|
|
|
|
|
|
$
|
2,642.7
|
|
|
$
|
2,448.8
|
|
|
$
|
2,194.7
|
|
|
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 or will be marketed by
SPMSD in certain Western European countries: Gardasil to
help prevent cervical, vulvar and vaginal cancers, precancerous
or dysplastic lesions, 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)
|
|
2008
|
|
2007
|
|
2006
|
|
|
Gardasil
|
|
$
|
865.3
|
|
$
|
476.0
|
|
$
|
7.5
|
Viral vaccines
|
|
|
105.1
|
|
|
86.8
|
|
|
100.1
|
Hepatitis vaccines
|
|
|
72.6
|
|
|
72.9
|
|
|
70.9
|
Other vaccines
|
|
|
841.8
|
|
|
802.3
|
|
|
735.4
|
|
|
|
|
$
|
1,884.8
|
|
$
|
1,438.0
|
|
$
|
913.9
|
|
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 subsequently expanded into Canada. Significant joint venture
products are Pepcid AC, an
over-the-counter
form of the Companys ulcer medication Pepcid, as
well as Pepcid Complete, an
over-the-counter
product which combines the Companys ulcer medication with
antacids.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
|
Gastrointestinal products
|
|
$
|
210.7
|
|
$
|
218.5
|
|
$
|
250.9
|
Other products
|
|
|
1.4
|
|
|
1.2
|
|
|
1.7
|
|
|
|
|
$
|
212.1
|
|
$
|
219.7
|
|
$
|
252.6
|
|
Capital
Expenditures
Capital expenditures were $1.3 billion in 2008,
$1.0 billion in 2007 and $980.2 million in 2006.
Expenditures in the United States were $946.6 million in
2008, $788.0 million in 2007 and $714.7 million in
2006. Expenditures during 2008 included $650.3 million for
production facilities, $177.1 million for research and
development facilities, $18.7 million for environmental
projects, and $452.2 million for administrative, safety and
general site projects, of which approximately 35% represents
capital investments related to a multi-year initiative to
standardize the Companys information systems. Capital
expenditures for 2009 are estimated to be $1.6 billion.
71
Depreciation expense was $1.4 billion in 2008,
$1.8 billion in 2007 and $2.1 billion in 2006, of
which $1.0 billion, $1.4 billion and
$1.5 billion, respectively, applied to locations in the
United States. Total depreciation expense in 2008, 2007 and 2006
included accelerated depreciation of $216.7 million,
$460.6 million and $763.8 million, respectively,
associated with the 2008 and 2005 Restructuring Programs (see
Note 3 to the consolidated financial statements).
Analysis
of Liquidity and Capital Resources
Mercks strong financial profile enables the Company to
fully fund research and development, focus on external
alliances, support in-line products and maximize upcoming
launches while providing significant cash returns to
shareholders.
Selected
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Working capital
|
|
$
|
4,986.2
|
|
|
$
|
2,787.2
|
|
|
$
|
2,507.5
|
|
Total debt to total liabilities and equity
|
|
|
13.2
|
%
|
|
|
11.9
|
%
|
|
|
15.3
|
%
|
Cash provided by operations to total debt
|
|
|
1.1:1
|
|
|
|
1.2:1
|
|
|
|
1.0:1
|
|
|
Cash provided by operating activities, which was
$6.6 billion in 2008, $7.0 billion in 2007 and
$6.8 billion in 2006, continues to be the Companys
primary source of funds to finance capital expenditures,
treasury stock purchases and dividends paid to stockholders.
Cash provided by operating activities in 2008 reflects
$2.1 billion received in connection with a partial
redemption of the Companys partnership interest in AZLP
discussed above, representing a distribution of the
Companys accumulated earnings on its investment in AZLP
since inception. Cash provided by operating activities in 2008
was also impacted by a $675 million payment made in
connection with the previously disclosed resolution of
investigations of civil claims by federal and state authorities
relating to certain past marketing and selling activities and
$750 million of payments into the Vioxx settlement
funds. Cash provided by operating activities for 2007 reflects
the payment made under a previously disclosed settlement with
the Internal Revenue Service (IRS).
Cash used by investing activities in 2008 was $1.8 billion
compared with $2.8 billion in 2007. The lower use of cash
by investing activities primarily reflects a distribution from
AZLP in 2008 representing a return of the Companys
investment in AZLP and a $1.1 billion payment in 2007 in
connection with the December 2006 acquisition of Sirna
Therapeutics, Inc., partially offset by higher net purchases of
securities and other investments, higher capital expenditures
and an increase in restricted assets. Cash used in financing
activities was $5.5 billion in 2008 compared with
$4.9 billion in 2007 reflecting higher purchases of
treasury stock, lower proceeds from the exercise stock options
and higher payments on debt in connection with the settlement of
a note due to Astra, partially offset by a net increase in
short-term borrowings.
At December 31, 2008, the total of worldwide cash and
investments was $12.0 billion, including $5.5 billion
of cash, cash equivalents and short-term investments, and
$6.5 billion of long-term investments. In addition, the
Company has $6.3 billion of cash and investments restricted
under certain collateral arrangements as discussed below.
Working capital levels are more than adequate to meet the
operating requirements of the Company. The increase in working
capital was primarily attributable to net cash receipts from
AZLP as discussed above in Selected Joint Venture and
Affiliate Information. 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.
In August 2008, the Company executed a $4.1 billion letter
of credit agreement with a financial institution, which
satisfied certain conditions set forth in the U.S. Vioxx
Settlement Agreement (see Note 10 to the consolidated
financial statements). The Company pledged collateral to the
financial institution of approximately $5.1 billion
pursuant to the terms of the letter of credit agreement.
Although the amount of assets pledged as collateral is set by
the letter of credit agreement and such assets are held in
custody by a third party, the assets are
72
managed by the Company. The Company considers the assets pledged
under the letter of credit agreement to be restricted. As a
result, $2.1 billion and $1.4 billion of cash and
investments, respectively, were classified as restricted current
assets and $1.6 billion of investments were classified as
restricted non-current assets. The letter of credit amount and
required collateral balances will decline as payments (after the
first $750 million) under the Settlement Agreement are
made. As of December 31, 2008, $3.8 billion was
recorded within Deferred income taxes and other current assets
and $1.3 billion was classified as Other assets.
Additionally, during 2008, the Company paid $750 million
into the Vioxx settlement funds pursuant to the
Settlement Agreement.
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 accrued for.
As previously disclosed, in October 2006, the CRA issued the
Company a notice of reassessment containing adjustments related
to certain intercompany pricing matters. In February 2009, Merck
and the CRA negotiated a settlement agreement in regard to these
matters. The settlement calls for Merck to pay additional tax of
approximately $300 million (U.S. dollars) and interest
of approximately $360 million (U.S. dollars) with no
additional amounts or penalties due on this assessment. In
accordance with FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48),
the settlement will be accounted for in the first quarter of
2009. The Company had previously established reserves for these
matters. A significant portion of the taxes paid is expected to
be creditable for U.S. tax purposes. The resolution of
these matters will not have a material effect on the
Companys financial position or liquidity, other than with
respect to the associated collateral as discussed below.
