1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-3305
MERCK & CO., INC.
P. O. Box 100
One Merck Drive
Whitehouse Station, N.J. 08889-0100
(908) 423-1000
Incorporated in New Jersey I.R.S. Employer Identification
No. 22-1109110
The number of shares of common stock outstanding as of the close of business on
July 31, 2001:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 2,289,438,998
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 X No
----- -----
2
Part I - Financial Information
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
--------------------------------------------------------
(Unaudited, $ in millions except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales $ 11,893.1 $ 9,477.1 $ 23,238.2 $ 18,328.4
----------- ----------- ----------- -----------
Costs, Expenses and Other
Materials and production 7,204.8 5,052.1 14,251.3 9,885.5
Marketing and administrative 1,637.4 1,524.3 3,143.6 2,941.4
Research and development 602.4 548.0 1,149.8 1,071.7
Equity income from affiliates (215.0) (211.8) (393.6) (400.1)
Other (income) expense, net 70.0 87.2 126.1 158.6
----------- ----------- ----------- -----------
9,299.6 6,999.8 18,277.2 13,657.1
----------- ----------- ----------- -----------
Income Before Taxes 2,593.5 2,477.3 4,961.0 4,671.3
Taxes on Income 778.1 755.6 1,488.3 1,450.0
----------- ----------- ----------- -----------
Net Income $ 1,815.4 $ 1,721.7 $ 3,472.7 $ 3,221.3
=========== =========== =========== ===========
Basic Earnings per Common Share $.79 $.74 $1.51 $1.39
Earnings per Common Share Assuming
Dilution $.78 $.73 $1.49 $1.37
Dividends Declared per Common Share $.34 $.29 $ .68 $ .58
The accompanying notes are an integral part of this consolidated
financial statement.
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MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2001 AND DECEMBER 31, 2000
-----------------------------------
(Unaudited, $ in millions)
June 30 December 31
2001 2000
---------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 2,108.4 $ 2,536.8
Short-term investments 1,851.4 1,717.8
Accounts receivable 5,249.8 5,017.9
Inventories 3,153.5 3,021.5
Prepaid expenses and taxes 1,108.0 1,059.4
---------- ------------
Total current assets 13,471.1 13,353.4
---------- ------------
Investments 5,683.5 4,947.8
Property, Plant and Equipment, at cost,
net of allowance for depreciation of
$5,567.3 in 2001 and $5,225.1 in 2000 12,370.4 11,482.1
Goodwill and Other Intangibles,
net of accumulated amortization of
$2,033.6 in 2001 and $1,850.7 in 2000 7,190.2 7,374.2
Other Assets 3,033.3 2,752.9
---------- ------------
$ 41,748.5 $ 39,910.4
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 4,019.6 $ 4,361.3
Loans payable and current portion of long-term debt 5,764.9 3,319.3
Income taxes payable 1,413.3 1,244.3
Dividends payable 778.0 784.7
---------- ------------
Total current liabilities 11,975.8 9,709.6
---------- ------------
Long-Term Debt 3,655.9 3,600.7
----------- ------------
Deferred Income Taxes and Noncurrent Liabilities 6,393.8 6,746.7
----------- ------------
Minority Interests 4,956.7 5,021.0
----------- ------------
Stockholders' Equity
Common stock
Authorized - 5,400,000,000 shares
Issued - 2,968,409,107 shares - June 30, 2001
- 2,968,355,365 shares - December 31, 2000 29.7 29.7
Other paid-in capital 6,313.2 6,265.8
Retained earnings 29,275.6 27,363.9
Accumulated other comprehensive income 5.1 30.8
----------- ------------
35,623.6 33,690.2
Less treasury stock, at cost
683,386,920 shares - June 30, 2001
660,756,186 shares - December 31, 2000 20,857.3 18,857.8
----------- ------------
Total stockholders' equity 14,766.3 14,832.4
----------- ------------
$ 41,748.5 $ 39,910.4
=========== ============
The accompanying notes are an integral part of this consolidated
financial statement.
