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, 2006
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 31, 2006:
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Class
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Number of Shares Outstanding |
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Common Stock
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2,176,128,392 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No þ
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, 2006 AND 2005
(Unaudited, $ in millions except per share amounts)
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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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2006 |
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2005 |
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2006 |
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2005 |
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Sales |
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$ |
5,771.7 |
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$ |
5,467.5 |
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$ |
11,181.5 |
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$ |
10,829.8 |
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Costs, Expenses and Other |
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Materials and production |
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1,445.2 |
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1,160.6 |
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2,787.9 |
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2,432.0 |
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Marketing and administrative |
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1,734.0 |
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1,749.5 |
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3,449.0 |
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3,355.0 |
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Research and development |
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1,172.5 |
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946.8 |
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2,114.5 |
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1,793.4 |
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Restructuring costs |
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(6.9 |
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5.8 |
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36.8 |
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13.6 |
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Equity income from affiliates |
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(611.3 |
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(334.1 |
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(1,114.7 |
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(650.4 |
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Other (income) expense, net |
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(70.1 |
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14.0 |
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(170.7 |
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40.6 |
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3,663.4 |
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3,542.6 |
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7,102.8 |
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6,984.2 |
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Income Before Taxes |
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2,108.3 |
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1,924.9 |
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4,078.7 |
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3,845.6 |
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Taxes on Income |
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609.0 |
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1,204.3 |
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1,059.4 |
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1,754.9 |
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Net Income |
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$ |
1,499.3 |
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$ |
720.6 |
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$ |
3,019.3 |
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$ |
2,090.7 |
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Basic Earnings per Common Share |
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$ |
.69 |
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$ |
.33 |
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$ |
1.38 |
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$ |
.95 |
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Earnings per Common Share Assuming Dilution |
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$ |
.69 |
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$ |
.33 |
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$ |
1.38 |
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$ |
.95 |
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Dividends Declared per Common Share |
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$ |
.38 |
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$ |
.38 |
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$ |
.76 |
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$ |
.76 |
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The accompanying notes are an integral part of this consolidated financial statement.
- 2 -
MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006 AND DECEMBER 31, 2005
(Unaudited, $ in millions)
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June 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
8,213.3 |
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$ |
9,585.3 |
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Short-term investments |
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2,251.1 |
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6,052.3 |
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Accounts receivable |
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3,084.7 |
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2,927.3 |
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Inventories (excludes inventories of $684.5 in 2006 and
$753.8 in 2005 classified in Other assets see Note 5) |
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1,640.5 |
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1,658.1 |
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Prepaid expenses and taxes |
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700.5 |
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826.3 |
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Total current assets |
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15,890.1 |
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21,049.3 |
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Investments |
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5,265.5 |
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1,107.9 |
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Property, Plant and Equipment, at cost, net of allowance for
depreciation of $10,210.1 in 2006 and $9,315.1 in 2005 |
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13,728.1 |
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14,398.2 |
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Goodwill |
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1,085.7 |
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1,085.7 |
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Other Intangibles, net |
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678.3 |
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518.7 |
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Other Assets |
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6,831.0 |
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6,686.0 |
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$ |
43,478.7 |
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$ |
44,845.8 |
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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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$ |
1,703.0 |
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$ |
2,972.0 |
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Trade accounts payable |
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363.7 |
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471.1 |
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Accrued and other current liabilities |
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4,966.3 |
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5,277.8 |
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Income taxes payable |
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2,638.3 |
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3,691.5 |
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Dividends payable |
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831.0 |
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830.0 |
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Total current liabilities |
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10,502.3 |
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13,242.4 |
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Long-Term Debt |
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4,758.7 |
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5,125.6 |
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Deferred Income Taxes and Noncurrent Liabilities |
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6,511.2 |
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6,092.9 |
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Minority Interests |
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2,407.7 |
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2,407.2 |
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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 2,976,223,337 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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7,045.2 |
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6,900.0 |
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Retained earnings |
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39,335.4 |
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37,980.0 |
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Accumulated other comprehensive income |
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19.3 |
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52.3 |
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46,429.7 |
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44,962.1 |
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Less treasury stock, at cost |
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798,372,855 shares June 30, 2006 |
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794,299,347 shares December 31, 2005 |
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27,130.9 |
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26,984.4 |
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Total stockholders equity |
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19,298.8 |
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17,977.7 |
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$ |
43,478.7 |
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$ |
44,845.8 |
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The accompanying notes are an integral part of this consolidated financial statement.
