10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005 |
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
For the transition period from to |
Commission File No. 1-3305
MERCK
& CO., INC.
P. O. Box 100
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 |
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No. 22-1109110 |
The number of shares of common stock outstanding as of the close of business on July 29, 2005:
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Class
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Number of Shares Outstanding |
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Common Stock
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2,195,582,795 |
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited, $ in millions except per share amounts)
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Three Months |
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Six Months |
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Ended June 30 |
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Ended June 30 |
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2005 |
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2004 |
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2005 |
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2004 |
Sales |
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$ |
5,467.5 |
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$ |
6,021.7 |
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$ |
10,829.8 |
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$ |
11,652.6 |
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Costs, Expenses and Other |
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Materials and production |
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1,160.6 |
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1,163.7 |
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2,432.0 |
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2,311.9 |
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Marketing and administrative |
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1,755.3 |
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1,616.2 |
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3,368.6 |
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3,227.6 |
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Research and development |
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946.8 |
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986.0 |
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1,793.4 |
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1,982.3 |
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Equity income from affiliates |
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(334.1 |
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(220.5 |
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(650.4 |
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(415.2 |
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Other (income) expense, net |
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14.0 |
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37.5 |
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40.6 |
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(235.7 |
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3,542.6 |
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3,582.9 |
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6,984.2 |
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6,870.9 |
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Income Before Taxes |
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1,924.9 |
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2,438.8 |
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3,845.6 |
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4,781.7 |
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Taxes on Income |
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1,204.3 |
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670.7 |
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1,754.9 |
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1,395.0 |
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Net Income |
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$ |
720.6 |
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$ |
1,768.1 |
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$ |
2,090.7 |
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$ |
3,386.7 |
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Basic Earnings per Common Share |
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$.33 |
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$.80 |
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$.95 |
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$1.52 |
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Earnings per Common Share Assuming Dilution |
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$.33 |
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$.79 |
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$.95 |
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$1.52 |
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Dividends Declared per Common Share |
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$.38 |
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$.37 |
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$.76 |
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$.74 |
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The accompanying notes are an integral part of this consolidated financial statement.
-1-
MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2005 AND DECEMBER 31, 2004
(Unaudited, $ in millions)
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June 30 |
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December 31 |
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2005 |
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2004 |
ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
1,917.6 |
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$ |
2,878.8 |
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Short-term investments |
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11,113.1 |
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4,211.1 |
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Accounts receivable |
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3,506.7 |
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3,627.7 |
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Inventories (excludes inventories of $756.5 in 2005 and $638.7 in 2004
classified in Other assets-see Note 4) |
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1,811.2 |
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1,898.7 |
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Prepaid expenses and taxes |
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780.7 |
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858.9 |
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Total current assets |
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19,129.3 |
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13,475.2 |
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Investments |
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1,358.4 |
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6,727.1 |
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Property, Plant and Equipment, at cost,
net of allowance for depreciation of
$8,673.5 in 2005 and $8,094.9 in 2004 |
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14,670.3 |
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14,713.7 |
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Goodwill |
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1,085.7 |
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1,085.7 |
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Other Intangibles, net |
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589.3 |
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679.2 |
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Other Assets |
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6,173.3 |
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5,891.9 |
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$ |
43,006.3 |
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$ |
42,572.8 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Loans payable and current portion of long-term debt |
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$ |
1,494.4 |
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$ |
2,181.2 |
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Trade accounts payable |
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409.1 |
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421.4 |
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Accrued and other current liabilities |
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4,956.0 |
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5,288.1 |
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Income taxes payable |
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3,497.6 |
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3,012.3 |
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Dividends payable |
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836.3 |
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841.1 |
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Total current liabilities |
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11,193.4 |
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11,744.1 |
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Long-Term Debt |
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5,672.4 |
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4,691.5 |
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Deferred Income Taxes and Noncurrent Liabilities |
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6,347.0 |
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6,442.1 |
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Minority Interests |
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2,408.4 |
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2,406.9 |
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Stockholders Equity |
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Common stock |
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Authorized - 5,400,000,000 shares |
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Issued - 2,976,230,393 shares |
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29.8 |
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29.8 |
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Other paid-in capital |
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6,824.3 |
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6,869.8 |
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Retained earnings |
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37,041.6 |
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36,626.3 |
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Accumulated other comprehensive income (loss) |
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5.3 |
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(45.9 |
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43,901.0 |
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43,480.0 |
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Less treasury stock, at cost
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778,175,068 shares - June 30, 2005
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767,591,491 shares - December 31, 2004 |
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26,515.9 |
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26,191.8 |
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Total stockholders equity |
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17,385.1 |
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17,288.2 |
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$ |
43,006.3 |
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$ |
42,572.8 |
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The accompanying notes are an integral part of this consolidated financial statement.
-2-
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited, $ in millions)
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Six Months |
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Ended June 30 |
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2005 |
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2004 |
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net Income |
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$ |
2,090.7 |
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$ |
3,386.7 |
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Adjustments to reconcile net income to cash provided from operations: |
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Depreciation and amortization |
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779.1 |
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700.5 |
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Deferred income taxes |
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(26.1 |
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188.0 |
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Other |
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100.4 |
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(67.0 |
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Net changes in assets and liabilities |
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172.0 |
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(31.9 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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3,116.1 |
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4,176.3 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(662.4 |
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(762.1 |
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Purchase of securities, subsidiaries and other investments |
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(59,787.2 |
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(26,708.0 |
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Proceeds from sale of securities, subsidiaries and other investments |
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58,221.1 |
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25,869.3 |
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Banyu acquisition |
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(10.1 |
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Other |
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(0.8 |
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(1.5 |
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NET CASH USED BY INVESTING ACTIVITIES |
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(2,229.3 |
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(1,612.4 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net change in short-term borrowings |
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(169.2 |
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(548.1 |
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Proceeds from issuance of debt |
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1,000.0 |
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405.1 |
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Payments on debt |
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(508.1 |
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(4.0 |
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Purchase of treasury stock |
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(508.7 |
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(444.0 |
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Dividends paid to stockholders |
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(1,680.2 |
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(1,645.8 |
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Other |
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142.6 |
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75.9 |
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NET CASH USED BY FINANCING ACTIVITIES |
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(1,723.6 |
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(2,160.9 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
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(124.4 |
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(4.2 |
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NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS |
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(961.2 |
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398.8 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
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2,878.8 |
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1,201.0 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
1,917.6 |
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$ |
1,599.8 |
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The accompanying notes are an integral part of this consolidated financial statement.
-3-
Notes to Consolidated Financial Statements
1. |
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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 Companys latest Annual Report on Form 10-K. |
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The results of operations of any interim period are not necessarily indicative of the results
of operations for the full year. In the Companys opinion, all adjustments necessary for a
fair presentation of these interim statements have been included and are of a normal and
recurring nature. |
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Certain reclassifications have been made to prior year amounts to conform with current year
presentation. |
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2. |
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In September 2004, the Company 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). |
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In connection with the withdrawal, the Company recorded an unfavorable adjustment to net
income of $552.6 million, or $.25 per share, in the third quarter 2004. The adjustment to
pre-tax income was $726.2 million. Of this amount, $491.6 million related to estimated
customer returns of product previously sold and was recorded as a reduction of Sales, $93.2
million related to write-offs of inventory held by the Company and was recorded in Materials
and production expense, and $141.4 million related to estimated costs to undertake the
withdrawal of the product and was recorded in Marketing and administrative expense. The tax
benefit of this adjustment was $173.6 million, which reflects the geographical mix of Vioxx
returns and the cost of the withdrawal. The adjustment did not include charges for future
legal defense costs (see Note 6). As of June 30, 2005, the Vioxx withdrawal process was
substantially complete and the costs associated with the withdrawal were in line with the
original amounts estimated by the Company. |
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3. |
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The Company grants performance share units (PSUs) and restricted stock units (RSUs), in
addition to stock options, to certain management level employees. Both PSU and RSU payouts
will be in shares of Company stock after the end of a three-year period, subject to the
terms applicable to such awards. Additionally, PSU payouts will be contingent on the
Companys performance against a pre-set objective or set of objectives. |
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Employee stock-based compensation is recognized using the intrinsic value method. Generally,
employee stock options are granted to purchase shares of Company stock at the fair market
value at the time of grant. Accordingly, no compensation expense is recognized for the
Companys stock-based compensation plans other than for its employee performance-based awards
(including PSUs), RSUs and options granted to employees of certain equity method investees. |
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The effect on net income and earnings per common share if the Company had applied the fair
value method for recognizing employee stock-based compensation is as follows: |
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($ in millions) |
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Three Months |
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Six Months |
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Ended June 30 |
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Ended June 30 |
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2005 |
|
2004 |
|
2005 |
|
2004 |
Net income, as reported |
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$ |
720.6 |
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$ |
1,768.1 |
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$ |
2,090.7 |
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$ |
3,386.7 |
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Compensation expense, net of tax: |
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Reported |
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7.8 |
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5.9 |
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|
14.1 |
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|
10.3 |
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Fair value method |
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(80.4 |
) |
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(122.5 |
) |
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(188.8 |
) |
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(239.5 |
) |
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Pro forma net income |
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$ |
648.0 |
|
|
$ |
1,651.5 |
|
|
$ |
1,916.0 |
|
|
$ |
3,157.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
|
$.33 |
|
|
|
$.80 |
|
|
|
$.95 |
|
|
|
$1.52 |
|
Basic pro forma |
|
|
$.29 |
|
|
|
$.74 |
|
|
|
$.87 |
|
|
|
$1.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming dilution as reported |
|
|
$.33 |
|
|
|
$.79 |
|
|
|
$.95 |
|
|
|
$1.52 |
|
Assuming dilution pro forma |
|
|
$.29 |
|
|
|
$.74 |
|
|
|
$.87 |
|
|
|
$1.41 |
|
-4-
Notes to Consolidated Financial Statements (continued)
In accordance with the current accounting requirements, the Company recognizes pro-forma
compensation expense for retirement-eligible employees over the vesting period for employee
stock options. Upon the adoption of Financial Accounting Standard Board No. 123R, Share-Based
Payment (FAS 123R), which is effective for the Company beginning January 1, 2006, compensation
expense will be recognized immediately for awards granted to retirement-eligible employees or
over the period from the grant date to the date retirement eligibility is achieved. This
approach is known as the non-substantive vesting period approach. If the Company had been
applying the non-substantive vesting period approach for stock options granted to
retirement-eligible employees, the effect on pro forma earnings per share assuming dilution
for all periods presented, as provided in the above table, would not have been significant.