In addition, in July 2007 and November 2008, the CRA proposed
additional adjustments for 1999 and 2000, respectively, relating
to other intercompany pricing matters. The adjustments would
increase Canadian tax due by approximately $260 million
(U.S. dollars) plus $240 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 assessments through the CRA
appeals process and the courts if necessary. Management believes
that resolution of these matters will not have a material effect
on the Companys financial position or liquidity.
In connection with the appeals process, 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 Deferred income
taxes and other current assets and Other Assets in the
Consolidated Balance Sheet and totaled approximately
$1.2 billion and $1.4 billion at December 31,
2008 and 2007, respectively. The guarantees will be reduced and
the related collateral released following payments to the CRA
and Quebec Ministry of Revenue, causing the restricted amounts
to be reclassified to cash and investments as appropriate on the
Consolidated Balance Sheet.
The IRS is examining the Companys 2002 to 2005 federal
income tax returns. In addition, various state and foreign tax
examinations are in progress. Tax years that remain subject to
examination by major tax jurisdictions include Germany from
1999, Italy from 2000 and Japan from 2002.
73
The Companys contractual obligations as of
December 31, 2008 are as follows:
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Total
|
|
|
2009
|
|
|
2010 - 2011
|
|
|
2012 -2013
|
|
|
Thereafter
|
|
|
|
|
Purchase obligations
|
|
$
|
1,243.6
|
|
|
$
|
557.7
|
|
|
$
|
365.1
|
|
|
$
|
246.5
|
|
|
$
|
74.3
|
|
Loans payable and current portion of long-term debt
|
|
|
2,297.1
|
|
|
|
2,297.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt
|
|
|
3,943.3
|
|
|
|
-
|
|
|
|
553.6
|
|
|
|
541.1
|
|
|
|
2,848.6
|
|
U.S. Vioxx Settlement
Agreement(1)
|
|
|
4,100.0
|
|
|
|
4,100.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unrecognized tax
benefits(2)
|
|
|
1,203.8
|
|
|
|
1,203.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating leases
|
|
|
376.2
|
|
|
|
103.0
|
|
|
|
139.3
|
|
|
|
77.7
|
|
|
|
56.2
|
|
|
|
|
|
$
|
13,164.0
|
|
|
$
|
8,261.6
|
|
|
$
|
1,058.0
|
|
|
$
|
865.3
|
|
|
$
|
2,979.1
|
|
|
|
|
(1)
|
Timing of payments under the U.S. Vioxx
Settlement Agreement may vary depending on the timing of the
claims assessment process.
|
|
(2)
|
As of December 31, 2008, the Companys Consolidated
Balance Sheet reflects liabilities for unrecognized tax
benefits, interest and penalties of $5.35 billion,
including $1.20 billion reflected as a current liability,
largely reflecting amounts related to the settlement with the
Canadian Revenue Agency as discussed above. 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 2009 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
$322.2 million of long-dated notes that are subject to
repayment at the option of the holders on an annual basis.
Required funding obligations for 2009 relating to the
Companys pension and other postretirement benefit plans
are not expected to be material. However, the Company currently
anticipates contributing $600.0 million and
$60.0 million, respectively, to its pension plans and other
postretirement benefit plans during 2009.
In December 2008, the Companys existing shelf registration
filed with the Securities and Exchange Commission
(SEC) expired. The Company intends to file a new
shelf registration in 2009.
In April 2008, the Company extended the maturity date of its
$1.5 billion,
5-year
revolving credit facility from April 2012 to April 2013. 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 stable 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
$12.0 billion exceed the sum of loans payable and long-term
debt of $6.2 billion. The Company places its cash and
investments in instruments that meet high credit quality
standards, as specified in its investment policy guidelines.
These guidelines also limit the amount of credit exposure to any
one issuer. Despite this strong financial profile, certain
contingent events, if realized, which are discussed in
Note 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 2008 was
$2.7 billion. As of December 31, 2008,
$2.4 billion remains under the 2002 stock repurchase
authorization approved by the Merck Board of Directors.
74
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 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
$194.7 million and $69.5 million, respectively, from a
uniform 10% weakening of the U.S. dollar at
December 31, 2008 and 2007. 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
offset the effects of exchange on exposures denominated in
developed country currencies, primarily the euro and Japanese
yen. For exposures in developing country currencies, the Company
will enter into forward contracts to partially offset the
effects of exchange on exposures when it is deemed economical to
do so based on a cost-benefit analysis that considers the
magnitude of the exposure, the volatility of the exchange rate
and the cost of the hedging instrument. The Company will also
minimize the effect of exchange on monetary assets and
liabilities by managing operating activities and net asset
positions at the local level. 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, 2008 and 2007, Income before taxes would have
declined by $15.8 million and
75
$24.6 million, respectively. Because 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, 2008, the Company was a party to two
pay-floating, receive-fixed interest rate swap contracts
maturing in 2011 with notional amounts of $125 million each
designated as fair value hedges of fixed-rate notes in which the
notional amounts match the amount of the hedged fixed-rate
notes. The swaps effectively convert the fixed-rate obligations
to floating-rate instruments. In 2008, the Company terminated
four interest rate swap contracts with notional amounts of
$250 million each, and terminated one interest rate swap
contract with a notional amount of $500 million. These
swaps had effectively converted its $1.0 billion, 4.75%
fixed-rate notes due 2015 and its $500 million, 4.375%
fixed-rate notes due 2013 to variable rate debt. As a result of
the swap terminations, the Company received $128.3 million
in cash, excluding accrued interest which was not material. The
corresponding gains related to the basis adjustment of the debt
associated with the terminated swap contracts were deferred and
are being amortized as a reduction of interest expense over the
remaining term of the notes. The cash flows from these contracts
are reported as operating activities in the Consolidated
Statement of Cash Flows.
The Companys investment portfolio includes cash
equivalents and short-term investments, the market values of
which are not significantly 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, 2008 and 2007
would have positively impacted the net aggregate market value of
these instruments by $98.9 million and $62.1 million,
respectively. A one percentage point decrease at
December 31, 2008 and 2007 would have negatively impacted
the net aggregate market value by $156.3 million and
$114.6 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 values of the Companys investments were
determined using a combination of pricing and duration models.
Critical
Accounting Policies and Other Matters
The Companys consolidated financial statements include
certain amounts that are based on managements best
estimates and judgments. Estimates are used 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, restructuring costs, 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 at the time of
delivery and when title and risk of loss passes to the customer.
Recognition of revenue also requires reasonable assurance of
collection of sales proceeds and completion of all performance
obligations. Domestically, sales discounts are issued to
customers as direct
76
discounts at the
point-of-sale
or indirectly through an intermediary wholesaler, known as
chargebacks, or indirectly in the form of rebates. Additionally,
sales are generally made with a limited right of return under
certain conditions. Revenues are recorded net of provisions for
sales discounts and returns, which are established at the time
of sale.