- 3 -
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited, $ in millions)
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Six Months Ended |
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June 30, |
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2006 |
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2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net Income |
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$ |
3,019.3 |
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$ |
2,090.7 |
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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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1,162.1 |
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779.1 |
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Deferred income taxes |
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203.7 |
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(26.1 |
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Equity income from affiliates |
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(1,114.7 |
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(650.4 |
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Dividends and distributions from equity affiliates |
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997.1 |
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443.0 |
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Share-based compensation |
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182.3 |
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21.7 |
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Acquired research |
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296.3 |
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Other |
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(1.4 |
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286.1 |
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Net changes in assets and liabilities |
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(1,236.7 |
) |
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172.0 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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3,508.0 |
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3,116.1 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(460.7 |
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(662.4 |
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Purchase of securities, subsidiaries and other investments |
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(11,905.3 |
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(59,787.2 |
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Proceeds from sale of securities, subsidiaries and other investments |
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11,145.6 |
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58,221.1 |
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Other |
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(0.8 |
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(0.8 |
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NET CASH USED BY INVESTING ACTIVITIES |
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(1,221.2 |
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(2,229.3 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net change in short-term borrowings |
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(1,606.6 |
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(169.2 |
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Proceeds from issuance of debt |
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5.1 |
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1,000.0 |
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Payments on debt |
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(0.8 |
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(508.1 |
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Purchase of treasury stock |
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(500.0 |
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(508.7 |
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Dividends paid to stockholders |
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(1,663.1 |
) |
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(1,680.2 |
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Proceeds from exercise of stock options |
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311.9 |
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110.5 |
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Other |
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(227.0 |
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32.1 |
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NET CASH USED BY FINANCING ACTIVITIES |
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(3,680.5 |
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(1,723.6 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
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21.7 |
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(124.4 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
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(1,372.0 |
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(961.2 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
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9,585.3 |
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2,878.8 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
8,213.3 |
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$ |
1,917.6 |
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The accompanying notes are an integral part of this consolidated financial statement.
- 4 -
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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Effective January 1, 2006, the Company began recognizing revenue from the sale of vaccines to
the Federal government for placement into stockpiles related to the Pediatric Vaccine