4. |
|
Inventories consisted of: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
June 30 |
|
December 31 |
|
|
2005 |
|
2004 |
Finished goods |
|
$ |
457.4 |
|
|
$ |
376.8 |
|
Raw materials and work in process |
|
|
2,066.7 |
|
|
|
2,166.8 |
|
Supplies |
|
|
85.5 |
|
|
|
94.7 |
|
|
|
|
|
|
|
|
|
|
Total (approximates current cost) |
|
|
2,609.6 |
|
|
|
2,638.3 |
|
Reduction to LIFO cost for domestic inventories |
|
|
(41.9 |
) |
|
|
(100.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,567.7 |
|
|
$ |
2,537.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
1,811.2 |
|
|
$ |
1,898.7 |
|
Other assets |
|
|
756.5 |
|
|
|
638.7 |
|
Amounts recognized as Other assets are comprised entirely of raw materials and work in process
inventories, which include vaccine inventories produced in preparation for product launches,
and inventories for other products, principally vaccines and Arcoxia, not expected to be sold
within one year.
5. |
|
In February 2005, the Company issued $1.0 billion of 4.75% ten-year notes. In addition,
the Company established a $1.5 billion, 5-year revolving credit facility to provide backup
liquidity for its commercial paper borrowing facility and for general corporate purposes.
The Company has not drawn funding from this facility. |
|
6. |
|
The Company is involved in various claims and legal proceedings of a nature considered
normal to its business, including product liability, intellectual property and commercial
litigation, as well as additional matters such as antitrust actions. The following updates
previous disclosures. |
Vioxx
Litigation
Product Liability Lawsuits
As previously disclosed, federal and state product liability lawsuits involving individual
claims, as well as several putative class actions have been filed against the Company with
respect to Vioxx. Also, as previously disclosed, the Ernst vs. Merck product liability trial
is currently ongoing in Texas. As of June 30, 2005, the Company has been served or is aware
that it has been named as a defendant in approximately 4,100 lawsuits, which include
approximately 7,500 plaintiff groups alleging personal injuries resulting from the use of
Vioxx. Certain of these lawsuits include allegations regarding gastrointestinal bleeding,
cardiovascular events, thrombotic events or kidney damage. The Company has also been named as
a defendant in approximately 120 putative class actions alleging personal injuries or seeking
(i) medical monitoring as a result of the putative class members use of Vioxx, (ii)
disgorgement of certain profits under common law unjust enrichment theories, and/or (iii)
various remedies under state consumer fraud and fair business practice statutes, including
recovering the cost of Vioxx purchased by individuals and third-party payors such as union
health plans (all of the actions discussed in this paragraph are collectively referred to as
the Vioxx Product Liability Lawsuits). The actions filed in the state courts of California
and New Jersey, respectively, have been transferred to a single judge in each state for
coordinated proceedings. In addition, on February 16, 2005, the Judicial Panel on
Multidistrict Litigation (the JPML) transferred all Vioxx Product Liability Lawsuits pending
in federal courts nationwide into one Multidistrict Litigation (MDL) for coordinated
pre-trial proceedings. The MDL has been transferred to the United States District Court for
the Eastern District of Louisiana before District Judge Eldon E. Fallon.
On
August 3, 2005, Judge Fallon issued an order
setting the Evelyn Irvin vs. Merck case as the first case to be tried
in the MDL. The trial currently is scheduled to begin on
November 28, 2005 and has been brought by Mrs. Evelyn Irvin
Plunkett, on behalf of her late husband Richard Irvin, Jr., who
died from an apparent heart attack. Plaintiff alleges that
Mr. Irvin took Vioxx for approximately one month.
Merck has entered into a tolling agreement with the MDL Plaintiffs Steering Committee which
establishes a procedure to halt the running of the statute of limitations (tolling) as to
certain categories of claims allegedly arising from the use of Vioxx by non-New Jersey
citizens. This Agreement applies to individuals who have not filed
-5-
Notes to Consolidated Financial Statements (continued)
lawsuits and may or may not eventually file lawsuits and only to those claimants who seek to
toll claims alleging injuries resulting from a thrombotic cardiovascular event that results in
a myocardial infarction or ischemic stroke. The agreement provides counsel additional time to evaluate potential claims. The agreement
requires any tolled claims to be filed in federal court.
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 seeks 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. Merck believes that the class was improperly certified and intends to seek appellate
review of the decision. The trial courts ruling is procedural only; it does not address the
merits of plaintiffs allegations, which the Company intends to defend vigorously.
Shareholder Lawsuits
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, a number of
putative class action lawsuits were filed in late 2003 and early 2004 by several shareholders
in the United States District Court for the Eastern District of Louisiana naming as defendants
the Company and several current or former officers and directors of the Company. After the
announcement of the withdrawal of Vioxx, the Company was named as a defendant in additional
securities lawsuits filed in (or removed to) various federal courts. On February 23, 2005,
the JPML transferred all of these securities lawsuits (the Vioxx Securities Lawsuits), along
with related lawsuits discussed below, to the United States District Court for the District of
New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide MDL for
coordinated pretrial proceedings (the Shareholder MDL). Judge Chesler has consolidated the
Vioxx Securities Lawsuits for all purposes. On June 9, 2005, plaintiffs in the Vioxx
Securities Lawsuits filed a Fourth Consolidated and Amended Class Action Complaint superseding
prior complaints in the various cases (the Complaint). Plaintiffs request certification of
a class of purchasers of Company stock between May 21, 1999 and October 29, 2004. The
Complaint, which names additional current and former officers and directors of the Company,
alleges 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 seeks unspecified
compensatory damages and the costs of suit, including attorneys fees. The Complaint also
asserts a claim under Section 20A of the Securities and Exchange Act against certain
defendants relating to their sales of Merck stock. In addition, the Complaint includes
allegations under Sections 11, 12 and 15 of the Securities Act of 1933 that certain defendants
made incomplete and misleading statements in a registration statement and certain prospectuses
filed in connection with the Merck Stock Investment Plan, a dividend reinvestment plan.
As previously disclosed, in March 2004, two shareholder derivative actions were filed in the
United States District Court for the Eastern District of Louisiana naming the Company as a
nominal defendant and certain members of the Board (past and present), together with certain
executive officers, as defendants. The complaints arise out of substantially the same factual
allegations that are made in the Vioxx Securities Lawsuits. The derivative suits, which are
purportedly brought to assert rights of the Company, assert claims against the Board members
and officers for breach of fiduciary duty, waste of corporate assets, unjust enrichment, abuse
of control and gross mismanagement. After the withdrawal of Vioxx, additional shareholder
derivative actions making similar allegations were filed in the New Jersey Superior Court for
Hunterdon County and in the United States District Court for the District of New Jersey (all
of the actions discussed in this paragraph are collectively referred to as the Vioxx
Derivative Lawsuits). On February 23, 2005, the JPML transferred the Vioxx Derivative
Lawsuits pending in federal court to the Shareholder MDL. Judge Chesler has consolidated the
Vioxx Derivative Lawsuits in the MDL for all purposes. On June 20, 2005, the federal
derivative plaintiffs filed a Verified Consolidated Shareholders Derivative Complaint
superseding prior complaints in the various cases. In addition, the Vioxx Derivative Lawsuits
pending in New Jersey Superior Court have been consolidated and, on April 29, 2005, state
plaintiffs filed a superseding Verified Consolidated Amended Shareholder Derivative Complaint.
Defendants have moved to stay the state court proceedings during the pendency of the federal
Vioxx Derivative Lawsuits; that motion is pending.
As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Board to take legal action against Mr. Raymond Gilmartin, formerly 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 response to that demand letter, the
Board of Directors determined at its November 23, 2004 meeting that the Board would take the
shareholders request under consideration and it remains under consideration.
In addition, as previously disclosed, after the announcement of the voluntary worldwide
withdrawal of Vioxx, putative class actions were filed against the Company and certain current
and former officers and directors of the
-6-
Notes to Consolidated Financial Statements (continued)
Company in the United States District Court for the Eastern District of Louisiana and in the
United States District Court for the District of New Jersey (the Vioxx ERISA Lawsuits and,
together with the Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits, the Vioxx
Shareholder Lawsuits) on behalf of certain of the Companys current and former employees who
are participants in certain of the Companys retirement plans asserting claims under the
Employee Retirement Income Security Act (ERISA). The lawsuits make similar allegations to
the allegations contained in the Vioxx Securities Lawsuits and claim that the defendants
breached their duties as plan fiduciaries.
On February 23, 2005, the JPML transferred all Vioxx ERISA Lawsuits to the Shareholder MDL.
Judge Chesler has ordered that the Vioxx ERISA Lawsuits be consolidated for all purposes. A
consolidated and amended complaint was filed in the Vioxx ERISA Lawsuits on August 2,
2005.
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, Canada, Brazil, Australia, Turkey and Israel.
Additional
Lawsuits
Based on media reports and other sources, the Company anticipates that additional Vioxx
Product Liability Lawsuits, Vioxx Shareholder Lawsuits and Vioxx Foreign Lawsuits
(collectively, the Vioxx Lawsuits) will be filed against it and/or certain of its current
and former officers and directors in the future.
Insurance
As previously disclosed, the Company has product liability insurance for claims brought
in the Vioxx Product Liability Lawsuits with stated upper limits of approximately $630 million
after deductibles and co-insurance. This insurance provides coverage for legal defense costs
and potential damage amounts that have been or will be incurred in connection with the Vioxx
Product Liability Lawsuits. The Company believes that this insurance coverage extends to
additional Vioxx Product Liability Lawsuits that may be filed in the future. 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. Additional insurance coverage for these claims may also be
available under upper-level excess policies that provide coverage for
a variety of risks. There are disputes with certain insurers about the availability of some or all of this
insurance coverage and there are likely to be additional disputes. At this time, the Company
believes it is reasonably possible that its insurance coverage with respect to the Vioxx
Lawsuits will not be adequate to cover its defense costs and any losses.
As previously disclosed, Merck received notice that the Companys upper level excess
insurers (which provide excess insurance potentially applicable to all of the Vioxx Lawsuits)
commenced an arbitration seeking, among other things, to cancel those policies, to void all of
their obligations under those policies and to raise other coverage issues with respect to the
Vioxx Lawsuits. Merck intends to contest vigorously the insurers claims and will attempt to
enforce its rights under applicable insurance policies. The amounts actually recovered under
the policies discussed in this section may be less than the amounts specified in the preceding
paragraph.
Investigations
As previously disclosed, in November 2004, the Company was advised by the staff of the
Securities and Exchange Commission (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 received a subpoena from the
U.S. Department of Justice (the DOJ) requesting information related to the Companys
research, marketing and selling activities with respect to Vioxx in a federal health care
investigation under criminal statutes. There are also ongoing investigations by certain
Congressional committees. Also, the District Attorneys Office in Munich, Germany notified
the Companys subsidiary in Germany that it received complaints and commenced an investigation
in order to determine whether any criminal charges should be brought in Germany concerning
Vioxx. As previously disclosed, the Companys U.K. subsidiary has been notified by the
Medicines and Healthcare Products Regulatory Agency in the United Kingdom (the
MHRA) of an investigation by the MHRA of compliance by the Company with EU adverse
experience reporting requirements in connection with 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.