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4
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
---------------------------------------
(Unaudited, $ in millions)
Six Months
Ended June 30
-------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Income before taxes $ 4,961.0 $ 4,671.3
Adjustments to reconcile income before taxes to cash provided from
operations before taxes:
Depreciation and amortization 723.6 638.8
Other (290.2) (250.9)
Net changes in assets and liabilities (472.1) (74.2)
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES BEFORE TAXES 4,922.3 4,985.0
INCOME TAXES PAID (1,555.2) (1,339.1)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,367.1 3,645.9
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,435.1) (1,198.0)
Purchase of securities, subsidiaries and other investments (15,518.5) (13,332.7)
Proceeds from sale of securities, subsidiaries and other investments 14,474.1 12,859.0
Proceeds from relinquishment of certain AstraZeneca product rights -- 93.6
Other (44.1) (35.1)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (2,523.6) (1,613.2)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings 1,960.3 1,027.2
Proceeds from issuance of debt 566.2 300.7
Payments on debt (11.1) (74.2)
Proceeds from issuance of preferred units of subsidiary -- 1,500.0
Purchase of treasury stock (2,181.4) (2,802.0)
Dividends paid to stockholders (1,567.7) (1,348.8)
Other 44.3 186.9
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (1,189.4) (1,210.2)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (82.5) (38.4)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (428.4) 784.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,536.8 2,021.9
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,108.4 $ 2,806.0
=========== ===========
The accompanying notes are an integral part of this consolidated
financial statement.
Notes to Consolidated Financial Statements
------------------------------------------
1. The accompanying unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations for reporting on Form
10-Q. Accordingly, certain information and disclosures required by
accounting principles generally accepted in the United States for complete
consolidated financial statements are not included herein. The interim
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's latest Annual Report on Form 10-K.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full year 2001; in the
Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and
recurring nature.
Certain reclassifications have been made to prior year amounts to conform
with current year presentation.
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Notes to Consolidated Financial Statements (continued)
------------------------------------------
2. Inventories consisted of:
($ in millions)
-----------------------
June 30 December 31
2001 2000
--------- -----------
Finished goods $ 1,908.2 $ 1,762.8
Raw materials and work in process 1,155.7 1,174.9
Supplies 89.6 83.8
--------- ----------
Total (approximates current cost) 3,153.5 3,021.5
Reduction to LIFO cost -- --
---------- ----------
$ 3,153.5 $ 3,021.5
========== ==========
3. In February 2001, the Company issued $500.0 million of notes with annual
interest rate resets and a final maturity of ten years. On an annual basis,
the notes will either be repurchased from the holders at the option of the
remarketing agent and remarketed, or redeemed by the Company. The notes are
reported in Loans payable and current portion of long-term debt.
4. The Company, along with numerous other defendants, is a party in several
antitrust actions brought by retail pharmacies and consumers, alleging
conspiracies in restraint of trade and challenging pricing and/or purchasing
practices, one of which has been certified as a federal class action and a
number of which have been certified as state class actions. In 1996, the
Company and several other defendants finalized an agreement to settle the
federal class action alleging conspiracy, which represents the single
largest group of retail pharmacy claims. Since that time, the Company has
entered into other settlements on satisfactory terms. The Company has not
engaged in any conspiracy, and no admission of wrongdoing was made nor was
included in the final agreements. While it is not feasible to predict or
determine the final outcome of these proceedings, management does not
believe that they should result in a materially adverse effect on the
Company's financial position, results of operations or liquidity.
5. Sales consisted of:
($ in millions)
--------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Atherosclerosis $ 1,495.6 $ 1,439.1 $ 3,158.4 $ 2,723.4
Hypertension/heart failure 1,128.4 1,202.0 2,145.9 2,341.3
Anti-inflammatory/analgesics 744.7 497.2 1,251.3 888.8
Osteoporosis 492.4 323.0 841.6 599.6
Respiratory 378.9 213.1 676.6 380.1
Vaccines/biologicals 250.0 239.0 488.7 447.6
Antibiotics 193.1 208.0 381.2 397.9
Ophthalmologicals 170.3 165.1 333.1 321.3
Anti-ulcerants 107.2 215.4 294.1 422.2
Human immunodeficiency virus (HIV) 98.3 133.7 222.0 272.0
Other Merck products 263.8 402.5 492.5 859.9
Merck-Medco 6,570.4 4,439.0 12,952.8 8,674.3
---------- ----------- ----------- -----------
$ 11,893.1 $ 9,477.1 $ 23,238.2 $ 18,328.4
=========== =========== =========== ===========
Other Merck products include sales of other human pharmaceuticals,
continuing sales to divested businesses and pharmaceutical and animal health
supply sales to the Company's joint ventures and AstraZeneca LP. Also
included are rebates and discounts on Merck pharmaceutical products.
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6
Notes to Consolidated Financial Statements (continued)
------------------------------------------
6. Other (income) expense, net, consisted of:
($ in millions)
-----------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
-------------------- -------------------
2001 2000 2001 2000
-------- --------- -------- --------
Interest income $ (129.6) $ (107.0) $ (265.7) $ (201.7)
Interest expense 122.7 116.0 233.4 233.3
Exchange gains, net (7.5) (9.7) (20.1) (17.5)
Minority interests 60.7 95.8 146.0 156.0
Amortization of goodwill and other intangibles 80.5 78.6 161.1 157.4
Other, net (56.8) (86.5) (128.6) (168.9)
-------- -------- -------- --------
$ 70.0 $ 87.2 $ 126.1 $ 158.6
======== ======== ======== ========
Minority interests include third parties' share of exchange gains and losses
arising from translation of the financial statements into U.S. dollars.