The provision for aggregate indirect customer discounts covers
chargebacks and rebates. Chargebacks are discounts that occur
when a contracted customer purchases directly through an
intermediary wholesaler. The contracted customer generally
purchases product at its contracted price plus a
mark-up from
the wholesaler. The wholesaler, in turn, charges the Company
back for the difference between the price initially paid by the
wholesaler and the contract price paid to the wholesaler by the
customer. The provision for chargebacks is based on expected
sell-through levels by the Companys wholesale customers to
contracted customers, as well as estimated wholesaler inventory
levels. Rebates are amounts owed based upon definitive
contractual agreements or legal requirements with private sector
and public sector (Medicaid and Medicare
Part D) benefit providers, after the final dispensing
of the product by a pharmacy to a benefit plan participant. The
provision is based on expected payments, which are driven by
patient usage and contract performance by the benefit provider
customers.
The Company 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 2008, 2007 or 2006.
Summarized information about changes in the aggregate indirect
customer discount accrual is as follows:
|
|
|
|
|
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
|
Balance, January 1
|
|
$
|
699.4
|
|
$
|
757.1
|
Current provision
|
|
|
2,037.5
|
|
|
2,109.7
|
Adjustments to prior years
|
|
|
(13.7)
|
|
|
(14.1)
|
Payments
|
|
|
(2,106.9)
|
|
|
(2,153.3)
|
|
|
Balance, December 31
|
|
$
|
616.3
|
|
$
|
699.4
|
|
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 $55.6 million and $560.7 million,
respectively, at December 31, 2008, and $82.5 million
and $616.9 million, respectively, at December 31, 2007.
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 2008,
2007 and 2006.
Through its distribution program with U.S. wholesalers, the
Company encourages wholesalers to align purchases with
underlying demand and maintain inventories below 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 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.
77
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, 2008 and 2007 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 December 31, 2007, the Company had an
aggregate reserve of approximately $5.372 billion (the
Vioxx Reserve) for the Settlement Program and
the Companys future legal defense costs worldwide related
to (i) the Vioxx Product Liability Lawsuits,
(ii) the Vioxx Shareholder Lawsuits, (iii) the
Vioxx Foreign Lawsuits, and (iv) the Vioxx
Investigations (collectively, the Vioxx
Litigation) (see Note 10 to the consolidated
financial statements). During 2008, the Company spent
approximately $305 million in the aggregate in legal
defense costs worldwide related to the Vioxx Litigation.
In the fourth quarter of 2008, the Company recorded a charge of
$62 million solely for its future legal defense costs
related to the Vioxx Litigation. In addition, in the
fourth quarter of 2008, the Company paid an additional
$250 million into the settlement funds in connection with
the Settlement Program after having paid $500 million into
the settlement funds in the third quarter of 2008. Consequently,
as of December 31, 2008, the aggregate amount of the
Vioxx Reserve was approximately $4.379 billion. In
adding to the Vioxx Reserve solely for its future legal
defense costs, the Company considered the same factors that it
considered when it previously established reserves for the
Vioxx Litigation. Some of the significant factors
considered in the review of the Vioxx Reserve were as
follows: the actual costs incurred by the Company; the
development of the Companys legal defense strategy and
structure in light of the scope of the Vioxx Litigation,
including the Settlement Agreement and the expectation that
certain lawsuits will continue to be pending; the number of
cases being brought against the Company; the costs and outcomes
of completed trials and the most current information regarding
anticipated timing, progression, and related costs of pre-trial
activities and trials in the Vioxx Ligation. The amount
of the Vioxx Reserve as of December 31, 2008
allocated solely to defense costs represents the Companys
best estimate of the minimum amount of defense costs to be
incurred in connection with the remaining aspects of the
Vioxx Litigation; however, events such as additional
trials in the Vioxx Litigation and other events that
could arise in the course of the Vioxx Litigation could
affect the ultimate amount of defense
78
costs to be incurred by the Company. The Company will continue
to monitor its legal defense costs and review the adequacy of
the associated reserves and may determine to increase the
Vioxx Reserve at any time in the future if, based upon
the factors set forth, it believes it would be appropriate to do
so.
The Company currently anticipates that two U.S. Vioxx
Product Liability Lawsuits will be tried in 2009. Except
with respect to a product liability trial scheduled to be held
in Australia, the Company cannot predict the timing of any other
trials related to the Vioxx Litigation. The Company
believes that it has meritorious defenses to the Vioxx
Lawsuits and will vigorously defend against them. In view of
the inherent difficulty of predicting the outcome of litigation,
particularly where there are many claimants and the claimants
seek indeterminate damages, the Company is unable to predict the
outcome of these matters, and at this time cannot reasonably
estimate the possible loss or range of loss with respect to the
Vioxx Lawsuits not included in the Settlement Program.
The Company has not established any reserves for any potential
liability relating to the Vioxx Lawsuits not included in
the Settlement Program or the Vioxx Investigations. 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. During
2008, the Company spent approximately $34 million and added
$40 million to its reserve. Consequently, as of
December 31, 2008, the Company had a reserve of
approximately $33 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
completion of the first three federal trials discussed in
Note 10 to the consolidated financial statements. 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 site investigations, feasibility studies and related
cost assessments of remedial techniques are completed, and as
the extent to which other potentially responsible parties who
may be jointly and severally liable can be expected to
contribute is determined.
The Company is also remediating environmental contamination
resulting from past industrial activity at certain of its sites
and takes an active role in identifying and providing for these
costs. A worldwide survey was initially performed to assess all
sites for potential contamination resulting from past industrial
activities. Where assessment indicated that physical
investigation was warranted, such investigation was performed,
providing a better evaluation of the need for remedial action.
Where such need was identified, remedial action was then
initiated. 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
$34.5 million in 2008, and are estimated at
$47.1 million for the years 2009 through 2013. In
managements opinion, the liabilities for all environmental
matters that are probable and reasonably estimable have been
accrued and totaled $89.5 million and $109.6 million
at December 31, 2008 and December 31, 2007,
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
79
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 $70.0 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 in accordance with
FAS 123R, which requires all share-based payments to
employees, including grants of stock options, to be expensed
over the requisite service period based on the grant date fair
value of the awards. The Company determines the fair value of
certain share-based awards using the Black-Scholes
option-pricing model which uses both historical and current
market data to estimate the fair value. This method incorporates
various assumptions such as the risk-free interest rate,
expected volatility, expected dividend yield and expected life
of the options.
Pensions
and Other Postretirement Benefit Plans
Net pension and other postretirement benefit cost totaled
$376.6 million in 2008, $489.3 million in 2007 and
$563.7 million in 2006. The decrease of $112.7 million
in 2008 is primarily due to the lower amortization of actuarial
net losses and higher expected return on plan assets which were
partially offset by an increase in termination benefits
attributable to the Companys restructuring actions.
Pension and other postretirement benefit plan information for
financial reporting purposes is calculated using actuarial
assumptions including a discount rate for plan benefit
obligations and an expected rate of return on plan assets.