-7-
Notes to Consolidated Financial Statements (continued)
Reserves
As noted above, the Ernst vs. Merck product liability trial is currently ongoing in Texas.
The Company currently anticipates that one or more additional Vioxx Product Liability Lawsuits
may go to trial in the second half of 2005. The Company cannot predict the timing of any
trials with respect to the Vioxx Shareholder Lawsuits. 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. The Company has not established any
reserves for any potential liability relating to the Vioxx Lawsuits or the Vioxx
Investigations (collectively the Vioxx Litigation). As of December 31, 2004, the Company
had established a reserve of $675 million solely for its future legal defense costs related to
the Vioxx Litigation. This reserve was based on certain assumptions and was the minimum
amount that the Company believed that it could reasonably estimate
would be spent over a
multi-year period. Some of the significant factors that were considered in the establishment
of the reserve for the Vioxx Litigation were as follows: the actual costs incurred by the
Company up to that time; the development of the Companys legal defense strategy and structure
in light of the expanded scope of the Vioxx Litigation; the number of cases being brought
against the Company; and the anticipated timing, progression, and related costs of pre-trial
activities and trials in the Vioxx Product Liability Lawsuits. In the second quarter, the
Company did not increase the Vioxx legal defense reserve and the Company will continue to
monitor its legal defense costs and review the adequacy of the associated reserves.
Unfavorable outcomes in the Vioxx Litigation could have a material adverse effect on the
Companys financial position, liquidity and results of operations.
Commercial
Litigation
Beginning in 1993, the Company was named in a number of antitrust suits, certain of which were
certified as class actions, instituted by most of the nations retail pharmacies and consumers
in several states. In 1994, these actions, except for those pending in state courts, were
consolidated for pre-trial purposes in the federal court in Chicago, Illinois. In 1996, the
Company and several other defendants settled the federal class action, which represented the
single largest group of claims. Since that time, the Company has settled substantially all of
the remaining cases on satisfactory terms; the few remaining cases have been inactive for
several years. The Company has not engaged in any conspiracy and no admission of wrongdoing
was made nor was included in any settlement agreements.
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. The Company and
the other defendants are awaiting the final ruling on their motion to dismiss in the Suffolk
County case, which was the first of the New York county cases to be filed. In addition, the
Company is a defendant in four cases pending in Kentucky, Illinois, Alabama and Wisconsin
which are being vigorously defended.
As previously disclosed, the Company has been named as a defendant in antitrust cases in
federal court in Minnesota and in state court in California, each alleging an unlawful
conspiracy among different sets of pharmaceutical manufacturers to protect high prices in the
United States by impeding importation into the United States of lower-priced pharmaceuticals
from Canada. The Company and the other defendants are awaiting a final decision on their
motion to dismiss.
As previously disclosed, a suit in federal court in Alabama by two providers of health
services to needy patients alleges that 15 pharmaceutical companies overcharged the plaintiffs
and a class of those similarly situated, for pharmaceuticals purchased by the plaintiffs under
the program established by Section 340B of the Public Health Service Act. The Company and the
other defendants have filed a motion to dismiss the complaint on numerous grounds.
-8-
Notes to Consolidated Financial Statements (continued)
As previously disclosed, in January 2003, the DOJ notified the federal court in New Orleans,
Louisiana that it was not going to intervene at that time in a pending Federal False Claims
Act case that was filed under seal in December 1999 against the Company. The court issued an
order unsealing the complaint, which was filed by a physician in Louisiana, and ordered that
the complaint be served. The complaint, which alleged that the Companys discounting of
Pepcid in certain Louisiana hospitals led to increases in costs to Medicaid, was dismissed.
An amended complaint was filed under seal and the case has been administratively closed by the
Court until the seal is lifted. The State of Louisiana has filed its own amended complaint,
incorporating the allegations contained in the sealed amended complaint. The allegations
contained in the sealed amended complaint are unknown.
In April 2005, the Company was named in a qui tam lawsuit under the Nevada False Claims Act.
The suit, in which the Nevada Attorney General has intervened, alleges that the Company
inappropriately offered nominal pricing and other marketing and pricing inducements to certain
customers and also failed to comply with its obligations under the Medicaid Best Price scheme
related to such arrangements. The Company intends to vigorously defend against this lawsuit.
Governmental
Proceedings
As previously disclosed, the Company has received a subpoena from the DOJ in connection with
its investigation of the Companys marketing and selling activities. The Company has also
reported that it has received a Civil Investigative Demand (CID) from the Attorney General
of Texas regarding the Companys marketing and selling activities relating to Texas.
Recently, the Company received another CID from the Attorney General of Texas asking for
additional information regarding the Companys marketing and selling activities related to
Texas, including with respect to certain of its nominal pricing programs. In April 2004, the
Company received a subpoena from the office of the Inspector General for the District of
Columbia in connection with an investigation of the Companys interactions with physicians in
the District of Columbia, Maryland, and Virginia. In November 2004, the Company received a
letter request from the DOJ in connection with its investigation of the Companys pricing of
Pepcid.
The Company has received a letter from the DOJ advising it of the existence of a qui tam
complaint alleging that the Company violated certain rules related to its calculations of best
price and other federal pricing benchmark calculations, certain of which may affect the
Companys Medicaid rebate obligation. The Company is cooperating with the DOJs requests for
information.
On February 23, 2004, the Italian Antitrust Authorities adopted a measure commencing a formal
investigation of Merck Sharp & Dohme (Italia) S.p.A. (MSD Italy) and the Company under
Article 14 of the Italian Competition Law and Article 82 EC to ascertain whether the Company
and MSD Italy committed an abuse of a dominant position by virtue of the Companys refusal to
grant to ACS Dobfar S.p.A. (Dobfar), an Italian company, a voluntary license, pursuant to
domestic legislation passed in 2002, to permit Dobfar to manufacture Tienam (imipenem and
cilastatin) in Italy for sale outside Italy, in countries where patent protection under the
applicable domestic rules has expired or never existed. The Company has a Supplementary
Protection Certificate (SPC) which provides the Company certain rights with respect to the
manufacture and sale of Tienam in Italy which expires in January 2006. A hearing before the
Italian Antitrust Authorities was held on May 2, 2005. On June 17, 2005, the Italian
Antitrust Authority (ICA) issued an order imposing interim measures requiring the Company to
grant a license to manufacture Tienam in Italy. Pursuant to the ICAs order, the license
granted to Dobfar will be limited to the right to only manufacture and build supply stock of
Tienam and will not allow Dobfar to export Tienam outside of Italy or to sell their Tienam
product within Italy prior to the expiry of the SPC. The Company has appealed the ICAs order
and the proceedings before the ICA are ongoing.
The Company is cooperating with all of these investigations. The Company cannot predict the
outcome of these investigations; however, it is possible that unfavorable outcomes could have
a material adverse effect on the Companys financial position, liquidity and results of
operations. In addition, from time to time, other federal, state or foreign regulators or
authorities may seek information about practices in the pharmaceutical industry in inquiries
other than the investigations discussed in this section. It is not feasible to predict the
outcome of any such inquiries.
Vaccine
Litigation
As previously disclosed, the Company is a party in claims brought under the Consumer
Protection Act of 1987 in the United Kingdom, which allege that certain children suffer from a
variety of conditions as a result of being vaccinated with various bivalent vaccines for
measles and rubella and/or trivalent vaccines for measles, mumps and rubella, including the
Companys M-M-R II. The conditions include autism, with or without inflammatory bowel
disease, epilepsy, diabetes, encephalitis, encephalopathy, deafness, chronic fatigue syndrome
and transverse
-9-
Notes to Consolidated Financial Statements (continued)
myelitis. In early September 2003, the Legal Services Commission (the LSC) announced its
decision to withdraw public funding of the litigation brought by the claimants. This decision
was confirmed on appeal by the Funding Review Committee (FRC) on September 30, 2003. The
claimants application for judicial review of the decision to withdraw public funding was
dismissed in February 2004 and the April 2004 trial date was vacated. The lead claimants have
decided not to apply to the Court of Appeal for permission to appeal the decision. As a
result, legal aid for all lead claimants has now been discharged. The non-lead claimants were
subject to a show cause procedure to withdraw legal aid unless the claimants could show
cause as to why it should not be withdrawn. The FRC heard 37 of the show cause appeals by
the non-lead claimants in October 2004. The appeals involving autism (26) were unsuccessful,
but funding was reinstated for 11 appeals involving other non-autism conditions, such as
epilepsy, deafness, encephalitis and transverse myelitis. In light of the 11 successful
appeals, the LSC has reconsidered the cases of some other claimants and, to date, funding has
been reinstated in approximately 30 non-lead, non-autism cases against the Company, in most
cases to the limited extent necessary to allow solicitors to provide a report on the
individual cases to the LSC. The LSC is still considering reinstating funding for 2
additional cases against the Company. Directions for further conduct of the litigation were
made at a case management hearing on March 17, 2005. As a result of the judges ruling
following the case management hearing, approximately 530 cases against the Company have been
brought to an end leaving approximately 40 active cases. The Company will vigorously defend
against these lawsuits.
As previously disclosed, the Company is also a party to individual and class action product
liability lawsuits and claims in the United States involving pediatric vaccines (e.g.,
hepatitis B vaccine) that contained thimerosal, a preservative used in vaccines. Merck has
not distributed thimerosal-containing pediatric vaccines in the United States since the fall
of 2001. As of June 30, 2005, there were approximately 285 active thimerosal related lawsuits
with approximately 800 plaintiffs. Other defendants include 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. Two state court cases
and two Federal District Court cases were scheduled for trial in 2005. All of these cases
have been dismissed. Certain of the dismissals have been appealed. Currently, one case is
set for trial in 2006. The Company will vigorously 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 aware that there
are numerous cases pending in Vaccine Court involving allegations that thimerosal-containing
vaccines and/or the M-M-R II vaccine cause autism spectrum disorders. All of the cases
referred to in the preceding paragraph as having been dismissed or being scheduled for trial
have been brought by plaintiffs who claim to have made a timely withdrawal of their Vaccine
Court petition. The Company is not a party to these Vaccine Court proceedings because the
petitions are brought against the Department of Health and Human Services.
Patent
Litigation
From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug
Applications (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, Prilosec and Propecia prior to the expiration of the Companys (and
AstraZenecas in the case of Prilosec) patents concerning these products. The generic
companies ANDAs generally include allegations of non-infringement, invalidity and
unenforceability of the patents. Generic manufacturers have received FDA approval to market a
generic form of Prilosec. The Company has filed patent infringement suits in federal court
against companies filing ANDAs for generic alendronate and finasteride, and AstraZeneca and
the Company have filed patent infringement suits in federal court against companies filing
ANDAs for generic omeprazole. 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.