Stockpile in accordance with SEC Interpretation, Commission Guidance Regarding Accounting for
Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into
the Pediatric Vaccine Stockpile or the Strategic National Stockpile. The Company
retrospectively applied the impacts of adopting the Interpretation to the Companys
consolidated financial statements by reducing Accrued and other current liabilities by $103.4
million and increasing Income taxes payable by $42.3 million and Retained earnings by $61.1
million, respectively, in its December 31, 2005 consolidated balance sheet. There was no
impact to the Companys results of operations for the six month periods ending June 30, 2006
and 2005, respectively. |
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2. |
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In November 2005, the Company commenced the initial phase of its global restructuring
program designed to reduce the Companys cost structure, increase efficiency and enhance
competitiveness. As part of this program, the Company plans to sell or close five
manufacturing sites and two preclinical sites by the end of 2008 and eliminate approximately
7,000 positions company-wide. Through the end of 2008, when the initial phase of the global
restructuring program is expected to be substantially complete, the cumulative pre-tax costs
are expected to range from $1.8 billion to $2.2 billion. Approximately 70% of the cumulative
pre-tax costs are estimated as non-cash, relating primarily to accelerated depreciation for
those facilities scheduled for closure. Since the inception of the global restructuring
program through June 30, 2006, the Company has recorded total pre-tax accumulated costs of
$845.9 million and eliminated approximately 3,400 positions
which are comprised of employee separations and the elimination of contractors and vacant positions. |
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The following table summarizes the charges related to restructuring activities by type of cost
for the three and six months ended June 30, 2006. |
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($ in millions) |
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Three Months Ended June 30, 2006 |
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Six Months Ended June 30, 2006 |
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Separation |
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Accelerated |
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Separation |
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Accelerated |
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Costs |
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Depreciation |
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Other |
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Total |
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Costs |
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|
Depreciation |
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Other |
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Total |
|
Materials and
production |
|
$ |
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|
$ |
163.0 |
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$ |
4.5 |
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$ |
167.5 |
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$ |
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|
|
$ |
361.6 |
|
|
$ |
10.9 |
|
|
$ |
372.5 |
|
Research and
development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.4 |
|
|
|
|
|
|
|
55.4 |
|
Restructuring
costs |
|
|
21.9 |
|
|
|
|
|
|
|
(28.8 |
) |
|
|
(6.9 |
) |
|
|
49.7 |
|
|
|
|
|
|
|
(12.9 |
) |
|
|
36.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21.9 |
|
|
$ |
163.0 |
|
|
$ |
(24.3 |
) |
|
$ |
160.6 |
|
|
$ |
49.7 |
|
|
$ |
417.0 |
|
|
$ |
(2.0 |
) |
|
$ |
464.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2006, the Company recorded total pre-tax
restructuring costs of $160.6 million and $464.7 million and eliminated approximately 2,300
positions during 2006 primarily related to the global restructuring program. The global
restructuring program includes the following costs:
|
(1) |
|
Separation costs related to Company-wide position eliminations, |
|
(2) |
|
Accelerated depreciation related to the five Merck owned manufacturing facilities
worldwide and two preclinical sites expected to be sold or closed by the end of 2008, |
- 5 -
Notes to Consolidated Financial Statements (continued)
|
(3) |
|
Other costs which include pre-tax gains of $39.5 million resulting from the second
quarter sales of facilities in connection with the global restructuring program, partially
offset by expenses of $15.2 million and $37.5 million for the three and six months ended
June 30, 2006, respectively, related to the Companys pension and other postretirement
plans, asset impairments, and other exit costs. |
The following table summarizes the charges and spending relating to restructuring activities
for the six month period ending June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Separation |
|
|
Accelerated |
|
|
|
|
|
|
|
|
|
Costs |
|
|
Depreciation |
|
|
Other |
|
|
Total |
|
Restructuring accrual as of January 1, 2006 * |
|
$ |
240.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
240.3 |
|
Expense |
|
|
49.7 |
|
|
|
417.0 |
|
|
|
(2.0 |
) |
|
|
464.7 |
|
(Payments)/receipts,
net |
|
|
(121.9 |
) |
|
|
|
|
|
|
17.1 |
** |
|
|
(104.8 |
) |
Non-cash activity |
|
|
|
|
|
|
(417.0 |
) |
|
|
(15.1 |
) |
|
|
(432.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual as of June 30, 2006 |
|
$ |
168.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
168.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The restructuring accrual at January 1, 2006 includes separation costs associated with
the global restructuring program as well as amounts from previously announced restructuring
programs. The previously announced restructuring programs were substantially complete as of
the end of the first quarter. |
|
** |
|
Includes proceeds from the second quarter sales of facilities