The Company reassesses its benefit plan assumptions on a regular
basis. For both the pension and other postretirement benefit
plans, the discount rate is evaluated on measurement dates and
modified to reflect the prevailing market rate of a portfolio of
high-quality fixed-income debt instruments that would provide
the future cash flows needed to pay the benefits included in the
benefit obligation as they come due. At December 31, 2008,
the discount rates for the Companys U.S. pension
plans and U.S. other postretirement benefit plans ranged
from 6.0% to 6.40% compared with a range of 5.75% to 6.50% at
December 31, 2007.
The expected rate of return for both the pension and other
postretirement benefit plans represents the average rate of
return to be earned on plan assets over the period the benefits
included in the benefit obligation are to be paid. In developing
the expected rate of return, the Company considers long-term
compound annualized returns of historical market data as well as
actual returns on the Companys plan assets. Using this
reference information, the Company develops forward-looking
return expectations for each asset category and a weighted
average expected long-term rate of return for a target portfolio
allocated across these investment categories. The expected
portfolio performance reflects the contribution of active
management as appropriate. As a result of this analysis, for
2009, the Companys expected rate of return of 8.75%
remained unchanged from 2008 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 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.
The actual return on plan assets for pension and other
postretirement benefit plans reflects the allocation to global
equity markets which delivered significant negative returns
during 2008.
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
$35.2 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
$13.0 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
80
requirement under the Internal Revenue Code during 2009. The
preceding hypothetical changes in the discount rate and expected
rate of return assumptions would not impact the Companys
funding requirements.
Net loss amounts, which reflect experience differentials
primarily relating to differences between expected and actual
returns on plan assets as well as the effects of changes in
actuarial assumptions, are recorded as a component of
Accumulated other comprehensive income. Expected returns for
pension plans are based on a calculated market-related value of
assets. Under this methodology, asset gains/losses resulting
from actual returns that differ from the Companys expected
returns are recognized in the market-related value of assets
ratably over a five-year period. Also, net loss amounts in
Accumulated other comprehensive income in excess of certain
thresholds are amortized into net pension and other
postretirement benefit cost over the average remaining service
life of employees. Amortization of net losses for the
Companys U.S. plans at December 31, 2008 is
expected to increase net pension and other postretirement
benefit cost by approximately $130 million annually from
2009 through 2013.
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.
On January 1, 2009, the Company adopted FASB Statement
No. 141R, Business Combinations
(FAS 141R), which changes the way assets
and liabilities are recognized in purchase accounting on a
prospective basis. See Recently Issued Accounting Standards
below.
Restructuring
Costs
The Company has recorded restructuring costs in connection with
its global restructuring programs designed to reduce the
Companys cost structure, increase efficiency and enhance
competitiveness. As a result, the Company has made estimates and
judgments regarding its future plans, including future
termination benefits and other exit costs to be incurred when
the restructuring actions take place. In connection with these
actions, management also assesses the recoverability of
long-lived assets employed in the business. In certain
instances, asset lives have been shortened based on changes in
the expected useful lives of the affected assets. Severance and
other related costs are reflected within Restructuring costs.
Asset-related charges are reflected within Materials and
production costs and Research and development expenses depending
upon the nature of the asset.
81
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 FASB Statement No. 144, Accounting for
the Impairment 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 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 FASB Statement No. 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.
Fair
Value Measurements
On January 1, 2008, the Company adopted FASB 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 establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
FAS 157 describes three levels of inputs that may be used
to measure fair value (see Note 5 to the consolidated
financial statements). At December 31, 2008, the
Companys Level 3 assets of $96.6 million
primarily include mortgage-backed and asset-backed securities,
as well as certain corporate notes and bonds for which there was
a decrease in the observability of market pricing for these
investments. On January 1, 2008, the Company had
$1,273.1 million invested in a short-term fixed income fund
(the Fund). Due to market liquidity conditions, cash
redemptions from the Fund were restricted. As a result of this
restriction on cash redemptions, the Company did not consider
the Fund to be traded in an active market with observable
pricing on January 1, 2008 and these amounts were
categorized as Level 3. On January 7, 2008, the
Company elected to be
redeemed-in-kind
from the Fund and received its share of the underlying
securities of the Fund. As a result, $1,099.7 million of
the underlying securities were transferred out of Level 3
as it was determined these securities had observable markets. As
of December 31, 2008, $96.6 million of the investment
securities associated with the
redemption-in-kind
remained classified in Level 3 (approximately 0.9% of the
Companys investment securities) as the securities
contained at least one significant input which was unobservable
(all of which were pledged under certain collateral arrangements
(see Note 15 to the consolidated financial statements)).
These securities account for the entire balance of the
Companys Level 3 assets at December 31, 2008.
These securities were valued primarily using pricing models for
which management understands the methodologies. These models
incorporate transaction details such as contractual terms,
maturity, timing and amount of future cash inflows, as well as
assumptions about liquidity and credit valuation adjustments of
marketplace participants at December 31, 2008.
82
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 FIN 48, 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. At December 31, 2008, foreign earnings of
$22.0 billion have been retained indefinitely by subsidiary
companies for reinvestment, therefore no provision has been made
for income taxes that would be payable upon the distribution of
such earnings.
Recently
Issued Accounting Standards
In December 2007, the FASB issued FAS 141R which expands
the scope of acquisition accounting to all transactions under
which control of a business is obtained. This standard requires
an acquirer to recognize the assets acquired and liabilities
assumed at the acquisition date fair values with limited
exceptions. Additionally, 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 141R is effective, on a prospective basis,
January 1, 2009 and future transactions will be accounted
for under this standard.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(FAS 160) which provides guidance for the
accounting, reporting and disclosure of noncontrolling interests
and requires, among other things, that noncontrolling interests
be recorded as equity in the consolidated financial statements.
FAS 160 is effective, on a prospective basis,
January 1, 2009 with the exception of the presentation and
disclosure requirements of FAS 160 which must be applied
retrospectively. The adoption of this standard will result in
the reclassification of $2.4 billion of Minority Interests
(now referred to as noncontrolling interests) to a separate
component of Stockholders Equity on the Consolidated
Balance Sheet. Additionally, net income attributable to
noncontrolling interests will be shown separately from parent
net income in the Consolidated Statement of Income.
In December 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force (EITF) on Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1,
which is effective January 1, 2009, is applied
retrospectively to all prior periods presented for all
collaborative arrangements existing as of the effective date.
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for
83
transactions between participants in a collaborative arrangement
and between participants in the arrangement and third parties.
The effect of adoption of
EITF 07-1
is not expected to be material to the Companys financial
position or results of operations.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (FAS 161), which is effective
January 1, 2009. FAS 161 requires enhanced disclosures
about derivative instruments and hedging activities to allow for
a better understanding of their effects on an entitys
financial position, financial performance, and cash flows. Among
other things, FAS 161 requires disclosure of the fair
values of derivative instruments and associated gains and losses
in a tabular format. Since FAS 161 requires only additional
disclosures about the Companys derivatives and hedging
activities, the adoption of FAS 161 will not affect the
Companys financial position or results of operations.
In June 2008, the FASB issued Staff Position
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities (FSP
EITF 03-6-1),
which is effective January 1, 2009. FSP
EITF 03-6-1
clarifies that share-based payment awards that entitle holders
to receive nonforfeitable dividends before they vest will be
considered participating securities and therefore included in
the basic earnings per share calculation. The effect of adoption
of FSP
EITF 03-6-1
is not expected to be material to the Companys results of
operations.