-10-
Notes to Consolidated Financial Statements (continued)
A trial in the United States with respect to the alendronate daily product concluded in
November 2001. In November 2002, a decision was issued by the U.S. District Court in Delaware
finding the Companys patent valid and infringed. On October 30, 2003, the U.S. Court of
Appeals for the Federal Circuit affirmed the validity and infringement of the Companys basic
U.S. patent covering the use of alendronate in any form. A request for rehearing was denied.
A trial in the United States involving the alendronate weekly product was held in March 2003.
On August 28, 2003, the U.S. District Court in Delaware, upheld the validity of the Companys
U.S. patent covering the weekly administration of alendronate. However, on January 28, 2005,
the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. found the Companys
patent claims for once-weekly administration of Fosamax to be invalid. Based on the Court of
Appeals decision, Fosamax will lose its market exclusivity in the United States in February
2008 and the Company expects a decline in U.S. Fosamax sales at that time. Prior to the
decision, Mercks patent for once-weekly administration of Fosamax was set to expire in July
2018. On April 21, 2005, the full U.S. Court of Appeals for the Federal Circuit in
Washington, D.C. denied the Companys request to reconsider the previous decision made by that
court holding that the Companys patent for once weekly administration of Fosamax was invalid.
The Company intends to seek an appeal of this decision in the U.S. Supreme Court.
In May 2005, the Federal Court of Canada Trial Division issued a decision refusing to bar the
approval of generic alendronate on the ground 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
seeking damages for lost sales of generic weekly alendronate due to the patent proceeding.
In January 2003, the High Court of Justice for England and Wales held that patents of the
Company protecting the alendronate daily and weekly products were invalid in the United
Kingdom. On November 6, 2003, the Court of Appeals of England and Wales affirmed the ruling
by the High Court of Justice for England and Wales. European countries permit companies
seeking approval of a generic product to reference data of the innovative product in certain
circumstances under data exclusivity regulations. The Company has been granted leave to
appeal a decision of the UK regulatory authority that its data for weekly alendronate may be
referenced by companies seeking approval of generic weekly alendronate products. The Company
has also filed an appeal of a grant by the Swedish regulatory authority of approval of generic
weekly alendronate products which referenced the Companys data on weekly alendronate for
their approval.
As previously announced by the Company, on July 20, 2004, the Opposition Division (the
Opposition Division) of the European Patent Office (the EPO) rendered an oral decision to
revoke the Companys patent in Europe that covers the weekly administration of alendronate.
On August 19, 2004, the written opinion was issued confirming the oral decision revoking the
Companys patent. On September 16, 2004, the Company filed an appeal of this decision. A
decision on this appeal is expected in 2006. Based on other patents, the alendronate weekly
product is protected in most major European markets until at least 2007.
On October 5, 2004, in an action in Australia challenging the validity of the Companys
Australian patent for the weekly administration of alendronate, the patent was found to be
invalid. The Company has appealed the decision.
In addition, as previously disclosed, in Japan a proceeding has been filed challenging the
validity of the Companys Japanese patent for the weekly administration of alendronate.
Proceedings have been filed in Canada challenging the validity of the Companys patent for
once weekly administration of alendronate. In April 2005, the first of these proceedings went
to hearing. The Company is awaiting a decision.
In the case of omeprazole, the trial court in the United States rendered an opinion in October
2002 upholding the validity of the Companys and AstraZenecas patents covering the stabilized
formulation of omeprazole and ruling that one defendants omeprazole product did not infringe
those patents. The other three defendants products were found to infringe the formulation
patents. In December 2003, the U.S. Court of Appeals for the Federal Circuit affirmed the
decision of the trial court. With respect to certain other generic manufacturers omeprazole
products, no trial date has yet been set.
In the case of finasteride, an ANDA has been filed seeking approval of a generic version of
Propecia and alleging invalidity of the Companys patents. The Company filed a patent
infringement lawsuit in the District Court of Delaware in September 2004. A trial is not
anticipated before 2006.
-11-
Notes to Consolidated Financial Statements (continued)
Environmental Matters
As previously disclosed, in December 2003, the Virginia Department of Environmental Quality
(VADEQ) issued a Notice of Violation of the Companys Elkton, Virginia facility for air
permit limit exceedances reported by the facility as a result of performance testing of a
process train. The Company has settled this matter with VADEQ by agreeing (i) to make $3.1
million in capital improvements at the site, (ii) to pay VADEQ a $200,000 fine, and (iii) to
perform a Supplemental Environmental Project for $300,000.
Other Litigation
On July 27, 2005, Merck was served with a further shareholder derivative suit filed in the New
Jersey Superior Court for Hunterdon County against the Company and certain current and former
officers and directors. This lawsuit seeks to recover or cancel compensation awarded to the
Companys executive officers in 2004, and asserts claims for breach of fiduciary duty, waste
and unjust enrichment.
As previously disclosed, on July 6, 2004, the United States District Court for the District of
New Jersey granted a motion by the Company, Medco Health Solutions, Inc. (Medco Health) and
certain officers and directors to dismiss a purported class action complaint involving claims
related to the Companys revenue recognition practice for retail co-payments paid by
individuals to whom Medco Health provides pharmaceutical benefits as well as other
allegations. The complaint was dismissed with prejudice. On August 20, 2004, the same court
granted the Companys motion to dismiss with prejudice a related shareholder derivative
action. Plaintiffs in both actions have appealed the decisions. A hearing on those appeals
has been scheduled for September 2005.
As previously disclosed, prior to the spin-off of Medco Health, the Company and Medco Health
agreed to settle, on a class action basis, a series of lawsuits asserting violations of ERISA
(the Gruer Cases). The Company, Medco Health and certain plaintiffs counsel filed the
settlement agreement with the federal district court in New York, where cases commenced by a
number of plaintiffs, including participants in a number of pharmaceutical benefit plans for
which Medco Health is the pharmacy benefit manager, as well as trustees of such plans, have
been consolidated. 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. In 2003, the district
court preliminarily approved the settlement and held hearings to hear objections to the
fairness of the proposed settlement. The district court 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. Three notices of appeal have been filed and the appellate court is expected to
hear arguments regarding the appeals in March 2005 and decide the appeals thereafter.
Currently, 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. Medco Health and the Company agreed to the proposed
settlement in order to avoid the significant cost and distraction of prolonged litigation.
After the spin-off of Medco Health, Medco Health assumed substantially all of the liability
exposure for the matters discussed in the foregoing paragraph. 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 Note, in the opinion of
the Company, all such proceedings are either adequately covered by insurance or, if not so
covered, should not ultimately result in any liability that would have a material adverse
effect on the financial position, liquidity or results of operations of the Company, other
than proceedings for which a separate assessment is provided in this Note.
7. |
|
As previously disclosed, in October 2004, the American Jobs Creation Act of 2004 (the AJCA)
was signed into law. The AJCA creates temporary incentives for U.S. multinationals to
repatriate accumulated income earned outside the United States as of December 31, 2002. In
accordance with the AJCA, the Company will repatriate $15 billion during 2005. The Company
has recorded an income tax charge of $740 million in Taxes on Income in the second |
-12-
Notes to Consolidated Financial Statements (continued)
|
|
quarter related to this repatriation. This charge was partially offset by a $100 million
benefit associated with a decision to implement certain tax planning
strategies. |
|
|
|
The Company has not changed its intention to indefinitely reinvest accumulated earnings earned
subsequent to December 31, 2002. No provision will be made for income taxes that would be
payable upon the distributions of such earnings and it is not practicable to determine the
amount of the related unrecognized deferred income tax liability. |
|
8. |
|
As previously disclosed, the IRS has substantially completed its examination of the
Companys tax returns for the years 1993 to 1996 and on April 28, 2004 issued a preliminary
notice of deficiency with respect to a partnership transaction entered into in 1993.
Specifically, the IRS is proposing to disallow certain royalty and other expenses claimed as
deductions on the 1993-1996 tax returns of the Company. The Company anticipates receiving a
similar notice for 1997-1999, shortly. If the IRS ultimately prevails in its positions, the
Companys income tax due for the years 1993-1999 would increase by approximately $970
million plus interest of approximately $580 million. The IRS will likely make similar
claims for years subsequent to 1999 in future audits with respect to this transaction. The
potential disallowance for these later years, computed on a similar basis to the 1993-1999
disallowances, would be approximately $540 million plus interest of approximately $60
million. The IRS has proposed penalties on the Company with respect to all periods that
have been examined and the Company anticipates the IRS would seek to impose penalties on all
other periods. |
|
|
|
The Company vigorously disagrees with the proposed adjustments and intends to aggressively
contest this matter through applicable IRS and judicial procedures, as appropriate. Although
the final resolution of the proposed adjustments is uncertain and involves unsettled areas of
the law, based on currently available information, the Company has provided for the best
estimate of the probable tax liability for this matter. While the resolution of the issue may
result in tax liabilities which are significantly higher or lower than the reserves
established for this matter, management currently believes that the resolution will not have a
material effect on the Companys financial position or liquidity. However, an unfavorable
resolution could have a material effect on the Companys results of operations or cash flows
in the quarter in which an adjustment is recorded or the tax is due or paid. |
|
9. |
|
The Company has defined benefit pension plans covering eligible employees in the United
States and in certain of its international subsidiaries. The net cost of such plans
consisted of the following components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Service cost |
|
$ |
80.7 |
|
|
$ |
82.1 |
|
|
$ |
165.6 |
|
|
$ |
152.6 |
|
Interest cost |
|
|
78.3 |
|
|
|
80.0 |
|
|
|
157.3 |
|
|
|
143.9 |
|
Expected return on plan assets |
|
|
(100.0 |
) |
|
|
(100.7 |
) |
|
|
(201.2 |
) |
|
|
(181.6 |
) |
Net amortization |
|
|
38.1 |
|
|
|
30.1 |
|
|
|
76.6 |
|
|
|
60.0 |
|
Termination benefits |
|
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
97.1 |
|
|
$ |
93.1 |
|
|
$ |
198.3 |
|
|
$ |
182.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provides medical, dental and life insurance benefits, principally to its eligible
U.S. retirees and similar benefits to their dependents, through its other postretirement
benefits plans. The net cost of such plans consisted of the following
components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Service cost |
|
$ |
21.6 |
|
|
$ |
14.9 |
|
|
$ |
44.9 |
|
|
$ |
40.8 |
|
Interest cost |
|
|
26.1 |
|
|
|
18.4 |
|
|
|
52.8 |
|
|
|
50.5 |
|
Expected return on plan assets |
|
|
(25.8 |
) |
|
|
(15.3 |
) |
|
|
(51.7 |
) |
|
|
(38.8 |
) |
Net amortization |
|
|
5.2 |
|
|
|
4.6 |
|
|
|
10.8 |
|
|
|
14.4 |
|
Curtailments |
|
|
|
|
|
|
(12.3 |
) |
|
|
|
|
|
|
(12.3 |
) |
Termination benefits |
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27.1 |
|
|
$ |
11.1 |
|
|
$ |
56.8 |
|
|
$ |
56.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While the Company is recognizing the federal subsidy under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) in accordance with current accounting
requirements, it will continue to evaluate the Act and regulations that follow to determine
the optimal approach to incorporating the impact of the Act. |
-13-
Notes to Consolidated Financial Statements (continued)
The Company changed participant contributions and the service recognized for eligibility for
certain of its other postretirement benefit plans. These amendments generated curtailment
gains of $12.3 million for the three and six month periods ended June 30, 2004.