Interest paid for the six-month periods ended June 30, 2001 and 2000 was
$222.4 million and $221.3 million, respectively.
7. Income taxes paid for the six-month periods ended June 30, 2001 and 2000
were $1,555.2 million and $1,339.1 million, respectively.
8. The net income effect of dilutive securities was not significant to the
Company's calculation of Earnings per common share assuming dilution. A
reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows:
(shares in millions)
-------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
--------------------- ------------------
2001 2000 2001 2000
------- ------- ------- -------
Average common shares outstanding 2,290.8 2,300.2 2,297.2 2,310.0
Common shares issuable(1) 37.4 45.5 39.8 45.5
------- ------- ------- -------
Average common shares outstanding assuming dilution 2,328.2 2,345.7 2,337.0 2,355.5
======= ======= ======= =======
(1) Issuable primarily under stock option plans.
9. Effective January 1, 2001, the Company adopted the provisions of Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS
133), which establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at fair value and that changes in fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Upon adoption of the Statement, the Company recorded a favorable
cumulative effect of accounting change of $45.5 million after tax in Other
comprehensive income (loss), representing the mark to fair value of
purchased local currency put options. (See Note 10 for further information.)
The cumulative effect of accounting change recorded in Net income was not
significant.
Foreign Currency Risk Management
A significant portion of the Company's cash flows 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 Company's 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.
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Notes to Consolidated Financial Statements (continued)
------------------------------------------
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 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. 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. 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, gains in the expected future cash flows of the options
fully offset the decline in the expected future U.S. dollar cash flows of
the hedged foreign currency sales. Conversely, if the U.S. dollar weakens,
the options' value reduces to zero, but the Company benefits from the
increase in the value of the anticipated foreign currency cash flows. During
the first four months of 2001, changes in the options' intrinsic value were
deferred in Accumulated other comprehensive income (AOCI) until recognition
of the hedged anticipated revenue. Amounts associated with option time
value, which was excluded from the designated hedge relationship and marked
to fair value in Marketing and administrative expenses, were not
significant. Effective May 2001, as permitted by FAS 133 implementation
guidance, Assessing and Measuring the Effectiveness of an Option Used in a
Cash Flow Hedge, the designated hedge relationship is based on changes in
the options' expected future cash flows. Accordingly the entire fair value
change in the options is deferred in AOCI and reclassified into Sales when
the hedged anticipated revenue is recognized. No hedge ineffectiveness is
recorded. The fair value of purchased currency options is reported in
Accounts receivable or Other assets.
A 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. To achieve this objective, the
Company will manage foreign currency risk on monetary assets and liabilities
when cost beneficial. Merck seeks to fully offset exposure denominated in
developed country currencies, primarily the euro, Japanese yen and Canadian
dollar, and will either partially offset or not offset at all exposure in
other currencies, particularly exposure in developing countries where we
consider the cost of instruments to be uneconomic or such instruments are
unavailable at any cost. The Company will minimize the effect of exchange on
exposed positions, principally by managing operating activities and net
asset positions at the local level. Merck manages its net asset exposure
principally with forward exchange contracts. These contracts enable the
Company to buy and sell foreign currencies in the future at fixed exchange
rates and offset the consequences of changes in foreign exchange on the
amount of U.S. dollar cash flows derived from the net assets. Prior to
conversion to U.S. dollars, monetary assets and liabilities are remeasured
at spot rates in effect on the balance sheet date. The effects of changes in
spot rates are reported in Other (income) expense, net. The forward
contracts, which are not designated as hedges, are marked to forward through
Other (income) expense, net. Fair value changes in the forward contracts
offset the changes in the value of the remeasured assets and liabilities
attributable to changes in foreign currency exchange rates, except to the
extent of the spot-forward differences. These differences are not
significant due to the short-term nature of the contracts, which typically
have average maturities at inception of less than one year.
The Company also 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. Changes in
the fair value of the hedged securities due to fluctuations in spot rates
are offset in Other (income) expense, net, by fair value changes in the
forward contracts also based on spot rates. Hedge ineffectiveness was not
material for the three and six months quarter ended June 30, 2001. Changes
in the contracts' fair value due to spot-forward differences are excluded
from the designated hedge relationship and recognized in Other (income)
expense, net. These amounts were not significant for the three and six
months ended June 30, 2001.
The fair values of forward exchange contracts are reported in Accounts
receivable, Other assets, Accounts payable and accrued liabilities or
Deferred income taxes and noncurrent liabilities.