In November 2008, the FASB issued
EITF 08-6,
Equity Method Investment Accounting Considerations
(EITF 08-6).
EITF 08-6
clarifies the accounting for certain transactions and impairment
considerations involving equity method investments.
EITF 08-6
is effective January 1, 2009, and will be applied on a
prospective basis to future transactions.
In November 2008, the FASB issued
EITF 08-7,
Accounting for Defensive Intangible Assets
(EITF 08-7).
EITF 08-7
clarifies that a defensive intangible asset should be accounted
for as a separate unit of accounting and should be assigned a
useful life that reflects the entitys consumption of the
expected benefits related to the asset.
EITF 08-7
is effective January 1, 2009, and will be applied on a
prospective basis to future transactions.
In December 2008, the FASB issued Staff Position
FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP
FAS 132(R)-1), which is effective December 31,
2009. FSP FAS 132(R)-1 amends FASB Statement No. 132R,
Employers Disclosures about Pensions and other
Postretirement Benefits, to provide guidance on an
employers disclosures about plan assets of a defined
pension or other postretirement plan. FSP FAS 132(R)-1
requires disclosures about plan assets including how investment
allocation decisions are made, the major categories of plan
assets, the inputs and valuation techniques used to measure the
fair value of plan assets, the effect of fair value measurements
using significant unobservable inputs (Level 3) on
changes in plan assets for the period, and significant
concentrations of risk within plan assets. Since FSP
FAS 132(R)-1 requires only additional disclosures about the
Companys pension and other postretirement plan assets, the
adoption of FSP FAS 132(R)-1 will not affect the
Companys financial position or 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
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.
84
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.
85
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The consolidated balance sheet of Merck & Co., Inc.
and subsidiaries as of December 31, 2008 and 2007, 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, 2008, the Notes to
Consolidated Financial Statements, and the report dated
February 26, 2009 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
|
$23,850.3
|
|
|
|
$24,197.7
|
|
|
|
$22,636.0
|
|
|
|
Costs, Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
|
5,582.5
|
|
|
|
6,140.7
|
|
|
|
6,001.1
|
|
Marketing and administrative
|
|
|
7,377.0
|
|
|
|
7,556.7
|
|
|
|
8,165.4
|
|
Research and development
|
|
|
4,805.3
|
|
|
|
4,882.8
|
|
|
|
4,782.9
|
|
Restructuring costs
|
|
|
1,032.5
|
|
|
|
327.1
|
|
|
|
142.3
|
|
Equity income from affiliates
|
|
|
(2,560.6
|
)
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
-
|
|
|
|
4,850.0
|
|
|
|
-
|
|
Other (income) expense, net
|
|
|
(2,194.2
|
)
|
|
|
46.2
|
|
|
|
(382.7
|
)
|
|
|
|
|
|
14,042.5
|
|
|
|
20,827.0
|
|
|
|
16,414.6
|
|
|
|
Income Before Taxes
|
|
|
9,807.8
|
|
|
|
3,370.7
|
|
|
|
6,221.4
|
|
Taxes on Income
|
|
|
1,999.4
|
|
|
|
95.3
|
|
|
|
1,787.6
|
|
|
|
Net Income
|
|
|
$7,808.4
|
|
|
|
$3,275.4
|
|
|
|
$4,433.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common Share
|
|
|
$3.66
|
|
|
|
$1.51
|
|
|
|
$2.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share Assuming Dilution
|
|
|
$3.64
|
|
|
|
$1.49
|
|
|
|
$2.03
|
|
|
Consolidated
Statement of Retained Earnings
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Balance, January 1
|
|
$
|
39,140.8
|
|
|
$
|
39,095.1
|
|
|
$
|
37,980.0
|
|
|
|
Cumulative Effect of Adoption of FIN 48
|
|
|
-
|
|
|
|
81.0
|
|
|
|
-
|
|
Net Income
|
|
|
7,808.4
|
|
|
|
3,275.4
|
|
|
|
4,433.8
|
|
Dividends Declared on Common Stock
|
|
|
(3,250.4
|
)
|
|
|
(3,310.7
|
)
|
|
|
(3,318.7
|
)
|
|
|
Balance, December 31
|
|
$
|
43,698.8
|
|
|
$
|
39,140.8
|
|
|
$
|
39,095.1
|
|
|
Consolidated
Statement of Comprehensive Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net Income
|
|
$
|
7,808.4
|
|
|
$
|
3,275.4
|
|
|
$
|
4,433.8
|
|
|
|
Other Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on derivatives, net of tax and net
income realization
|
|
|
151.6
|
|
|
|
(4.4
|
)
|
|
|
(50.9
|
)
|
Net unrealized (loss) gain on investments, net of tax and net
income realization
|
|
|
(80.5
|
)
|
|
|
58.0
|
|
|
|
26.1
|
|
Benefit plan net (loss) gain and prior service cost (credit),
net of tax and amortization
|
|
|
(1,761.7
|
)
|
|
|
240.3
|
|
|
|
-
|
|
Minimum pension liability, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
22.5
|
|
Cumulative translation adjustment relating to equity investees,
net of tax
|
|
|
(37.2
|
)
|
|
|
44.3
|
|
|
|
18.9
|
|
|
|
|
|
|
(1,727.8
|
)
|
|
|
338.2
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
6,080.6
|
|
|
$
|
3,613.6
|
|
|
$
|
4,450.4
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
86
Consolidated Balance Sheet
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,368.3
|
|
|
$
|
5,336.1
|
|
Short-term investments
|
|
|
1,118.1
|
|
|
|
2,894.7
|
|
Accounts receivable (including non-trade receivables of $871.2
in 2008 and $906.0 in 2007)
|
|
|
3,778.9
|
|
|
|
3,636.2
|
|
Inventories (excludes inventories of $395.0 in 2008 and $345.2
in 2007 classified in Other assets see Note 6)
|
|
|
2,283.3
|
|
|
|
1,881.0
|
|
Deferred income taxes and other current assets
|
|
|
7,756.3
|
|
|
|
1,297.4
|
|
|
|
Total current assets
|
|
|
19,304.9
|
|
|
|
15,045.4
|
|
|
|
Investments
|
|
|
6,491.3
|
|
|
|
7,159.2
|
|
|
|
Property, Plant and Equipment (at cost)
|
|
|
|
|
|
|
|
|
Land
|
|
|
386.1
|
|
|
|
405.8
|
|
Buildings
|
|
|
9,767.4
|
|
|
|
10,048.0