The Company recorded termination charges for the three and six month periods ended June 30,
2004 of $1.6 million and $7.1 million, respectively, on its pension plans and $0.8 million and
$1.5 million, respectively, on its other postretirement benefits plans related to expanded
eligibility for certain employees under a restructuring action which was completed by the end
of 2004.
10. |
|
Other (income) expense, net, consisted of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Interest income |
|
$ |
(98.7 |
) |
|
$ |
(68.5 |
) |
|
$ |
(192.5 |
) |
|
$ |
(134.2 |
) |
Interest expense |
|
|
93.1 |
|
|
|
71.6 |
|
|
|
177.6 |
|
|
|
144.4 |
|
Exchange (gains)/losses |
|
|
(8.4 |
) |
|
|
14.9 |
|
|
|
(9.1 |
) |
|
|
7.1 |
|
Minority interests |
|
|
30.3 |
|
|
|
36.8 |
|
|
|
60.7 |
|
|
|
76.4 |
|
Other, net |
|
|
(2.3 |
) |
|
|
(17.3 |
) |
|
|
3.9 |
|
|
|
(329.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14.0 |
|
|
$ |
37.5 |
|
|
$ |
40.6 |
|
|
$ |
(235.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in Other, net for the six months ended June 30, 2005, reflects the inclusion in
2004 of a $176.8 million gain on the sale of the Companys 50-percent equity stake in its
European joint venture with Johnson & Johnson as well as realized gains on the Companys
investment portfolios.
Interest paid for the six months ended June 30, 2005 and 2004 was $151.6 million and $140.5
million, respectively.
11. |
|
The weighted average common shares used in the computations of basic earnings per common
share and earnings per common share assuming dilution (shares in millions) are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Average common shares outstanding |
|
|
2,201.8 |
|
|
|
2,221.4 |
|
|
|
2,204.4 |
|
|
|
2,221.9 |
|
Common shares issuable(1) |
|
|
4.3 |
|
|
|
8.7 |
|
|
|
3.7 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding assuming dilution |
|
|
2,206.1 |
|
|
|
2,230.1 |
|
|
|
2,208.1 |
|
|
|
2,231.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Issuable primarily under stock-based compensation plans. |
|
|
|
For the three and six months ended June 30, 2005 and 2004, 215.3 million and 205.2
million, respectively, common shares issuable under the Companys stock-based compensation
plans were excluded from the computation of earnings per common share assuming dilution
because the effect would have been antidilutive. |
|
12. |
|
Comprehensive income for the three months ended June 30, 2005 and 2004, representing all
changes in stockholders equity during the period other than changes resulting from the
Companys stock, was $798.8 million and $1,638.1 million, respectively. Comprehensive
income for the six months ended June 30, 2005 and 2004 was $2,141.9 and $3,271.6,
respectively. |
|
13. |
|
The Companys operations are principally managed on a products basis. The Merck
Pharmaceutical segment includes products marketed either directly or through joint ventures.
These products consist of therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. Other segment revenues include non-reportable human and
animal health segments. |
-14-
Notes to Consolidated Financial Statements (continued)
Revenues and profits for these segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Segment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merck Pharmaceutical |
|
$ |
5,166.2 |
|
|
$ |
5,727.7 |
|
|
$ |
10,238.5 |
|
|
$ |
11,039.8 |
|
Other segment revenues |
|
|
260.7 |
|
|
|
241.2 |
|
|
|
493.6 |
|
|
|
496.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,426.9 |
|
|
$ |
5,968.9 |
|
|
$ |
10,732.1 |
|
|
$ |
11,536.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merck Pharmaceutical |
|
$ |
3,234.9 |
|
|
$ |
3,786.2 |
|
|
$ |
6,397.4 |
|
|
$ |
7,203.1 |
|
Other segment profits |
|
|
264.2 |
|
|
|
242.6 |
|
|
|
504.6 |
|
|
|
496.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,499.1 |
|
|
$ |
4,028.8 |
|
|
$ |
6,902.0 |
|
|
$ |
7,699.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of total segment revenues to consolidated sales is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Segment revenues |
|
$ |
5,426.9 |
|
|
$ |
5,968.9 |
|
|
$ |
10,732.1 |
|
|
$ |
11,536.7 |
|
Other revenues |
|
|
40.6 |
|
|
|
52.8 |
|
|
|
97.7 |
|
|
|
115.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,467.5 |
|
|
$ |
6,021.7 |
|
|
$ |
10,829.8 |
|
|
$ |
11,652.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to
divested products or businesses and other supply sales.
Net sales by category of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Atherosclerosis |
|
$ |
1,155.5 |
|
|
$ |
1,376.2 |
|
|
$ |
2,266.0 |
|
|
$ |
2,680.5 |
|
Hypertension/heart failure |
|
|
979.5 |
|
|
|
953.8 |
|
|
|
1,887.5 |
|
|
|
1,781.0 |
|
Osteoporosis |
|
|
852.7 |
|
|
|
791.9 |
|
|
|
1,624.6 |
|
|
|
1,550.9 |
|
Respiratory |
|
|
729.6 |
|
|
|
642.6 |
|
|
|
1,464.6 |
|
|
|
1,265.5 |
|
Anti-bacterial/anti-fungal |
|
|
371.8 |
|
|
|
286.7 |
|
|
|
729.2 |
|
|
|
555.0 |
|
Vaccines/biologicals |
|
|
247.3 |
|
|
|
223.5 |
|
|
|
471.1 |
|
|
|
452.5 |
|
Ophthalmologicals |
|
|
191.4 |
|
|
|
175.1 |
|
|
|
364.7 |
|
|
|
347.0 |
|
Urology |
|
|
188.1 |
|
|
|
184.5 |
|
|
|
363.2 |
|
|
|
359.3 |
|
Human immunodeficiency virus (HIV) |
|
|
88.6 |
|
|
|
64.3 |
|
|
|
167.3 |
|
|
|
128.5 |
|
Anti-inflammatory/analgesics |
|
|
72.0 |
|
|
|
731.4 |
|
|
|
142.9 |
|
|
|
1,437.0 |
|
Other |
|
|
591.0 |
|
|
|
591.7 |
|
|
|
1,348.7 |
|
|
|
1,095.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,467.5 |
|
|
$ |
6,021.7 |
|
|
$ |
10,829.8 |
|
|
$ |
11,652.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-inflammatory/analgesics includes sales of Vioxx prior to its voluntary worldwide
withdrawal in September 2004 (see Note 2). Other primarily includes sales of other human
pharmaceuticals, pharmaceutical and animal health supply sales to the Companys joint ventures
and revenue from the Companys relationship with AstraZeneca LP.
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. 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.
-15-
Notes to Consolidated Financial Statements (continued)
A reconciliation of segment profits to total income from continuing operations before
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Segment profits |
|
$ |
3,499.1 |
|
|
$ |
4,028.8 |
|
|
$ |
6,902.0 |
|
|
$ |
7,699.5 |
|
Other profits |
|
|
46.6 |
|
|
|
(14.9 |
) |
|
|
112.0 |
|
|
|
24.6 |
|
Adjustments |
|
|
129.4 |
|
|
|
117.9 |
|
|
|
249.8 |
|
|
|
233.7 |
|
Unallocated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
98.7 |
|
|
|
68.5 |
|
|
|
192.5 |
|
|
|
134.2 |
|
Interest expense |
|
|
(93.1 |
) |
|
|
(71.6 |
) |
|
|
(177.6 |
) |
|
|
(144.4 |
) |
Equity income from affiliates |
|
|
11.0 |
|
|
|
17.6 |
|
|
|
73.8 |
|
|
|
60.0 |
|
Depreciation and amortization |
|
|
(359.8 |
) |
|
|
(314.1 |
) |
|
|
(700.0 |
) |
|
|
(624.0 |
) |
Research and development |
|
|
(946.8 |
) |
|
|
(986.0 |
) |
|
|
(1,793.4 |
) |
|
|
(1,982.3 |
) |
Other expenses, net |
|
|
(460.2 |
) |
|
|
(407.4 |
) |
|
|
(1,013.5 |
) |
|
|
(619.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,924.9 |
|
|
$ |
2,438.8 |
|
|
$ |
3,845.6 |
|
|
$ |
4,781.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
includes expenses from corporate and manufacturing cost centers and other miscellaneous income
(expense), net.
-16-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Management
On May 5, 2005, the Board of Directors of the Company announced its election of Richard T. Clark
as the Companys Chief Executive Officer and President and a member of the Merck Board, effective
immediately. Mr. Clark was previously the President of Mercks Manufacturing Division.
The Board also announced that Lawrence A. Bossidy, former Chairman & CEO of Honeywell, Inc., will
serve as chairperson of the Boards newly structured Executive Committee, which will work closely
with Mr. Clark to provide support and continuity as he assumes his new duties. This committee is
expected to be in place for one to two years. Raymond V. Gilmartin stepped down as Chairman,
President and CEO and as a Director of the Company and will serve as Special Advisor to the
Executive Committee. The Board has not named a new Chairman of the Board.
Summary
Earnings per share (EPS) for the second quarter of 2005 were $0.33, compared to $0.79 for the
second quarter of 2004. In the second quarter of 2005, the Company recorded a net tax charge of
$640 million to Taxes on Income (or $0.29 per share), which included a $740 million charge
relating to the decision to repatriate $15 billion of foreign earnings in accordance with the
American Jobs Creation Act (AJCA) of 2004 (see Note 7), partially offset by a $100 million
benefit associated with a decision to implement certain tax planning strategies. Excluding the
impact of the net tax charge, EPS for the second quarter of 2005 were $0.62. Net income was
$720.6 million, compared to $1,768.1 million in the second quarter of last year. Worldwide sales
were $5.5 billion for the quarter, compared to $6.0 billion for the second quarter of 2004.
Total sales decreased 9% for the second quarter of 2005 compared with the same period in the
prior year, which reflects a decrease of 11% related to the Vioxx withdrawal, partially offset by
other revenue growth of 2%. This growth reflects a 2% favorable effect from foreign exchange and
a 1% favorable effect from price changes, partially offset by a 1% volume decline.
For the first six months of 2005, EPS were $0.95, which includes the $0.29 per share net tax
charge recorded in the second quarter. Excluding the impact of the net tax charge, EPS for the
first six months of 2005 were $1.24. Net income was $2,090.7 million and worldwide sales were
$10.8 billion for the first six months of 2005. Total sales decreased 7% for the first six
months, which reflects a decrease of 12% related to the Vioxx withdrawal, partially offset by
other revenue growth of 5%. This growth reflects a 2% favorable effect from foreign exchange, a
volume increase of 2% and a 1% favorable effect from price changes.