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and
borrowing transactions. 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.
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Notes to Consolidated Financial Statements (continued)
------------------------------------------
The Company is a party to a seven-year combined interest rate and currency
swap contract entered into in 1997 which converts a variable rate Dutch
guilder investment to a variable rate U.S. dollar investment. The interest
rate component of the swap is not designated as a hedge. The currency swap
component is designated as a hedge of the changes in fair value of the
investment attributable to exchange. Accordingly, changes in the fair value
of the investment due to fluctuations in spot rates are offset in Other
(income) expense, net, by fair value changes in the currency swap. Hedge
ineffectiveness was not significant for the three and six months ended June
30, 2001. The fair value of this contract is reported in Accounts
receivable, Accounts payable and accrued liabilities or Other assets.
10. Comprehensive income for the three months ended June 30, 2001 and 2000,
representing all changes in Stockholders' equity during the period other
than changes resulting from the Company's stock, was $1,713.5 million and
$1,702.6 million, respectively. Comprehensive income for the six months
ended June 30, 2001 and 2000 was $3,447.0 million and $3,207.0 million,
respectively. The amount for the six months ended June 30, 2001 includes a
favorable cumulative effect of accounting change of $45.5 million (net of
$31.4 million of income tax) from the January 1 adoption of FAS 133. This
amount represented the mark to fair value of purchased local currency put
options maturing throughout 2001 which hedge anticipated foreign currency
denominated sales over that same period. (See Note 9 for further
information.) At June 30, 2001, the net deferred gain associated with these
options approximated $29.9 million (net of $20.7 million of income tax).
11. The Company's operations are principally managed on a products and services
basis and are comprised of two reportable segments: Merck Pharmaceutical,
which includes products marketed either directly or through joint ventures,
and Merck-Medco. Merck Pharmaceutical products consist of therapeutic
agents, sold by prescription, for the treatment of human disorders.
Merck-Medco revenues are derived from the filling and management of
prescriptions and health management programs. All Other includes
non-reportable human and animal health segments. Revenues and profits for
these segments are as follows:
($ in millions)
--------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Segment revenues:
Merck Pharmaceutical $ 4,918.1 $ 4,619.0 $ 9,478.2 $ 8,842.8
Merck-Medco 7,380.4 5,188.0 14,592.5 10,137.6
All Other 313.3 302.7 615.6 572.5
----------- ----------- ----------- -----------
$ 12,611.8 $ 10,109.7 $ 24,686.3 $ 19,552.9
=========== =========== =========== ===========
Segment profits:
Merck Pharmaceutical $ 2,950.2 $ 2,911.6 $ 5,804.7 $ 5,567.5
Merck-Medco 180.9 150.2 323.0 292.4
All Other 248.4 243.9 476.8 430.7
----------- ----------- ----------- -----------
$ 3,379.5 $ 3,305.7 $ 6,604.5 $ 6,290.6
=========== =========== =========== ===========
Segment profits are comprised of segment revenues less certain elements of
materials and production costs and operating expenses, including components
of equity income from affiliates and depreciation and amortization expenses.
The Company does not internally allocate the vast majority of indirect
production costs, research and development expenses and general and
administrative expenses, all predominantly related to the Merck
pharmaceutical business, 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 the marketing segment
profits. The vast majority of goodwill and other intangibles amortization,
predominantly related to the Merck-Medco business, as well as the cost of
financing capital employed, also are not allocated internally and,
therefore, are not included in the marketing segment profits.
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9
Notes to Consolidated Financial Statements (continued)
------------------------------------------
A reconciliation of total segment profits to consolidated income before
taxes is as follows:
($ in millions)
-------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Segment profits $ 3,379.5 $ 3,305.7 $ 6,604.5 $ 6,290.6
Other profits 78.3 68.4 150.6 159.5
Adjustments 101.0 128.3 174.0 249.4
Unallocated:
Interest income 129.6 107.0 265.7 201.7
Interest expense (122.7) (116.0) (233.4) (233.3)
Equity income from affiliates 117.7 70.9 186.0 149.2
Depreciation and amortization (288.2) (259.9) (573.6) (520.6)
Research and development (602.4) (548.0) (1,149.8) (1,071.7)
Other expenses, net (199.3) (279.1) (463.0) (553.5)
---------- ---------- ---------- ----------
$ 2,593.5 $ 2,477.3 $ 4,961.0 $ 4,671.3
========== ========== ========== ==========
Other profits are primarily comprised of miscellaneous corporate profits as
well as operating profits related to divested products or businesses and
other supply sales. Adjustments represent the elimination of the effect of
double counting certain items of income and expense. Equity income from
affiliates includes taxes paid at the joint venture level and a portion of
equity income that is not reported in segment profits. Other expenses, net,
include expenses from corporate and manufacturing cost centers and other
miscellaneous income (expense), net.