|
|
Machinery, equipment and office furnishings
|
|
|
13,103.7
|
|
|
|
13,553.7
|
|
Construction in progress
|
|
|
871.0
|
|
|
|
795.6
|
|
|
|
|
|
|
24,128.2
|
|
|
|
24,803.1
|
|
Less allowance for depreciation
|
|
|
12,128.6
|
|
|
|
12,457.1
|
|
|
|
|
|
|
11,999.6
|
|
|
|
12,346.0
|
|
|
|
Goodwill
|
|
|
1,438.7
|
|
|
|
1,454.8
|
|
|
|
Other Intangibles, Net
|
|
|
525.4
|
|
|
|
713.2
|
|
|
|
Other Assets
|
|
|
7,435.8
|
|
|
|
11,632.1
|
|
|
|
|
|
$
|
47,195.7
|
|
|
$
|
48,350.7
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt
|
|
$
|
2,297.1
|
|
|
$
|
1,823.6
|
|
Trade accounts payable
|
|
|
617.6
|
|
|
|
624.5
|
|
Accrued and other current liabilities
|
|
|
9,174.1
|
|
|
|
8,534.9
|
|
Income taxes payable
|
|
|
1,426.4
|
|
|
|
444.1
|
|
Dividends payable
|
|
|
803.5
|
|
|
|
831.1
|
|
|
|
Total current liabilities
|
|
|
14,318.7
|
|
|
|
12,258.2
|
|
|
|
Long-Term Debt
|
|
|
3,943.3
|
|
|
|
3,915.8
|
|
|
|
Deferred Income Taxes and Noncurrent Liabilities
|
|
|
7,766.6
|
|
|
|
11,585.3
|
|
|
|
Minority Interests
|
|
|
2,408.8
|
|
|
|
2,406.7
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock, one cent par value
|
|
|
|
|
|
|
|
|
Authorized 5,400,000,000 shares
|
|
|
|
|
|
|
|
|
Issued 2,983,508,675 shares 2008
and 2007
|
|
|
29.8
|
|
|
|
29.8
|
|
Other paid-in capital
|
|
|
8,319.1
|
|
|
|
8,014.9
|
|
Retained earnings
|
|
|
43,698.8
|
|
|
|
39,140.8
|
|
Accumulated other comprehensive loss
|
|
|
(2,553.9
|
)
|
|
|
(826.1
|
)
|
|
|
|
|
|
49,493.8
|
|
|
|
46,359.4
|
|
Less treasury stock, at cost
|
|
|
|
|
|
|
|
|
875,818,333 shares 2008
|
|
|
|
|
|
|
|
|
811,005,791 shares 2007
|
|
|
30,735.5
|
|
|
|
28,174.7
|
|
|
|
Total stockholders equity
|
|
|
18,758.3
|
|
|
|
18,184.7
|
|
|
|
|
|
$
|
47,195.7
|
|
|
$
|
48,350.7
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
87
Consolidated Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,808.4
|
|
|
$
|
3,275.4
|
|
|
$
|
4,433.8
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on distribution from AstraZeneca LP
|
|
|
(2,222.7
|
)
|
|
|
-
|
|
|
|
-
|
|
Equity income from affiliates
|
|
|
(2,560.6
|
)
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
|
)
|
Dividends and distributions from equity affiliates
|
|
|
4,289.6
|
|
|
|
2,485.6
|
|
|
|
1,931.9
|
|
U.S. Vioxx Settlement Agreement charge
|
|
|
-
|
|
|
|
4,850.0
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
1,631.2
|
|
|
|
1,988.2
|
|
|
|
2,268.4
|
|
Deferred income taxes
|
|
|
530.1
|
|
|
|
(1,781.9
|
)
|
|
|
(530.2
|
)
|
Share-based compensation
|
|
|
348.0
|
|
|
|
330.2
|
|
|
|
312.5
|
|
Acquired research
|
|
|
-
|
|
|
|
325.1
|
|
|
|
762.5
|
|
Taxes paid for Internal Revenue Service settlement
|
|
|
-
|
|
|
|
(2,788.1
|
)
|
|
|
-
|
|
Other
|
|
|
731.7
|
|
|
|
(64.7
|
)
|
|
|
18.1
|
|
Net changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(889.4
|
)
|
|
|
(290.7
|
)
|
|
|
(709.3
|
)
|
Inventories
|
|
|
(452.1
|
)
|
|
|
(40.7
|
)
|
|
|
226.5
|
|
Trade accounts payable
|
|
|
-
|
|
|
|
117.7
|
|
|
|
16.4
|
|
Accrued and other current liabilities
|
|
|
(1,710.9
|
)
|
|
|
451.1
|
|
|
|
461.6
|
|
Income taxes payable
|
|
|
(465.3
|
)
|
|
|
987.2
|
|
|
|
(138.2
|
)
|
Noncurrent liabilities
|
|
|
(108.0
|
)
|
|
|
26.2
|
|
|
|
(125.6
|
)
|
Other
|
|
|
(358.3
|
)
|
|
|
105.1
|
|
|
|
131.2
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
6,571.7
|
|
|
|
6,999.2
|
|
|
|
6,765.2
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,298.3
|
)
|
|
|
(1,011.0
|
)
|
|
|
(980.2
|
)
|
Purchases of securities and other investments
|
|
|
(11,967.3
|
)
|
|
|
(10,132.7
|
)
|
|
|
(19,591.3
|
)
|
Proceeds from sales of securities and other investments
|
|
|
11,065.8
|
|
|
|
10,860.2
|
|
|
|
16,143.8
|
|
Acquisitions of subsidiaries, net of cash acquired
|
|
|
-
|
|
|
|
(1,135.9
|
)
|
|
|
(404.9
|
)
|
Distribution from AstraZeneca LP
|
|
|
1,899.3
|
|
|
|
-
|
|
|
|
-
|
|
Increase in restricted assets
|
|
|
(1,629.7
|
)
|
|
|
(1,401.1
|
)
|
|
|
(48.1
|
)
|
Other
|
|
|
95.8
|
|
|
|
10.5
|
|
|
|
(3.0
|
)
|
|
|
Net Cash Used by Investing Activities
|
|
|
(1,834.4
|
)
|
|
|
(2,810.0
|
)
|
|
|
(4,883.7
|
)
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings
|
|
|
1,859.9
|
|
|
|
11.4
|
|
|
|
(1,522.8
|
)
|
Proceeds from issuance of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
755.1
|
|
Payments on debt
|
|
|
(1,392.0
|
)
|
|
|
(1,195.3
|
)
|
|
|
(506.2
|
)
|
Purchases of treasury stock
|
|
|
(2,725.0
|
)
|
|
|
(1,429.7
|
)
|
|
|
(1,002.3
|
)
|
Dividends paid to stockholders
|
|
|
(3,278.5
|
)
|
|
|
(3,307.3
|
)
|
|
|
(3,322.6
|
)
|
Proceeds from exercise of stock options
|
|
|
102.3
|
|
|
|
898.6
|
|
|
|
369.9
|
|
Other
|
|
|
(89.2
|
)
|
|
|
156.2
|
|
|
|
(375.3
|
)
|
|
|
Net Cash Used by Financing Activities
|
|
|
(5,522.5
|
)
|
|
|
(4,866.1
|
)
|
|
|
(5,604.2
|
)
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
(182.6
|
)
|
|
|
98.3
|
|
|
|
52.1
|
|
|
|
Net Decrease in Cash and Cash Equivalents
|
|
|
(967.8
|
)
|
|
|
(578.6
|
)
|
|
|
(3,670.6
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
5,336.1
|
|
|
|
5,914.7
|
|
|
|
9,585.3
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
4,368.3
|
|
|
$
|
5,336.1
|
|
|
$
|
5,914.7
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
88
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 and Infectious Diseases
segment. The Pharmaceutical segment includes human health
pharmaceutical products marketed either directly by Merck 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
and Infectious Diseases segment includes human health vaccine
and infectious disease products marketed either directly by
Merck or, in the case of vaccines, also through a joint venture.