The Companys gross margin was 78.8% in the second quarter of 2005 as compared to 80.7% in the
second quarter of 2004 and 77.5% compared to 80.2% for the respective six-month period ended June
30, 2005, reflecting the impact of changes in the product mix.
Marketing and administrative expenses increased 9% and 4%, respectively, for the three and six
month periods ended June 30, 2005, including a 3% increase from foreign exchange in both periods.
The increase reflects activities required to prepare for the launch of four new investigational
vaccines and to maintain activities in support of in-line products.
Research and development expenses were $947 million during the second quarter of 2005, a 4%
decrease from the second quarter of 2004, which reflects the impact of $120.0 million of
licensing expense resulting from the collaborations with Bristol-Myers Squibb Company and with
Vertex Pharmaceuticals Incorporated recorded in the second quarter of 2004, and a 9% increase in
other research and development activities in the quarter. For the six months ended June 30,
2005, research and development expenses were 10% below the comparable period in the prior year,
which reflects the impact of $190.0 million of licensing expense resulting from the
collaborations with Bristol-Myers Squibb Company, H. Lundbeck A/S and Vertex Pharmaceuticals
Incorporated, as well as $125.5 million for acquired research expense from the acquisition of
Aton Pharma, Inc. recorded in the first half of 2004, and an 8% increase in other research and
development activities in the first half of 2005.
The change in Other (income) expense, net for the six month period ended June 30, 2005, reflects
the inclusion in 2004 of a $176.8 million gain on the sale of the Companys 50-percent equity
stake in its European joint venture with Johnson & Johnson as well as realized gains on the
Companys investment portfolios.
-17-
The effective tax rate was 62.6% and 45.6%, respectively, for the three and six month periods
ended June 30, 2005. Included in both periods of 2005 was a net charge of $640 million, which
included a $740 million charge related to the decision to repatriate $15 billion of foreign
earnings in accordance with the AJCA, partially offset by a $100 million benefit associated with
a decision to implement certain tax planning strategies. This net tax charge resulted in an
increase of 33.3 percentage points and 16.6 percentage points to the effective tax rate for the
three and six months ended June 30, 2005, respectively.
Sales
Net sales by category of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30 |
|
Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Atherosclerosis |
|
$ |
1,155.5 |
|
|
$ |
1,376.2 |
|
|
$ |
2,266.0 |
|
|
$ |
2,680.5 |
|
Hypertension/heart failure |
|
|
979.5 |
|
|
|
953.8 |
|
|
|
1,887.5 |
|
|
|
1,781.0 |
|
Osteoporosis |
|
|
852.7 |
|
|
|
791.9 |
|
|
|
1,624.6 |
|
|
|
1,550.9 |
|
Respiratory |
|
|
729.6 |
|
|
|
642.6 |
|
|
|
1,464.6 |
|
|
|
1,265.5 |
|
Anti-bacterial/anti-fungal |
|
|
371.8 |
|
|
|
286.7 |
|
|
|
729.2 |
|
|
|
555.0 |
|
Vaccines/biologicals |
|
|
247.3 |
|
|
|
223.5 |
|
|
|
471.1 |
|
|
|
452.5 |
|
Ophthalmologicals |
|
|
191.4 |
|
|
|
175.1 |
|
|
|
364.7 |
|
|
|
347.0 |
|
Urology |
|
|
188.1 |
|
|
|
184.5 |
|
|
|
363.2 |
|
|
|
359.3 |
|
Human immunodeficiency virus (HIV) |
|
|
88.6 |
|
|
|
64.3 |
|
|
|
167.3 |
|
|
|
128.5 |
|
Anti-inflammatory/analgesics |
|
|
72.0 |
|
|
|
731.4 |
|
|
|
142.9 |
|
|
|
1,437.0 |
|
Other |
|
|
591.0 |
|
|
|
591.7 |
|
|
|
1,348.7 |
|
|
|
1,095.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,467.5 |
|
|
$ |
6,021.7 |
|
|
$ |
10,829.8 |
|
|
$ |
11,652.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by individual therapeutic class are presented net of discounts and returns. The provision
for discounts includes indirect customer discounts that occur when a contracted customer
purchases directly through an intermediary wholesale purchaser, known as chargebacks, as well as
indirectly in the form of rebates owed based upon definitive contractual agreements or legal
requirements with private sector and public sector (Medicaid) benefit providers, after the final
dispensing of the product by a pharmacy to a benefit plan participant. These discounts, in the
aggregate, reduced revenues by $1,177.0 million and $1,083.4 million for the three month period
ended June 30, 2005 and 2004, respectively, and by $2,161.0 million and $2,027.3 million for the
six months ended June 30, 2005 and 2004, respectively. In the preceding table,
Anti-inflammatory/analgesics includes sales of Vioxx prior to its voluntary worldwide withdrawal
in September 2004. Other primarily includes sales of other human pharmaceuticals, pharmaceutical
and animal health supply sales to the Companys joint ventures and revenue from the Companys
relationship with AstraZeneca LP (AZLP). In connection with the distribution program for U.S.
wholesalers, implemented in 2003, inventory levels at key wholesalers for each of the Companys
major products are generally less than a month.
Worldwide sales of the Companys respiratory product, Singulair, a once-daily oral medicine
indicated for the treatment of chronic asthma and the relief of symptoms of seasonal allergic
rhinitis, were strong, reaching $729.6 million by the end of the second quarter of 2005,
representing growth of 14% as compared to the second quarter of 2004. U.S. mail-order-adjusted
prescription levels for Singulair increased by approximately 15% for the second quarter of 2005,
as compared to the second quarter of 2004. Sales for the six months ended June 30, 2005 were
$1.5 billion, a 16% increase over the comparable 2004 period.
The launch of a new indication in the European Union (EU) for Singulair to treat symptoms of
seasonal allergic rhinitis in asthmatic patients helped drive sales growth for Singulair in
Europe. Singulair is the only respiratory therapy approved in the EU for the treatment of both
asthma and seasonal allergic rhinitis in asthmatic patients. An indication for Singulair for the
treatment of allergic rhinitis was granted in the United States in early 2003.
-18-
Fosamax continued to be the most-prescribed medicine worldwide for the treatment of
postmenopausal, male and glucocorticoid-induced osteoporosis. Fosamax Plus D, a new product that
builds on the proven power of Fosamax to reduce the risk of both hip and spine fractures with a
weekly dose of vitamin D, became available in late April. Fosamax Plus D is the only treatment
for postmenopausal osteoporosis that offers proven fracture protection plus once-weekly vitamin
D. Vitamin D insufficiency is associated with reduced calcium absorption, bone loss and
increased risk of fracture. Global sales for the franchise reached $852.7 million during the
second quarter of 2005, representing growth of 8% as compared to the second quarter of 2004.
U.S. mail-order-adjusted prescription levels increased by approximately 6% for the second quarter
of 2005, as compared to the second quarter of 2004. Sales for the six months ended June 30, 2005
were $1.6 billion, a 5% increase compared to the first six months of 2004.
On May 26, the European Commissions Committee for Medicinal Products for Human Use (CHMP)
recommended marketing authorization for Fosamax Plus D, which will be known in Europe as
Fosavance. If approved by the European Commission, marketing authorization for the EU will be
granted within 90 days of the CHMP positive opinion. The approval of Fosamax Plus D and
Fosavance will not extend the patent for Fosamax.
Global sales of Mercks antihypertensive medicines, Cozaar and Hyzaar**, remained solid, reaching
$784.7 million for the second quarter of 2005 and representing growth of 8% as compared to the
second quarter of 2004. U.S. mail-order-adjusted prescription levels for Cozaar and Hyzaar
increased by approximately 3% for the second quarter of 2005 as compared to the second quarter of
2004. Sales for the six months ended June 30, 2005 were $1.5 billion, an 11% increase over the
comparable 2004 period.
In April, the FDA approved a new indication for Hyzaar, based on the LIFE trial, for reduction in
the risk of stroke in patients with hypertension and left ventricular hypertrophy (LVH), but
there is evidence that this benefit does not apply to black patients.
Zocor, Mercks atherosclerosis product for modifying cholesterol, achieved worldwide sales of
$1.2 billion in the second quarter of 2005, representing a decrease of 16% from the second
quarter of 2004. U.S. mail-order-adjusted prescription levels for Zocor declined by
approximately 6% for the second quarter of 2005 as compared to the second quarter of 2004. Sales
for the six months ended June 30, 2005 were $2.3 billion, a 15% decrease from the comparable 2004
period.
Sales of Mercks other promoted medicines and vaccines were $1.5 billion for the second quarter
of 2005, representing growth of 9% as compared with the second quarter of 2004. Sales for the
six months ended June 30, 2005 were $2.9 billion, an 11% increase over the comparable 2004
period. These products treat or prevent a broad range of medical conditions, including
infectious disease, glaucoma, benign prostate enlargement, migraine, arthritis and pain.
In April, results from an investigational study evaluating the effect of an antiemetic regimen
including Emend in the prevention of nausea and vomiting after chemotherapy in breast cancer
patients were published in the Journal of Clinical Oncology. The study showed that breast cancer
patients receiving a regimen including Emend prevented nausea and vomiting more than in patients
who received a standard regimen.
Global sales of Zetia and Vytorin, both of which are developed and marketed by the
Merck/Schering-Plough partnership, in the aggregate reached $506.9 million for the second quarter
of 2005 and combined new prescriptions reached 12.5% of the U.S. lipid-lowering market, according
to the weekly IMS Health data as of the week ending July 8, 2005. The Company records the
results from its interest in the Merck/Schering-Plough partnership in Equity income from
affiliates.
Global sales of Zetia (marketed as Ezetrol in more than 80 countries outside the United States),
the cholesterol-absorption inhibitor, reached $314.3 million in the second quarter of 2005, an
increase of 30% compared with the second quarter of 2004. Sales for the six months ended June
30, 2005 were $645.9 million, an increase of 50% over the comparable 2004 period. U.S.
prescription levels for Zetia increased by 6.7% for the quarter, according to IMS Health.
Global sales of Vytorin (marketed as Inegy in more than 35 countries outside the United States)
reached $192.6 million and $372.2 million for the three and six months ended June 30, 2005,
respectively.
|
|
|
** |
|
COZAAR and HYZAAR are registered trademarks of E.I. DuPont de Nemours & Company,
Wilmington, Del. |
-19-
Vytorin was approved in the United States in July 2004 and is demonstrating consistent
growth. During the second quarter of 2005, Inegy was launched in the United Kingdom, Portugal,
the Netherlands and Ireland.