in connection with the global restructuring program. |
|
|
|
The Company recorded Restructuring costs for the three and six months ended June 30, 2005 of
$5.8 million and $13.6 million, respectively, associated with earlier restructuring programs. |
|
3. |
|
The Company has share-based compensation plans under which employees, non-employee
directors and employees of certain of the Companys equity method investees may be granted
options to purchase shares of Company common stock at the fair market value at the time of
grant. In addition to stock options, the Company grants performance share units (PSUs) and
restricted stock units (RSUs) to certain management level employees. These plans were
approved by the Companys shareholders. At June 30, 2006, 183.9 million shares were
authorized for future grants under the Companys share-based compensation plans. The Company
settles employee share-based compensation awards primarily with treasury shares. |
|
|
|
Generally, employee stock options are granted to purchase shares of Company stock at the fair
market value at the time of grant. These awards generally vest one-third each year over a
three year period, with a contractual term of 10 years. RSUs are stock awards that are granted
to employees and entitle the holder to shares of common stock as the awards vest, as well as
non-forfeitable dividend equivalents. The fair value of the awards is determined and fixed on
the grant date based on the Companys stock price. PSUs are stock awards where the ultimate
number of shares issued will be contingent on the Companys performance against a pre-set
objective or set of objectives. The fair value of each PSU is determined on the date of grant
based on the Companys stock price. Over the performance period, the number of shares of stock
that are expected to be issued will be adjusted based on the probability of achievement of a
performance target and final compensation expense will be recognized based on the ultimate
number of shares issued. 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. |
|
|
|
Effective January 1, 2006, the Company adopted Financial Accounting Standards No. 123R,
Share-Based Payments (FAS 123R). Employee share-based compensation expense was previously
recognized using the intrinsic value method which measures share-based compensation expense as
the amount at which the market price of the stock at the date of grant exceeds the exercise
price. FAS 123R requires the recognition of the fair value of share-based compensation in net
income, which the Company will recognize on a straight-line basis over the requisite service
period. Additionally, the Company elected the modified prospective transition method for
adopting FAS 123R, and therefore, prior periods were not restated. Under this method, the
provisions for FAS 123R apply to all awards granted or modified after January 1, 2006. In
addition, the unrecognized expense of awards that have not yet vested at the date of adoption
shall be recognized in net income in the relevant period after the date of adoption. Also
effective January 1, 2006, the Company adopted Financial Accounting Standards Board Staff
Position 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards,
which provides the Company an optional short cut method for calculating the historical pool of
windfall tax benefits upon adopting FAS 123R. |
|
|
|
The following table provides amounts of share-based compensation cost recorded in the
Consolidated Statement of Income (substantially all of the 2005 amount was related to RSUs): |
- 6 -
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Pre-tax share-based compensation expense |
|
$ |
61.0 |
|
|
$ |
12.0 |
|
|
$ |
182.3 |
|
|
$ |
21.7 |
|
Income tax benefits |
|
|
(19.0 |
) |
|
|
(4.2 |
) |
|
|
(56.3 |
) |
|
|
(7.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
42.0 |
|
|
$ |
7.8 |
|
|
$ |
126.0 |
|
|
$ |
14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the adoption of FAS 123R, effective January 1, 2006, the incremental impact on
the Companys share-based compensation expense reduced the Companys results of operations as
follows:
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2006 |
|
2006 |
Income Before Taxes |
|
$ |
41.9 |
|
|
$ |
140.5 |
|
Net Income |
|
|
29.2 |
|
|
|
98.1 |
|
Earnings per Common Share Assuming Dilution |
|
|
$.01 |
|
|
|
$.04 |
|
FAS 123R requires the Company to present pro forma information for periods prior to the
adoption as if the Company had accounted for employee share-based compensation under the fair
value method of that Statement. For purposes of pro forma disclosure, the estimated fair value
at the date of grant, including those granted to retirement-eligible employees, is amortized
to expense over the requisite service period. The following table illustrates the effect on
net income and earnings per common share if the Company had applied the fair value method for
recognizing employee share-based compensation for the three and six months ended June 30,
2005:
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2005 |
|
|
2005 |
|
Net income, as reported |
|
$ |
720.6 |
|
|
$ |
2,090.7 |
|
Compensation expense, net of tax: |
|
|
|
|
|
|
|
|
Reported |
|
|
7.8 |
|
|
|
14.1 |
|
Fair value method |
|
|
(80.4 |
) |
|
|
(188.8 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
648.0 |
|
|
$ |
1,916.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
|
$.33 |
|
|
|
$.95 |
|
Basic pro forma |
|
|
$.29 |
|
|
|
$.87 |
|
|
|
|
|
|
|
|
|
|
Assuming dilution as reported |
|
|
$.33 |
|
|
|
$.95 |
|
Assuming dilution pro forma |
|
|
$.29 |
|
|
|
$.87 |
|
The pro forma amounts and the fair value of each option grant were estimated on the date
of grant using the Black-Scholes option pricing model. Upon the adoption of FAS 123R,
compensation expense is being 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 this approach for stock options granted to retirement-eligible
employees, the effect on pro forma earnings per share assuming dilution for the three and six
months ended June 30, 2005, as provided in the above table, would not have been significant.