Vaccine 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.
Infectious disease products consist of therapeutic agents for
the treatment of infection sold primarily to drug wholesalers
and retailers, hospitals and government agencies. 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. Intercompany balances and transactions are
eliminated. Controlling interest is determined by majority
ownership interest and the absence of substantive third-party
participating rights or, in the case of variable interest
entities, by majority exposure to expected losses, residual
returns or both. For those consolidated subsidiaries where Merck
ownership is less than 100%, the outside 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 functional currency for the
Companys foreign subsidiaries.
Cash Equivalents Cash equivalents are
comprised of certain highly liquid investments with original
maturities of less than three months.
Inventories Inventories are valued at the
lower of cost or market. The cost of substantially all domestic
inventories is determined using the
last-in,
first-out (LIFO) method for both book and tax
purposes. The cost of all other inventories is determined using
the
first-in,
first-out (FIFO) method. Inventories consist of
currently marketed products and certain products awaiting
regulatory approval. In evaluating the recoverability of
inventories produced in preparation for product launches, the
Company considers the probability that revenue will be obtained
from the future sale of the related inventory together with the
status of the product within the regulatory approval process.
Investments Investments in marketable debt
and equity securities classified as
available-for-sale
are reported at fair value. On January 1, 2008, the Company
adopted Financial Accounting Standards Board (FASB)
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
defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants
on the measurement date. FAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value.
89
Fair value of the Companys investments is determined using
quoted market prices in active markets for identical assets or
liabilities or quoted prices for similar assets or liabilities
or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities. For declines in fair value that are
considered
other-than-temporary,
impairment losses are charged to Other (income) expense, net.
Declines in fair value that are considered temporary, to the
extent not hedged, are reported net of tax in Accumulated other
comprehensive income (AOCI). 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. Realized gains and losses are
included in Other (income) expense, net.
Revenue Recognition Revenues from sales of
products are recognized at the time of delivery and when title
and risk of loss passes to the customer. Recognition of revenue
also requires reasonable assurance of collection of sales
proceeds and completion of all performance obligations.
Domestically, sales discounts are issued to customers as direct
discounts at the
point-of-sale
or indirectly through an intermediary wholesaler, known as
chargebacks, or indirectly in the form of rebates. Additionally,
sales are generally made with a limited right of return under
certain conditions. Revenues are recorded net of provisions for
sales discounts and returns, which are established at the time
of sale. Accruals for chargebacks are reflected as a direct
reduction to accounts receivable and accruals for rebates are
recorded as current liabilities. The accrued balances relative
to these provisions included in Accounts receivable and Accrued
and other current liabilities were $55.6 million and
$560.7 million, respectively, at December 31, 2008 and
$82.5 million and $616.9 million, respectively, at
December 31, 2007.
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
beginning when the asset is substantially ready for use.
Capitalized software costs associated with the Companys
multi-year implementation of an enterprise-wide resource
planning system are being amortized over 7 to 10 years. At
December 31, 2008 and 2007, the Company had approximately
$330 million and $200 million, respectively, of
remaining unamortized capitalized software costs associated with
this initiative. All other capitalized software costs are being
amortized over periods ranging from 3 to 5 years. Costs
incurred during the preliminary project stage and
post-implementation stage, as well as maintenance and training
costs, are expensed as incurred.
Acquisitions The Company accounts for
acquired businesses using the purchase method of accounting in
accordance with FASB Statement No. 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. In accordance with FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, the
Company allocates amounts to acquired research which are
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 operating results of the acquired
business are reflected in the Companys consolidated
financial
90
statements and results of operations as of the date of
acquisition. On January 1, 2009, the Company adopted FASB
Statement No. 141R, Business Combinations, which
changes the way assets and liabilities are recognized in
purchase accounting on a prospective basis. See Recently
Issued Accounting Standards below.
Goodwill and Other Intangibles Goodwill
represents the excess of acquisition costs over the fair value
of net assets of businesses purchased. Goodwill is assigned to
reporting units within the Companys segments and evaluated
for impairment on at least an annual basis, using a fair value
based test. Other acquired intangibles are recorded at cost and
are amortized on a straight-line basis over their estimated
useful lives ranging from 3 to 20 years (see Note 7).
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 value exceeds fair value, which is
determined based on the net present value of estimated future
cash flows.
Research and Development Research and
development is expensed as incurred. Upfront and milestone
payments due to third parties in connection with research and
development collaborations prior to regulatory approval are
expensed as incurred. Payments due to third parties upon or
subsequent to regulatory approval are capitalized and amortized
over the shorter of the remaining license or product patent
life. On January 1, 2008, the Company adopted Emerging
Issues Task Force (EITF) Issue
No. 07-3,
Accounting for Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities,
which requires that nonrefundable advance payments for goods
and services that will be used in future research and
development activities be expensed when the activity has been
performed or when the goods have been received rather than when
the payment is made. See Recently Issued Accounting Standards
below.
Share-Based Compensation The Company expenses
all share-based payments to employees, including grants of stock
options, over the requisite service period based on the
grant-date fair value of the awards.
Restructuring Costs The Company records
restructuring activities, including costs for one-time
termination benefits, in accordance with FASB Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. Employee termination benefits covered
by existing benefit arrangements are recorded in accordance with
FASB Statement No. 112, Employers Accounting for
Postemployment Benefits an amendment of FASB
Statement No. 5 and 43 and FASB Statement No. 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans for Termination Benefits.
Employee termination costs are recorded when actions are
probable and estimable. Asset impairment costs are recorded in
accordance with FASB Statement No. 144, Accounting for
the Impairment and Disposal of Long-Lived Assets.
Contingencies and Legal Defense Costs The
Company records accruals for contingencies and legal defense
costs expected to be incurred in connection with a loss
contingency when it is probable that a liability has been
incurred and the amount can be reasonably estimated in
accordance with FASB Statement No. 5, Accounting for
Contingencies.
Taxes on Income Deferred taxes are recognized
for the future tax effects of temporary differences between
financial and income tax reporting based on enacted tax laws and
rates. The Company evaluates tax positions to determine whether
the benefits of tax positions are more likely than not of being
sustained upon audit based on the technical merits of the tax
position. For tax positions that are more likely than not of
being sustained upon audit, the Company recognizes the largest
amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement in the financial statements.
For tax positions that are not more likely than not of being
sustained upon audit, the Company does not recognize any portion
of the benefit in the financial statements.
Use of Estimates The consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the United States (GAAP) and,
accordingly, include certain amounts that are based on
managements best estimates and judgments. Estimates are
used 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, restructuring costs,
impairments of long-lived assets and investments, and
91
taxes on income. Because of the uncertainty inherent in such
estimates, actual results may differ from these estimates.