12. Legal proceedings to which the Company is a party are discussed in Part I
Item 3, Legal Proceedings, in the 2000 Annual Report on Form 10-K. Current
developments are addressed in Part II of this filing.
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10
MANAGEMENT`S ANALYSIS OF INTERIM FINANCIAL INFORMATION
Earnings per share for the second quarter of 2001 were $0.78, an increase of 7%
over the second quarter of 2000. Second quarter net income grew 5% to $1,815.4
million. Sales grew 25% to $11.9 billion for the quarter.
For the first six months, earnings per share were $1.49, an increase of 9% over
the first six-month period in 2000. Net income grew 8% to $3,472.7 million for
the first six months of 2001. Sales grew 27% for the period to $23.2 billion.
Merck's human health sales were driven by its five key growth drivers - 'Zocor',
'Vioxx', 'Cozaar' and 'Hyzaar'*, 'Fosamax' and 'Singulair' - which had increased
sales of 27% for the second quarter. The Merck-Medco business also drove sales
growth, increasing 48% for the quarter. Overall, Merck's human health sales grew
6% and 7% for the second quarter and first six months, respectively. Excluding
the unfavorable effect of three percentage points from foreign exchange for both
the second quarter and first six months, the Company's human health sales grew
by 9% and 10%, respectively. Sales outside of the United States accounted for
37% of the Company's first half 2001 human health sales.
Income growth for the first six months reflects strong worldwide sales volume
gains led by our five key growth drivers, which combined increased 28% over the
first six months 2000 sales. These five products now account for more than 60%
of Merck's worldwide human health sales, and they remain a solid platform for
growth for the Company.
'Zocor', Merck's cholesterol-modifying medicine, had another strong quarter with
worldwide sales reaching $1.4 billion in the second quarter of 2001. Physicians
continue to increase their prescriptions of 'Zocor' in large part because of the
medicine's demonstrated ability to act favorably on all three key lipid
parameters - low-density lipoprotein (LDL), so-called "bad" cholesterol;
high-density lipoprotein (HDL), so-called "good" cholesterol; and triglycerides.
In the United States, the National Cholesterol Education Panel (NCEP), part of
the National Institutes of Health, released new guidelines in May calling for
more aggressive treatment of cholesterol, based on clinical studies that have
demonstrated the benefits of lowering cholesterol. According to the NCEP press
release, under the new guidelines, 36 million Americans would be now identified
as candidates for cholesterol-lowering medicines such as 'Zocor'; currently,
only 13 million Americans are being treated with cholesterol-lowering medicines.
Furthermore, the new guidelines have set more aggressive LDL goals for patients
with diabetes and others at high risk for heart disease.
'Vioxx', a once-a-day medicine, is the only COX-2 selective agent indicated in
the United States for both osteoarthritis and acute pain. Since its 1999 launch,
'Vioxx' has become the world's fastest-growing branded prescription arthritis
medicine, and it is already Merck's second largest-selling medicine. In 2001,
'Vioxx' achieved new-prescription leadership within the coxib market in the
United States, demonstrating that physicians continue to recognize the
medicine's benefits to patients. 'Vioxx' achieved $725 million in sales for the
second quarter.
New scientific data supporting the efficacy and overall safety profile of
'Vioxx' were presented at medical meetings during the quarter. These data
included the results of the ADVANTAGE trial, presented at the Digestive Diseases
Week conference in May. In this study, fewer patients on 'Vioxx' stopped taking
their medicine because of gastrointestinal side effects compared to patients
taking naproxen, a commonly prescribed non-steroid anti-inflammatory drug.
In April 2001, Merck filed a Supplemental New Drug Application for 'Vioxx' with
the U.S. Food and Drug Administration (FDA) for the treatment of adult
rheumatoid arthritis.
'Cozaar' and 'Hyzaar', Merck's highly effective and well-tolerated high blood
pressure medicines, maintain their strong growth and leadership of the
angiotensin II antagonists (AIIAs) class despite intense competition. Sales for
the two products were $510 million for this quarter.
In May 2001, results of RENAAL, the renal protection study for 'Cozaar', were
presented at the 16th Annual Scientific Meeting of the American Society of
Hypertension. In this landmark trial, 'Cozaar' reduced the risk of worsening
kidney disease, including reducing the risk of end-stage renal disease (defined
as where dialysis or transplantation is required) in patients with Type 2
diabetes and kidney disease. This is the first trial that has ever demonstrated
the ability of a drug to significantly reduce the rate of dialysis or
transplantation in this patient population. Diabetes is the leading cause of
kidney failure, or end-stage renal disease, in the United States.