Merck earns ongoing revenue based on sales of products that are associated with alliances, the
most significant of which is AZLP. Revenue from the Companys relationship with AZLP recorded by
Merck was $337.0 million in the second quarter and $772.3 million in the first six months of the
year.
Research
and Development
Merck continues to make progress on its four investigational vaccines in late-stage development,
three of which are already under review by the Food and Drug Administration (FDA) and other
regulatory agencies around the world. Collectively, these vaccines represent a significant new
opportunity for Merck in the pediatric, adolescent and adult vaccine markets.
ProQuad, a vaccine against measles, mumps, rubella and varicella, is under standard FDA review
following submission of a Biologics License Application (BLA) in August 2004. ProQuad is an
investigational vaccine for simultaneous vaccination against measles, mumps, rubella and
varicella in children 12 months to 12 years of age. ProQuad combines two established Merck
vaccines, M-M-R II (Measles, Mumps, Rubella Virus Vaccine Live) and Varivax [Varicella Virus
Vaccine Live (Oka/Merck)].
In June, the FDA accepted for standard review the BLA for RotaTeq, Mercks investigational
pentavalent vaccine to protect against rotavirus gastroenteritis. Merck has submitted
applications for licensure of RotaTeq in Australia, Mexico and, through the Sanofi Pasteur-MSD
joint venture, in the EU. Merck plans additional filings later this year in Canada and in
countries in Asia and Latin America. It is estimated that virtually all children are infected
with rotavirus, a highly contagious virus, by the time they reach three years of age. Rotavirus
causes gastroenteritis and has been reported to result in approximately 70,000 hospitalizations
and 100 deaths annually in the United States. Worldwide, rotavirus is responsible for
approximately 500,000 deaths each year.
Also in June, the FDA accepted for standard review the BLA for Zostavax, Mercks investigational
vaccine for the prevention of herpes zoster, commonly known as shingles; prevention of
postherpetic neuralgia (PHN), the persistent,
long-term nerve pain that is the most common complication of shingles; and the reduction of acute
and chronic shingles-associated pain in adults. Sanofi Pasteur-MSD has submitted an application
for licensure of Zostavax in the EU, and Merck plans additional filings later this year in
Canada, Australia and in countries in Asia and Latin America. Shingles, the reactivation of the
chickenpox virus in adults, affects an estimated 800,000 people in the United States annually.
People over age 50 are most commonly affected. As the population continues to age, the occurrence
of shingles is likely to increase. On June 1, the New England Journal of Medicine published
results from the Shingles Prevention Study, a study in which Zostavax reduced the total burden of
pain and discomfort caused by shingles by 61% and reduced the incidence of PHN by 67% when
compared to placebo in more than 38,500 men and women aged 60 and older.
Merck remains on track to submit a license application for Gardasil to the FDA during the second
half of 2005. Gardasil is an investigational quadrivalent vaccine designed to target HPV types
most commonly associated with cervical cancer and cervical pre-cancer, as well as types that
cause external genital lesions. Cervical cancer, one of the leading cancers among women, results
in approximately 290,000 deaths worldwide each year. In May, new data from Phase III clinical
trials of Gardasil presented at the annual meeting of the European Society of Pediatric
Infectious Diseases showed that Gardasil produced higher anti-HPV immune responses among
adolescent males and females compared to young women.
Merck presented three studies of Phase II data on Mercks DPP-IV inhibitor, sitagliptin
(MK-0431), a potential new approach in the treatment of type 2 diabetes, at the 65th
Annual Scientific Sessions of the American Diabetes Association (ADA) held in June. The studies
showed that sitagliptin significantly improved glycemic control in patients with primarily
mild-to-moderate hyperglycemia and in patients with more severe hyperglycemia, as compared with
placebo. In these studies, sitagliptin was generally well tolerated. The Phase III studies of
sitagliptin are under way and Merck anticipates filing the New Drug Application (NDA) with the
FDA in 2006.
Merck and Bristol-Myers Squibb Company are jointly developing and marketing Pargluva
(muraglitazar), which is currently under review by the FDA. Clinical results for Pargluva, an
investigational dual alpha/gamma PPAR (peroxisome proliferator-activated receptor) for the
treatment of type 2 diabetes, were also presented at a late-breaking session of the ADA meeting.
-20-
A Phase III, active-controlled study showed that Pargluva improved glycemic parameters
significantly more than pioglitazone in patients with type 2 diabetes who were also taking
metformin. In this study, significant effects were also seen on triglycerides and high-density
lipoprotein cholesterol levels, and these effects were independent of statin use. In a Phase II
dose-ranging study, patients with type 2 diabetes who received Pargluva had improved glycemic
control that was maintained for up to 2 years.
Results of a Phase II clinical trial with gaboxadol, potentially the first Selective
Extrasynaptic GABAA Agonist (SEGA), a new class of sleep agents, were presented at the
19th Annual Meeting of the Associated Professional Sleep Societies (APSS) in late June.
Gaboxadol demonstrated significant improvement over placebo in several study endpoints for both
sleep initiation and sleep maintenance in patients with primary insomnia. Gaboxadol 15 mg also
significantly increased the amount of slow-wave sleep patients experienced in this study.
Slow-wave sleep is a measure of sleep quality. Gaboxadol was generally well tolerated with no
observed next-day residual effects in this research trial. Merck and H. Lundbeck A/S of Denmark
are collaborators in the clinical development and commercialization of gaboxadol, which is
currently in Phase III development.
Results from a Phase IIa study of suberoylanilide hydroxamic acid (SAHA) were presented at the
American Society of Clinical Oncology meeting in May. The study showed that SAHA, one of a new
class of anti-tumor agents that inhibits histone deacetylase, reduced the tumor burden in
patients with advanced, refractory cutaneous T-cell lymphoma (CTCL), an aggressive form of
non-Hodgkins lymphoma. A confirmatory Phase IIb study in CTCL is currently under way. Merck
also is pursuing clinical studies with SAHA in diffuse large B-cell lymphoma (DLBCL), multiple
myeloma and malignant pleural mesothelioma.
In June, Vical Incorporated exercised three options under a 2003 amendment to an existing
research collaboration and licensing agreement, granting Merck rights to use Vicals patented
non-viral gene delivery technology in cancer vaccine applications.
Also in June, Merck and Vertex Pharmaceuticals Incorporated announced the initiation of an
additional Phase I clinical study with VX-680, a small molecule inhibitor of Aurora kinases.
Aurora kinases are implicated in the onset and progression of human leukemias.
In late June, Sumitomo Pharmaceuticals of Japan granted Merck, through an affiliate, an exclusive
license for SM13496 (lurasidone) in all parts of the world except Japan, China, Korea
and Taiwan. Lurasidone is an atypical antipsychotic compound currently in Phase II development
for the treatment of schizophrenia, one of the most chronic and disabling of the severe mental
illnesses.
Also in late June, Merck announced an agreement with Metabasis Therapeutics to research, develop
and commercialize novel small molecule therapeutics with the potential to treat several diseases,
including type 2 diabetes, hyperlipidemia and obesity, by activation of an enzyme in the liver
called AMP-activated Protein Kinase (AMPK).
In July, Merck and Geron Corporation announced an agreement to develop a cancer vaccine against
telomerase. Telomerase is an enzyme, active in most cancer cells, that maintains telomere length
at the ends of chromosomes. This activity allows the cancer to grow and metastasize over long
periods of time.
-21-
The chart below reflects the Companys research pipeline as of August 1, 2005. Candidates
shown in Phase III include specific products. Candidates shown in Phase I, II and III include
the most advanced compound with a specific mechanism in a given therapeutic area. Back-up
compounds, regardless of their phase of development, additional indications in the same
therapeutic areas and additional line extensions or formulations for in-line products are not
shown. Preclinical areas shown are those where the Company has initiated Good Laboratory
Practices (GLP) studies in compounds with mechanisms distinct from those in Phase I, II and III.
The Companys programs are generally designed to focus on the development of novel medicines to
address large, unmet medical needs.
|
|
|
|
|
|
|
Preclinical |
|
Phase I |
|
Phase II |
|
Phase III |
Alzheimers Disease
|
|
Alzheimers Disease
|
|
AIDS
|
|
HPV and related cervical |
|
|
c-7617
|
|
c-1605
|
|
cancer and genital warts |
Antibacterials
|
|
Arthritis
|
|
Alzheimers Disease
|
|
Gardasil |
|
|
c-7198
|
|
c-9136
|
|
Diabetes |
Antiviral
|
|
c-9101
|
|
Arthritis
|
|
MK-0431
(sitagliptin) |
|
|
Atherosclerosis
|
|
c-9787
|
|
Insomnia |
Arthritis
|
|
c-6100
|
|
Atherosclerosis
|
|
Gaboxadol* |
|
|
c-6872
|
|
c-8834
|
|
CINV |
Atherosclerosis
|
|
Cancer
|
|
Cancer, CTCL
|
|
MK-0517 (c-9280)*** |
|
|
c-5889
|
|
SAHA* |
|
|
Cancer
|
|
c-8585
|
|
Endocrine |
|
|
|
|
c-4251
|
|
c-9136 |
|
|
Cardiovascular Disease
|
|
VX-680*
|
|
HIV Vaccine |
|
|
|
|
Diabetes
|
|
Multiple Sclerosis |
|
|
Diabetes
|
|
c-0730
|
|
c-6448
|
|
2004 U.S. Submissions |
|
|
c-0740
|
|
Obesity
|
|
Diabetes |
Endocrine
|
|
c-4247
|
|
c-5093
|
|
Pargluva* |
|
|
Endocrine
|
|
c-2624
|
|
Pediatric Vaccine |
Glaucoma
|
|
c-0302
|
|
Osteoporosis
|
|
ProQuad |
|
|
Flu Vaccine
|
|
c-3578 |
|
|
Immunology
|
|
Glaucoma
|
|
Pediatric Vaccine |
|
|
|
|
c-9993
|
|
Psychiatric Disease |
|
|
Insomnia
|
|
c-3859
|
|
lurasidone* |
|
|
|
|
Hypertension
|
|
c-9054 |
|
|
Pain
|
|
c-2617
|
|
Respiratory Disease
|
|
2005 U.S. Submissions |
|
|
Obesity
|
|
c-3193
|
|
Rotavirus Gastroenteritis |
Psychiatric Disease
|
|
PYY3-36*
|
|
Stroke
|
|
RotaTeq |
|
|
c-1913
|
|
ONO 2506**
|
|
Shingles |
Respiratory Disease
|
|
Osteoporosis
|
|
|
|
Zostavax |
|
|
c-8500 |
|
|
|
|
Vaccines
|
|
Pain |
|
|
|
|
|
|
c-1246 |
|
|
|
|
|
|
c-8928 |
|
|
|
|
|
|
c-6740 |
|
|
|
|
|
|
Parkinsons Disease
|
|
|
|
2005 U.S. Approvals |
|
|
c-6161
|
|
|
|
Osteoporosis |
|
|
Psychiatric Disease
|
|
|
|
Fosamax Plus D |
|
|
DOV** |
|
|
|
|
|
|
Urinary Incontinence |
|
|
|
|
|
|
c-0172 |
|
|
|
|
|
|
c-4699 |
|
|
|
|
|
|
|
* |
|
Licensed, alliance, or acquisition |
|
** |
|
Merck is in discussions with its licensing partner regarding
further plans for this compound. |
|
*** |
|
MK-0517, an intravenous prodrug of an NK-1 antagonist for CINV, has entered Phase III with
filing anticipated in 2006. |
-22-
Vioxx
On June 9 and 10, 2005, the Scientific Advisory Panel and Public Forum (Panel) on selective COX-2
inhibitor NSAIDS in Canada heard presentations from the Company as well as Health Canada and
other companies relating to COX-2 inhibitors. On July 7, 2005, the Panel recommended to Health
Canada by a 12 to 1 vote that Vioxx be allowed back on the market in Canada. The Company
appreciated the opportunity to present data to the Panel and respects the Panels recommendations
with respect to selective COX-2 inhibitors. At this time, the Company has not made a decision
whether to seek approval to bring Vioxx back to the market in Canada or elsewhere. The Company
looks forward to discussions with Health Canada as well as the FDA and other regulatory
authorities about Vioxx.