- 7 -
Notes to Consolidated Financial Statements (continued)
The Company continues to use the Black-Scholes option pricing model for option grants after
adoption of FAS 123R. In applying this model, the Company uses both historical data and
current market data to estimate the fair value of its options. The Black-Scholes model
requires several assumptions including expected term of the options, risk-free rate,
volatility, and dividend yield. The expected term represents the expected amount of time that
options granted are expected to be outstanding, based on historical and forecasted exercise
behavior. The risk-free rate is based on the rate at grant date of zero-coupon U.S. Treasury
Notes with a term equal to the expected term of the option. Expected volatility is estimated
using a blend of historical and implied volatility. The historical component is based on
historical monthly price changes. The implied volatility is obtained from market data on the
Companys traded options.
The weighted average fair value of options granted in the first half of 2006 were $7.09 per
option, determined using the following assumptions:
|
|
|
|
|
Expected dividend yield |
|
|
4.52 |
% |
Risk-free interest rate |
|
|
5.01 |
% |
Expected volatility |
|
|
27.12 |
% |
Expected life (years) |
|
|
5.9 |
|
Summarized information relative to the Companys stock option plans (options in thousands)
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Number |
|
|
Average |
|
|
Contractual |
|
|
Value |
|
|
|
of Options |
|
|
Price(1) |
|
|
Term |
|
|
($000s) |
|
Balance at December 31, 2005 |
|
|
250,088.0 |
|
|
$ |
54.52 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
29,601.6 |
|
|
|
35.01 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(10,362.7 |
) |
|
|
30.10 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(9,215.2 |
) |
|
|
57.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
260,111.7 |
|
|
$ |
53.18 |
|
|
|
5.53 |
|
|
$ |
244,518.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
196,050.3 |
|
|
$ |
58.47 |
|
|
|
4.45 |
|
|
$ |
89,479.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Weighted average exercise price
Additional information pertaining to the Companys stock option plans is provided in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Total intrinsic value of stock options exercised |
|
$ |
6.6 |
|
|
$ |
2.5 |
|
|
$ |
45.0 |
|
|
$ |
53.2 |
|
Fair value of stock options vested |
|
|
18.3 |
|
|
|
15.9 |
|
|
|
819.3 |
|
|
|
893.2 |
|
Cash received from the exercise
of stock options |
|
$ |
10.7 |
|
|
$ |
11.1 |
|
|
$ |
311.9 |
|
|
$ |
110.5 |
|
- 8 -
Notes to Consolidated Financial Statements (continued)
A summary of the Companys nonvested RSUs and PSUs (shares in thousands) at June 30, 2006
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
PSUs |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant Date |
|
|
Number |
|
|
Grant Date |
|
|
|
of Shares |
|
|
Fair Value |
|
|
of Shares |
|
|
Fair Value |
|
Nonvested at December 31, 2005 |
|
|
4,765.1 |
|
|
$ |
35.93 |
|
|
|
1,022.2 |
|
|
$ |
39.73 |
|
Granted |
|
|
1,496.9 |
|
|
|
34.98 |
|
|
|
520.7 |
|
|
|
35.09 |
|
Vested |
|
|
(27.2 |
) |
|
|
36.18 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(132.4 |
) |
|
|
36.04 |
|
|
|
(93.6 |
) |
|
|
34.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2006 |
|
|
6,102.4 |
|
|
$ |
35.69 |
|
|
|
1,449.3 |
|
|
$ |
38.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, there was $385.9 million of total pre-tax unrecognized compensation
expense related to nonvested stock options, RSU and PSU awards which will be recognized over a
weighted average period of 2.4 years. |
|
4. |
|
Merck continues its strategy of establishing strong external alliances to complement its
substantial internal research capabilities, including targeted acquisitions, research
collaborations, licensing pre-clinical and clinical compounds and technology transfers to
drive both near- and long-term growth. |
|
|
|
In June 2006, the Company acquired all of the outstanding equity of GlycoFi, Inc. (GlycoFi)
for approximately $373 million in cash ($400 million purchase price net of $25 million in shares already owned and net transaction costs). GlycoFi was a privately-held biotechnology
company that is a leader in the field of yeast glycoengineering, that
is the addition of specific carbohydrate modifications to the
proteins in yeast, and optimization of biologic
drug molecules. GlycoFis technology platform is used in the development of glycoprotein as
well as the optimization of a glycoprotein target. In connection with the acquisition, the
Company recorded a charge of $296.3 million for acquired research associated with GlycoFis
technology platform to be used in the research and development process, for which, at the
acquisition date, technological feasibility had not been established and no alternative future
use existed. This charge is not deductible for tax purposes. The Company expects this