*'Cozaar' and 'Hyzaar' are registered trademarks of E.I. du Pont de Nemours and
Company, Wilmington, DE, USA.
- 9 -
11
MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION (continued)
------------------------------------------------------
'Fosamax' continues to strengthen its position as the leading product worldwide
for the treatment and prevention of postmenopausal osteoporosis. Global sales of
'Fosamax' totaled $490 million this quarter.
Merck's 2000 introduction of 'Fosamax' Once Weekly, the first and only oral
once-weekly treatment for osteoporosis, has received tremendous physician and
patient acceptance. In the United States, 'Fosamax' Once Weekly is the No.1
prescribed therapy for osteoporosis based on new and total prescriptions. The
once weekly formulation also has been well received in the 22 additional markets
worldwide where it has launched. 'Fosamax' Once Weekly demonstrated
therapeutically equivalent increases in bone density to the once-daily regimen
over a two-year period. The results from the one-year, double-blind extension of
the original one-year multicenter study were presented at the Endocrine Society
Annual Meeting in June 2001.
In June 2001, Japan's Ministry of Health, Labor and Welfare granted marketing
approval for the tablet form of 'Fosamax'. In Japan, the world's second largest
national prescription pharmaceutical market, 'Fosamax' will be sold under the
trade name 'Fosamac' by Banyu Pharmaceutical Co., Ltd., (Banyu), Merck's
majority-owned affiliate. Under an agreement with Merck, the product also will
be co-marketed under the trade name 'Bonalon' by Teijin Limited. Both Banyu and
Teijin expect to launch 'Fosamax' in the third quarter of this year.
'Singulair', Merck's once-a-day leukotriene antagonist, which provides effective
asthma control, is one of the world's fastest-growing asthma medicines. After
only three years on the market, 'Singulair' has become the No. 1 asthma
controller in terms of total prescription sales on a weekly basis in the United
States. 'Singulair' is the first asthma controller therapy in more than 15 years
to be approved for children as young as two years old. 'Singulair' is a
once-a-day tablet, not an inhaled medication or a steroid. Global sales for
'Singulair' this quarter were $375 million.
Merck continues to study 'Singulair' as a potential treatment for seasonal
allergic rhinitis. Merck also recently completed a phase II clinical study of an
investigational formulation of IV montelukast, the active ingredient in
'Singulair', which when added to standard therapy, improved pulmonary function
compared to placebo and standard therapy in patients seeking emergency care for
acute asthma in this study.
In June 2001, marketing approval in Japan was granted for 'Singulair'. Banyu and
Kyorin Pharmaceutical Co., Ltd., a Merck licensee in Japan, plan to begin
co-marketing this medicine in Japan under the trade names 'Singulair' and
'Kipres', respectively, in the third quarter of this year.
Merck-Medco Managed Care, L.L.C. processed a total of 134 million prescriptions
this quarter, a 37% increase over second quarter 2000. With a 97% client
retention rate, Merck-Medco remains the leading pharmacy benefits manager among
Blue Cross Blue Shield and employer health plans. J.D. Power and Associates'
healthcare division, CareData, named Merck-Medco the nation's No.1 pharmacy
benefits manager.
merckmedco.com remains the world's largest Internet pharmacy, now processing
more than 135,000 prescriptions per week. Internet volume through merckmedco.com
totaled 1.7 million prescriptions for the quarter, a 74% increase over second
quarter 2000.
Merck recently reached an agreement to receive a fixed rate of 27% from
AstraZeneca for supply payments for U.S. sales of 'Nexium', which was launched
in the United States in March 2001. 'Nexium', an acid pump inhibitor, is
indicated to treat certain gastrointestinal acid-related disorders, including
acid reflux disease. Supply payments for 'Nexium' were agreed to as part of
Merck's 1998 restructuring agreement with Astra, which includes Merck
participating financially in the U.S. sales of certain AstraZeneca products.
Ezetimibe, an investigational cholesterol absorption inhibitor currently under
development by the joint venture Merck/Schering-Plough Pharmaceuticals, was
shown in a recent phase III study to have significantly reduced LDL levels.
Smaller phase II studies showed that ezetimibe combined with a statin or with a
fibrate lowered LDL cholesterol levels to a significantly greater degree than
either drug alone. Further studies are needed to confirm these findings.
The Company will enter into phase III trials of Merck's substance P antagonist
in major depressive disorder during the third quarter of 2001. Because of the
well-understood difficulties in conducting depression trials, it is too early to
predict when a New Drug Application ("NDA") filing can be expected.