As of June 30, 2005, the Vioxx withdrawal process was substantially complete and the costs
associated with the withdrawal were in line with the original amounts estimated by the Company.
For further information about the Vioxx litigation, see Note 6.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
($
in millions) |
|
June 30, 2005 |
|
December 31, 2004 |
|
Cash and Investments |
|
$ |
14,389.1 |
|
|
$ |
13,817.0 |
|
Working capital |
|
$ |
7,935.9 |
|
|
$ |
1,731.1 |
|
Total debt to total liabilities and equity |
|
|
16.7 |
% |
|
|
16.1 |
% |
As previously disclosed, in October 2004, the American Jobs Creation Act of 2004 (the AJCA) was
signed into law. The AJCA creates temporary incentives for U.S. multinationals to repatriate
accumulated income earned outside the United States as of December 31, 2002. In accordance with
the AJCA, the Company will repatriate $15 billion during 2005 (see Note 7). In preparation of
the repatriation, the Company has changed its mix of investments from long-term to short-term,
resulting in a significant increase in working capital at June 30, 2005.
Cash provided by operations continues to be the Companys primary source of funds to finance
operating needs and capital expenditures. Net cash provided by operating activities totaled $3.1
billion and $4.2 billion for the six months ended June 30, 2005 and 2004, respectively.
Capital expenditures totaled $662.4 million and $762.1 million in 2005 and 2004, respectively.
Capital expenditures for the full year 2005 are expected to approximate $1.5 billion.
Dividends paid to stockholders were $1.7 billion and $1.6 billion for the first six months of
2005 and 2004, respectively. In May and July 2005, the Board of Directors declared a quarterly
dividend of 38 cents per share on the Companys common stock for the third and fourth quarters of
2005, respectively.
The Company purchased $508.7 million of its Common Stock (16.0 million shares) for its Treasury
during the first six months of 2005. The Company has approximately $8.0 billion remaining under
the July 2002 treasury stock purchase authorization.
Recently
Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 151,
Inventory Costs an amendment of ARB No. 43, Chapter 4 (FAS 151), which is effective beginning
January 1, 2006. FAS 151 requires that abnormal amounts of idle facility expense, freight,
handling costs and wasted material be recognized as current period charges. The Statement also
requires that the allocation of fixed production overhead be based on the normal capacity of the
production facilities. The effect of this Statement on the Companys financial position or
results of operations is not expected to be material.
In December 2004, the FASB issued Statement No. 123R, Share-Based Payment (FAS 123R). On April
14, 2005, the SEC issued a new rule which delayed the Companys effective date of FAS 123R
beginning January 1, 2006. FAS 123R requires all share-based payments to employees to be
expensed over the requisite service period based on the grant-date fair value of the awards. The
Statement allows for either prospective or retrospective adoption and requires that the unvested
portion of all outstanding awards upon adoption be recognized using the same fair value and
attribution methodologies previously determined under Statement No. 123, Accounting for
Stock-Based Compensation. The Company is currently evaluating transition alternatives and
valuation methodologies for future grants. As a result, pro forma compensation expense, as
reflected in Note 3, may not be indicative of future expense to be recognized under FAS 123R.
The effect of adoption of FAS 123R on the Companys financial position or results of operations
has not yet been determined.
-23-
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. For a discussion of legal proceedings, see
Note 6 in the Notes to Consolidated Financial Statements contained herein.
Item 4. Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures. Based on their evaluation, as of the end of the period covered by this Form 10-Q,
the Companys Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under
the Securities Exchange Act of 1934, as amended) are effective. There have been no changes in
internal control over financial reporting, for the period covered by this report, that have
materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting, except as indicated below.
The Companys U.S. sales force has transitioned to a new expense reimbursement software and has
changed its third-party vendor. In addition, in order to streamline operations, improve
efficiencies and ensure continued compliance with filing requirements, payroll tax services were
outsourced to a third party vendor beginning in July 2005.
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 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 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
Companys forward-looking statements. These factors include inaccurate assumptions and a broad
variety of other risks and uncertainties, including some that are known and some that are not.
No forward-looking statement can be guaranteed and actual future results may vary materially.
The Company does not assume the obligation to update any forward-looking statement. One should
carefully evaluate such statements in light of factors described in the Companys filings with
the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K. In Item 1 of the
Companys Annual Report on Form 10-K for the year ended December 31, 2004, as filed on March 11,
2005, 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.
-24-
PART II Other Information
Item 1. Legal Proceedings
Information with respect to certain legal proceedings is incorporated by reference to Note 6 in
the Notes to the Consolidated Financial Statements contained herein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities for the three month period ended June 30, 2005 is as
follows:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar Value |
|
|
|
Total Number |
|
|
|
|
|
of Shares That May Yet |
|
|
|
of Shares |
|
Average Price |
|
Be Purchased Under the |
|
Period |
|
Purchased (1) |
|
Paid Per Share |
|
Plans or Programs (1) |
|
April 1
April 30, 2005 |
|
|
2,494,000 |
|
|
$ |
33.69 |
|
|
$ |
8,207.9 |
|
|
May 1 May 31, 2005 |
|
|
2,510,000 |
|
|
$ |
33.38 |
|
|
$ |
8,124.1 |
|
|
June 1 June 30, 2005 |
|
|
2,771,799 |
|
|
$ |
31.64 |
|
|
$ |
8,036.4 |
|
|
Total |
|
|
7,775,799 |
|
|
$ |
32.86 |
|
|
$ |
8,036.4 |
|
|
|
|
(1) |
|
All shares purchased during the period were made as part of a plan announced in July
2002 to purchase $10 billion in Merck shares. |
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 26,
2005, 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: |
|
|
|
|
|
|
|
|
|
Names |
|
For |
|
Withheld |
|
William G. Bowen, Ph.D. |
|
|
1,719,045,407 |
|
|
|
136,552,194 |
|
Raymond V. Gilmartin |
|
|
1,780,143,874 |
|
|
|
75,453,727 |
|
Rochelle B. Lazarus |
|
|
1,806,995,552 |
|
|
|
48,602,049 |
|
Thomas E. Shenk, Ph.D. |
|
|
1,808,404,258 |
|
|
|
47,193,343 |
|
Anne M. Tatlock |
|
|
1,800,590,373 |
|
|
|
55,007,228 |
|
Samuel O. Thier, M.D. |
|
|
1,794,325,235 |
|
|
|
61,272,366 |
|
Wendell P. Weeks |
|
|
1,807,653,080 |
|
|
|
47,944,521 |
|
Peter C. Wendell |
|
|
1,808,591,108 |
|
|
|
47,006,493 |
|
2. |
|
A proposal to ratify the appointment of independent registered public accounting firm for
2005 received 1,823,736,466 votes FOR and 12,664,587 votes AGAINST, with 19,196,548
abstentions. |
3. |
|
A stockholder proposal concerning stock option awards received 131,647,746 votes FOR and
1,215,632,164 votes AGAINST, with 43,081,333 abstentions and 465,236,358 broker non-votes. |
4. |
|
A stockholder proposal concerning subjecting non-deductible executive compensation to
shareholder vote received 93,514,638 votes FOR and 1,265,712,676 votes AGAINST, with
31,131,541 abstentions and 465,238,746 broker non-votes. |
5. |
|
A stockholder proposal concerning elimination of animal-based test methods received
34,673,393 votes FOR and 1,209,048,462 votes AGAINST, with 146,640,113 abstentions and
465,235,633 broker non-votes. |
-25-
6. |
|
A stockholder proposal concerning separating the roles of board chair and CEO received
635,030,523 votes FOR and 728,174,284 votes AGAINST, with 27,177,928 abstentions and
465,214,866 broker non-votes. |
7. |
|
A stockholder proposal concerning availability of Company products to Canadian wholesalers
received 308,251,674 votes FOR and 948,609,205 votes AGAINST, with 130,280,260 abstentions
and 468,456,462 broker non-votes. |
8. |
|
A stockholder proposal concerning use of shareholder resources for political purposes
received 110,541,885 votes FOR and 1,149,541,401 votes AGAINST, with 130,453,900 abstentions
and 465,060,415 broker non-votes. |
9. |
|
A stockholder proposal concerning a report related to the global HIV/AIDS-TB-Malaria
pandemics received 113,455,283 votes FOR and 1,144,624,439 votes AGAINST, with 132,457,118
abstentions and 465,060,761 broker non-votes. |
Item 6. Exhibits
Exhibits
|
|
|
Number |
|
Description |
3.1
|
|
Restated Certificate of
Incorporation of Merck & Co., Inc. (October 1, 2004)
Incorporated by reference to Form 10-Q Quarterly Report for the period ended September 30,
2004 |
|
|
|
3.2
|
|
By-Laws of Merck & Co., Inc.
(as amended effective May 24, 2005) Incorporated by
reference to Current Report on Form 8-K dated May 24, 2005 |
|
|
|
12
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
-26-
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 8, 2005
|
|
/s/ Kenneth C. Frazier |
|
|
|
|
|
KENNETH C. FRAZIER |
|
|
Senior Vice President and General Counsel |
|
|
|
Date: August 8, 2005
|
|
/s/ Richard C. Henriques |
|
|
|
|
|
RICHARD C. HENRIQUES |
|
|
Vice President, Controller |
-27-
EXHIBIT INDEX
|
|
|
Number |
|
Description |
3.1
|
|
Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)
Incorporated by reference to Form 10-Q Quarterly Report for the period ended September 30,
2004 |
|
|
|
3.2
|
|
By-Laws of Merck & Co., Inc. (as amended effective May 24, 2005) Incorporated by
reference to Current Report on Form 8-K dated May 24, 2005 |
|
|
|
12
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
-28-