technology to be fully developed over the next one to two years. The charge was recorded in
Research and development expense in the second quarter and was determined based upon the
present value of expected future cash flows of new product candidates resulting from this
technology adjusted for the probability of its technical and marketing success utilizing an
income approach reflecting the appropriate risk-adjusted discount rate. The Company also
recorded a $99.4 million intangible asset ($57.6 million net of deferred taxes) in the second
quarter related to GlycoFis developed technology that can be used immediately in the research
and development process and has alternative future uses. This intangible asset will be
amortized to Research and development expense on a straight-line basis over a 5 year useful
life. The remaining net assets acquired in this transaction were not material.
Because GlycoFi was a development stage
company that had not commenced its planned principal operations, the transaction was accounted
for as an acquisition of assets rather than as a business combination and, therefore, goodwill
was not recorded. GlycoFis results of operations have been included with the Companys
consolidated financial results since the acquisition date. |
|
|
|
In May 2006, the Company acquired all of the equity of Abmaxis, Inc. (Abmaxis) for
approximately $80 million in cash. Abmaxis was a privately-held biopharmaceutical company
dedicated to the discovery and optimization of monoclonal antibody (MAb) products for human
therapeutics and diagnostics. Abmaxis developed and validated a breakthrough antibody
engineering technology platform, Abmaxis in-silico Immunization, which has alternative future
uses to the Company with no significant technological or engineering risks at the date of
acquisition. In connection with the acquisition, the Company allocated substantially all of
the purchase price to Abmaxis technology platform and recorded an intangible asset of $135.3
million ($78.5 million net of deferred taxes). This intangible asset will be amortized to
Research and development expense on a straight-line basis over a 5 year useful life. The
remaining net assets acquired in this transaction were not material. Because Abmaxis was a
development stage company that had not commenced its planned principal operations, the
transaction was accounted for as an acquisition of assets rather than as a business
combination and, therefore, goodwill was not recorded. Abmaxis results of operations have
been included with the Companys consolidated financial results since the acquisition date. |
- 9 -
Notes to Consolidated Financial Statements (continued)
|
|
In March 2006, Merck and Paratek Pharmaceuticals, Inc. (Paratek) announced they entered into
an exclusive, worldwide collaborative development and license agreement for PTK 0796, a novel,
broad-spectrum aminomethylcycline (AMC) antibiotic with oral and intravenous (IV) formulations
currently in Phase I clinical testing. Under the terms of the agreement, Merck provided
upfront funding, will assume primary responsibility for clinical development of the IV and
oral formulations of PTK 0796 and has the right to market such products worldwide. Paratek
will participate in clinical development and be eligible to receive payments upon achievement
of certain milestones; these payments could total as much as $127 million once PTK 0796 is
approved for marketing. Paratek will also receive royalties on net sales and have the
opportunity to co-promote the IV formulation of PTK 0796 in the United States. |
|
|
|
In March 2006, Neuromed Pharmaceuticals Ltd. (Neuromed) and Merck signed a research
collaboration and license agreement to research, develop and commercialize novel compounds for
the treatment of pain and other neurological disorders, including Neuromeds lead compound,
NMED-160, which is currently in Phase II development for the treatment of pain. Under the
terms of the agreement, Neuromed received an upfront payment of $25 million which the Company
recorded as Research and development expense. The successful development and launch of
NMED-160 for an initial single indication on a worldwide basis would trigger milestone
payments totaling $202 million. Milestones could increase to approximately $450 million if a
further indication for NMED-160 is developed and approved and an additional compound is
developed and approved for two indications. Neuromed would also receive royalties on worldwide
sales of NMED-160 and any additional compounds developed under this agreement. |
|
|
|
Also in March 2006, Merck signed an agreement with NicOx S.A. (NicOx) to collaborate on the
development of new antihypertensive drugs using NicOxs proprietary nitric oxide-donating
technology. Under the terms of the agreement, NicOx received an upfront payment of
approximately $11.2 million, which the Company recorded as Research and development expense,
and is eligible for potential further milestone payments of approximately $340.2 million.