- 10 -
12
MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION (continued)
------------------------------------------------------
Effective January 1, 2001, the Company adopted the provisions of Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at fair value and that changes in fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Upon adoption of the
Statement, the Company recorded a favorable cumulative effect of accounting
change of $45.5 million after tax in Other comprehensive income (loss),
representing the mark to fair value of purchased local currency put options.
(See Note 10 to the consolidated financial statements for further information.)
The cumulative effect of accounting change recorded in Net income was not
significant.
On May 22, 2001, the Board of Directors declared a quarterly dividend of 34
cents per share on the Company's common stock for the third quarter of 2001,
which was paid on July 2, 2001 to stockholders of record at the close of
business on June 4, 2001. On July 24, 2001, the Board of Directors declared a
quarterly dividend of 35 cents per share of common stock for the fourth quarter
of 2001. The Company's total dividends paid during 2001 will be $1.37 per share,
a 13 percent increase over the amount paid during the same period in 2000.
In June 2001, the Company received a notice from the Federal Trade Commission
(FTC) advising the Company that the FTC had closed its investigation into
pricing practices which commenced in 1996.
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
Business Combinations (FAS 141), and Statement No. 142, Goodwill and Other
Intangible Assets (FAS 142). FAS 141 establishes new accounting and reporting
requirements for business combinations, including the initial recognition and
measurement of goodwill and other acquired intangible assets. FAS 141, which
requires use of the purchase method of accounting, is effective for all
combinations completed after June 30, 2001. FAS 142, which is effective
beginning January 1, 2002, addresses the recognition and measurement of goodwill
and other intangible assets subsequent to acquisition. Under FAS 142, goodwill
will not be amortized, but assigned to reporting units within the Company's
segments and evaluated for impairment on an annual basis. The Company is
currently assessing the appropriate reporting units and valuation methodologies
to be used for impairment test purposes. In accordance with the provisions of
FAS 142, beginning January 1, 2002, annual amortization expense of approximately
$130 million associated with goodwill existing as of June 30, 2001 will no
longer be recorded.
On July 2, 2001, the Company issued $500.0 million of five-year notes, bearing
coupons of 5.25% payable semiannually, under its shelf registration statement.
Proceeds from the sale of these securities will be used to repay short-term
borrowings and for general corporate purposes. The Company also entered into a
five-year $500.0 million notional amount pay-floating, receive-fixed interest
rate swap contract which was designated as a hedge of the fair value changes in
the notes attributable to changes in the benchmark London Interbank Offered Rate
(LIBOR) swap rate. During the year, the Company has issued an additional $85.7
million of securities under the shelf, which has a remaining capacity of $1.0
billion.
On July 18, 2001, the FDA granted an additional six months of U.S. marketing
exclusivity to 'Mevacor' (lovastatin), based upon studies performed by the
Company for pediatric use. The additional marketing exclusivity commenced on
June 15, 2001 and will expire on December 15, 2001.
On July 19, 2001, Merck completed its acquisition of Rosetta Inpharmatics, Inc.,
a leading informational genomics company, in a tax-free reorganization. In
accordance with the May 10, 2001 Agreement and Plan of Merger (the Agreement),
each share of outstanding Rosetta stock was converted into .2352 shares of Merck
stock, resulting in the issuance by the Company of approximately 7.7 million
shares of common stock. The estimated aggregate purchase price of $635.0 million
consists of the Merck shares and employee stock options, valued as of the
Agreement date, as well as certain acquisition-related fees and expenses. The
acquisition, which will be accounted for under the purchase method, will not
have a material impact on the Company's results of operations or financial
position. Rosetta has designed and developed several unique technologies to
efficiently analyze gene data to predict how medical compounds will interact
with different kinds of cells in the body, therefore allowing Merck scientists
to more precisely select drug targets and potentially accelerate the development
process.
- 11 -
13
MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION (continued)
------------------------------------------------------
From time to time, generic manufacturers of pharmaceutical products file
Abbreviated New Drug Applications ("ANDAs") with the FDA seeking to market
generic forms of Company 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 U.S. a generic form of 'Fosamax' (alendronate) and 'Prilosec'
(omeprazole) prior to the expiration of the Company's (and AstraZeneca's in the
case of 'Prilosec') patents concerning these products. The generic companies'
ANDAs include challenges to the validity and enforceability of the patents. The
Company has filed patent infringement suits in federal court against companies
filing ANDAs for generic alendronate, and AstraZeneca and the Company have filed
patent infringement suits in federal court against companies filing ANDAs for
generic omeprazole. 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. A trial with
respect to the alendronate daily product is scheduled for September 2001; no
trial date has been set for the matter involving the alendronate weekly product.
In the case of omeprazole, no trial dates have been set. 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.