Reclassifications Certain reclassifications
have been made to prior year amounts to conform with the current
year presentation.
Recently Adopted Accounting Standards In
2008, the Company adopted FASB Statement No. 157, Fair
Value Measurements (FAS 157), Statement
No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB
Statement No. 115 (FAS 159), Statement
No. 162, The Hierarchy of Generally Accepted Accounting
Principles (FAS 162), EITF Issue
No. 07-3,
Accounting for Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities
(EITF 07-3)
and FASB Staff Position
FAS 140-4
and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities (FSP
FAS 140-4
and FIN 46(R)-8).
On January 1, 2008, the Company adopted FAS 157, which
clarifies the definition of fair value, establishes a framework
for measuring fair value, and expands the disclosures on fair
value measurements. In February 2008, the FASB issued Staff
Position
157-2,
Effective Date of FASB Statement No. 157
(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
for financial assets and liabilities recognized at fair value on
a recurring basis did not have a material impact on the
Companys financial position and results of operations (see
Note 5). The effect of adoption of
FSP 157-2
on the Companys financial position and results of
operations is not expected to be material. In October 2008, the
FASB issued Staff Position
157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FSP 157-3),
which clarifies the application of FAS 157 in a market that
is not active.
FSP 157-3
was effective upon issuance and the effect of adoption on the
Companys financial position and results of operations was
not material.
On January 1, 2008, the Company adopted FAS 159, which
permits companies to make an irrevocable election 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 Company did not elect the fair
value option under FAS 159 for any of its financial assets
or liabilities upon adoption or in any subsequent period.
In the fourth quarter of 2008, the Company adopted FAS 162,
which identifies the sources of accounting principles and the
framework for selecting the principles used (order of authority)
in the preparation of financial statements that are presented in
conformity with generally accepted accounting standards in the
United States. The effect of adoption of FAS 162 on the
Companys financial statements was not material.
On January 1, 2008, the Company adopted
EITF 07-03,
which is being applied prospectively for new contracts.
EITF 07-3
addresses nonrefundable advance payments for goods or services
that will be used or rendered for future research and
development activities.
EITF 07-3
requires that 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
EITF 07-3
on the Companys financial position and results of
operations was not material.
On December 31, 2008, the Company adopted FSP
FAS 140-4
and FIN 46(R)-8 which amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, to require additional
disclosures about transfers of financial assets. FSP
FAS 140-4
and
FIN 46(R)-8
also amends FASB Interpretation No. 46R, Consolidation
of Variable Interest Entities, to include additional
disclosures about a public entitys involvement with
variable interest entities. The effect of adoption of FSP
FAS 140-4
and FIN 46(R)-8 had no impact on the Companys
disclosures.
Recently Issued Accounting Standards The FASB
recently issued Statement No. 141R, Business
Combinations (FAS 141R), Statement
No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51
(FAS 160), Statement
No. 161, Disclosures about Derivative Instruments and
Hedging Activities (FAS 161), Staff
Position
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (FSP
EITF 03-6-1),
Staff Position FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets (FSP
FAS 132(R)-1), and ratified the consensus reached by
the EITF on Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1),
Issue
No. 08-6,
92
Equity Method Investment Accounting Considerations
(EITF 08-6)
and Issue
No. 08-7,
Accounting for Defensive Intangible Assets
(EITF 08-7).
FAS 141R expands the scope of acquisition accounting to all
transactions under which control of a business is obtained. This
standard requires an acquirer to recognize the assets acquired
and liabilities assumed at the acquisition date fair values with
limited exceptions. Additionally, 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 141R is effective, on a
prospective basis, January 1, 2009 and future transactions
will be accounted for under this standard.
FAS 160 provides guidance for the accounting, reporting and
disclosure of noncontrolling interests and requires, among other
things, that noncontrolling interests be recorded as equity in
the consolidated financial statements. FAS 160 is
effective, on a prospective basis, January 1, 2009 with the
exception of the presentation and disclosure requirements of FAS
160 which must be applied retrospectively. The adoption of this
standard will result in the reclassification of
$2.4 billion of Minority Interests (now referred to as
noncontrolling interests) to a separate component of
Stockholders Equity on the Consolidated Balance Sheet.
Additionally, net income attributable to noncontrolling
interests will be shown separately from parent net income in the
Consolidated Statement of Income.
FAS 161, which is effective January 1, 2009, requires
enhanced disclosures about derivative instruments and hedging
activities to allow for a better understanding of their effects
on an entitys financial position, financial performance,
and cash flows. Among other things, FAS 161 requires
disclosure of the fair values of derivative instruments and
associated gains and losses in a tabular format. Since
FAS 161 requires only additional disclosures about the
Companys derivatives and hedging activities, the adoption
of FAS 161 will not affect the Companys financial
position or results of operations.
FSP
EITF 03-6-1,
which is effective January 1, 2009, clarifies that
share-based payment awards that entitle holders to receive
nonforfeitable dividends before they vest will be considered
participating securities and therefore included in the basic
earnings per share calculation. The effect of adoption of FSP
EITF 03-6-1
is not expected to be material to the Companys results of
operations.
FSP FAS 132(R)-1, which is effective December 31,
2009, amends FASB Statement No. 132R, Employers
Disclosures about Pensions and other Postretirement
Benefits, to provide guidance on an employers
disclosures about plan assets of a defined pension or other
postretirement plan. FSP FAS 132(R)-1 requires disclosures
about plan assets including how investment allocation decisions
are made, the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan
assets, the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan
assets for the period, and significant concentrations of risk
within plan assets. Since FSP FAS 132(R)-1 requires only
additional disclosures about the Companys pension and
other postretirement plan assets, the adoption of FSP
FAS 132(R)-1 will not affect the Companys financial
position or results of operations.
EITF 07-1,
which is effective January 1, 2009, is applied
retrospectively to all prior periods presented for all
collaborative arrangements existing as of the effective date.
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties. The effect of adoption of
EITF 07-1
is not expected to be material to the Companys financial
position or results of operations.
EITF 08-6,
which is effective January 1, 2009, clarifies the
accounting for certain transactions and impairment
considerations involving equity method investments and will be
applied on a prospective basis to future transactions.
EITF 08-7,
which is effective January 1, 2009, clarifies that a
defensive intangible asset should be accounted for as a separate
unit of accounting and should be assigned a useful life that
reflects the entitys consumption of the expected benefits
related to the asset.
EITF 08-7
will be applied on a prospective basis to future transactions.
93
2008
Global Restructuring Program
In October 2008, the Company announced a global restructuring
program (the 2008 Restructuring Program) to reduce
its cost structure, increase efficiency, and enhance
competitiveness. As part of the 2008 Restructuring Program, the
Company expects to eliminate approximately 7,200 positions
6,800 active employees and 400 vacancies
across all areas of the Company worldwide by the end of 2011.
During 2008, the Company eliminated approximately 1,750
positions in connection with this program, comprised of employee
separations and the elimination of contractors and vacant
positions. About 40% of the total reductions will occur in the
United States. As part of the 2008 Restructuring Program, the
Company is strea