Merck will also pay NicOx royalties on the sales of all products resulting from the
collaboration. |
|
5. |
|
Inventories consisted of: |
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
June |
|
|
December |
|
|
|
30, 2006 |
|
|
31, 2005 |
|
Finished goods |
|
$ |
398.6 |
|
|
$ |
400.0 |
|
Raw materials and work in process |
|
|
1,837.1 |
|
|
|
1,929.8 |
|
Supplies |
|
|
89.3 |
|
|
|
82.1 |
|
|
|
|
|
|
|
|
Total (approximates current cost) |
|
|
2,325.0 |
|
|
|
2,411.9 |
|
Reduction to LIFO cost for domestic inventories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,325.0 |
|
|
$ |
2,411.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
1,640.5 |
|
|
$ |
1,658.1 |
|
Other assets |
|
|
684.5 |
|
|
|
753.8 |
|
|
|
Amounts recognized as Other assets are comprised entirely of raw materials and work in
process inventories, which include inventories produced in preparation for product launches,
principally Januvia, and inventories for other products, principally vaccines and Arcoxia, not
expected to be sold within one year. |
|
6. |
|
In April and May 2006, respectively, the Company entered into pay-floating, receive-fixed
interest rate swap contracts each effectively converting $250 million of its $1.0 billion,
4.75% fixed-rate notes to floating rate instruments. The interest rate swaps are designated
as hedges of the fair value changes in the notes attributable to changes in the benchmark
London Interbank Offered Rate (LIBOR) swap rate and will mature in 2015. The fair value
changes in the notes are fully offset in interest expense by the fair value changes in the
swap contract. In April 2006, the Company extended the maturity date of its $1.5 billion,
5-year revolving credit facility from 2010 to 2011. The facility provides backup liquidity
for the Companys commercial paper borrowing facility and is to be used for general
corporate purposes. The Company has not drawn funding from this facility. |
- 10 -
Notes to Consolidated Financial Statements (continued)
7. |
|
The Company is involved in various claims and legal proceedings of a nature considered
normal to its business, including product liability, intellectual property, and commercial
litigation, as well as additional matters such as antitrust actions. |
|
|
|
Vioxx Litigation |
|
|
|
Product Liability Lawsuits |
|
|
As previously disclosed, federal and state product liability lawsuits involving individual
claims, as well as putative class actions, have been filed against the Company with respect to
Vioxx. As of June 30, 2006, the Company has been served or is aware that it has been named as
a defendant in approximately 14,200 lawsuits, which include approximately 27,100 plaintiff
groups, alleging personal injuries resulting from the use of Vioxx. Of these lawsuits,
approximately 5,700 lawsuits representing approximately 16,100 plaintiff groups are or are
slated to be in the federal MDL (discussed below) and approximately 7,100 lawsuits
representing approximately 7,100 plaintiff groups are included in a coordinated proceeding in
New Jersey Superior Court before Judge Carol E. Higbee. 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 190 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, Texas, New Jersey, and Philadelphia,
Pennsylvania, respectively, have been transferred to a single judge in each state for
coordinated proceedings. |
|
|
|
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. |
|
|
|
Judge Fallon has indicated that he intends to try a series of cases during the period November
2005 through 2006, in the following categories: (i) heart attack with short term use; (ii)
heart attack with long term use; (iii) stroke; and (iv) cardiovascular injury involving a
prescription written after April 2002 when the labeling for Vioxx was revised to include the
results of the VIGOR trial. |
|
|
|
Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that 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. The Tolling Agreement applies to individuals who have not
filed lawsuits and may or may not eventually file lawsuits and only to those claimants who
seek to toll claims alleging injuries resulting from a thrombotic cardiovascular event that