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 subject to risks and uncertainties. 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 Company's growth
strategy, financial results, product approvals and development programs. One
must carefully consider any such statement and should understand that many
factors could cause actual results to differ from the Company's forward-looking
statements. These factors include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and some that are
not. No forward-looking statement can be guaranteed and actual future results
may vary materially.
The Company does not assume the obligation to update any forward-looking
statement. One should carefully evaluate such statements in light of factors
described in the Company's filings with the Securities and Exchange Commission,
especially on Forms 10-K, 10-Q and 8-K (if any). In Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, as filed on
March 23, 2001, the Company discusses in more detail various important 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.
- 12 -
14
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
--------------------------
Information with respect to the closing of an FTC investigation and certain
legal proceedings against generic pharmaceutical manufacturers is incorporated
by reference from Part I of this report.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The following matters were voted upon at the Annual Meeting of Stockholders held
on April 24, 2001, and received the votes set forth below:
1. All of the following persons nominated were elected to serve as directors
and received the number of votes set opposite their respective names:
For Withheld
------------- -----------
William G. Bowen, Ph.D. 1,669,387,215 199,905,903
Erskine B. Bowles 1,837,179,012 32,114,106
Niall FitzGerald 1,619,556,467 249,736,651
Heidi G. Miller, Ph.D. 1,841,495,111 27,798,007
Thomas E. Shenk, Ph.D. 1,841,320,820 27,972,298
2. A proposal to ratify the appointment of independent public accountants
received 1,847,504,906 votes FOR and 10,494,261 votes AGAINST, with
11,293,951 abstentions.
3. A proposal to adopt the 2001 Non-Employee Directors Stock Option Plan
received 1,718,216,763 votes FOR and 134,581,824 votes AGAINST, with
16,494,531 abstentions.
4. A stockholder proposal concerning annual election of directors received
714,403,717 votes FOR and 677,951,552 votes AGAINST, with 35,392,835
abstentions and 441,845,014 broker non-votes.
5. A stockholder proposal concerning pharmaceutical pricing received 94,302,557
votes FOR and 1,227,031,878 votes AGAINST, with 56,081,671 abstentions and
441,877,012 broker non-votes.
6. A stockholder proposal concerning a "glass ceiling" review received
94,907,964 votes FOR and 1,245,621,974 votes AGAINST, with 87,074,315
abstentions and 441,688,865 broker non-votes.
- 13 -
15
Part II - Other Information (continued)
---------------------------
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
-------------
Number Description Method of Filing
------ ----------- -----------------
3(a) Restated Certificate of Incorporated by reference
Incorporation of Merck & Co., Inc. to Form 10-Q Quarterly
(September 1, 2000) Report for the period ended
September 30, 2000
3(b) By-Laws of Merck & Co., Inc. Incorporated by reference
(as amended effective to Form 10-Q Quarterly
February 25, 1997) Report for the period ended
March 31, 1997
10(a) 2001 Non-Employee Directors Filed with this document
Stock Option Plan (adopted
April 24, 2001)
12 Computation of Ratios of Filed with this document
Earnings to Fixed Charges
(b) Reports on Form 8-K
-----------------------
During the three-month period ending June 30, 2001, the Company filed or
furnished:
(i) two Current Reports on Form 8-K under Item 9 - Regulation FD Disclosure:
(a) Report dated April 20, 2001 and furnished April 20, 2001, regarding
earnings for first quarter and certain supplemental information;
(b) Report dated June 22, 2001 and furnished June 22, 2001, regarding
updated financial guidance for 2001; and
(ii) one Current Report on Form 8-K under Item 5 - Other Events: Report dated
May 11, 2001 and filed May 11, 2001, regarding the acquisition of Rosetta
Inpharmatics, Inc.
- 14 -
16
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCK & CO., INC.
Date: August 9, 2001 /s/ Kenneth C. Frazier
-----------------------------------------
KENNETH C. FRAZIER
Senior Vice President and General Counsel
Date: August 9, 2001 /s/ Richard C. Henriques
-----------------------------------------
RICHARD C. HENRIQUES
Vice President, Controller
- 15 -
17
EXHIBIT INDEX
-------------
Exhibits
--------
Number Description
------ -----------
3(a) Restated Certificate of Incorporation of Merck & Co., Inc. (September 1, 2000)
- Incorporated by reference to Form 10-Q Quarterly Report for the period ended
September 30, 2000
3(b) By-Laws of Merck & Co., Inc. (as amended effective February 25, 1997)
- Incorporated by reference to Form 10-Q Quarterly Report for the period ended
March 31, 1997
10(a) 2001 Non-Employee Directors Stock Option Plan (adopted April 24, 2001)
12 Computation of Ratios of Earnings to Fixed Charges