results in a myocardial infarction or ischemic stroke. The Tolling Agreement provides counsel
additional time to evaluate potential claims. The Tolling Agreement requires any tolled
claims to be filed in federal court. As of June 30, 2006, approximately 5,800 claimants had
entered into Tolling Agreements. |
|
|
|
The Company has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits
that were tried prior to March 31, 2006. In April 2006, in a trial involving two plaintiffs,
Thomas Cona and John McDarby, in Superior Court of New Jersey, Law Division, Atlantic County,
the jury returned a split verdict. The jury determined that Vioxx did not substantially
contribute to the heart attack of Mr. Cona, but did substantially contribute to the heart
attack of Mr. McDarby. In addition, the jury concluded that, in each case, Merck violated New
Jerseys consumer fraud statute, which allows plaintiffs to receive their expenses for
purchasing the drug, trebled, as well as reasonable attorneys fees. The jury awarded $4.5
million in compensatory damages to Mr. McDarby and his wife, who also was a plaintiff in that
case, as well as punitive damages of $9 million. The Company intends to appeal this verdict
after the completion of post-trial proceedings in the trial court. |
|
|
|
Also in April 2006, in Garza v. Merck, a jury in state court in Rio Grande City, Texas
returned a verdict in favor of the family of decedent Leonel Garza. The jury awarded a total
of $7 million in compensatory damages to Mr. Garzas widow and three sons. The jury also
purported to award $25 million in punitive damages. Under Texas law, in this case the
punitive damages are capped at $750,000. The Company intends to appeal this verdict after
completion of post-trial proceedings in the trial court. |
- 11 -
Notes to Consolidated Financial Statements (continued)
|
|
In July 2006, in Doherty v. Merck, in Superior Court of New Jersey, Law Division, Atlantic
County, a jury returned a verdict in favor of the Company on all counts. The jury rejected a
claim by the plaintiff that her nearly three years of Vioxx use caused her heart attack. The
jury also found in Mercks favor on the plaintiffs consumer fraud claim. |
|
|
|
In August 2006, in the first case to go to trial in the California
coordinated proceeding, Grossberg v. Merck, the jury returned a
verdict for Merck on all counts. |
|
|
|
In addition to these trials, there is a Vioxx Product Liability trial currently ongoing in Barnett v. Merck in
federal court in New Orleans, Louisiana. In New Jersey, Judge Higbee has cancelled the trial
previously set for September 2006 in Atlantic City, New Jersey. The next trial in New Jersey
is currently scheduled to start on January 16, 2007, and the Court has stated that it will
involve multiple plaintiffs. The specific plaintiffs cases to be tried have not yet been
selected. The Company expects a number of additional Vioxx Product Liability lawsuits to be
tried in 2006. |
|
|
|
Merck voluntarily withdrew Vioxx from the market on September 30, 2004. Many states have a
two-year statute of limitations for product liability claims, requiring that claims must be
filed within two years after the plaintiffs learned or could have learned of their potential
cause of action. As a result, some may view September 30, 2006 as a deadline for filing Vioxx
cases. It is important to note, however, that the law regarding statutes of limitations can
be complex, varies from state to state, can be fact-specific, and in some cases, might be
affected by the existence of pending class actions. For example, some states have three year
statutes of limitations and, in some instances, the statute of limitations is even longer.
Merck expects that there will be legal arguments concerning the proper application of these
statutes, and the decisions will be up to the judges presiding in individual cases in state
and federal proceedings. As referred to above, as of June 30, 2006, Merck has also entered
into agreements with approximately 5,800 plaintiffs to toll the statute of limitations, so the
September 30, 2006 date would not apply in those instances. |
|
|
|
Other Lawsuits |
|
|
As previously disclosed, on July 29, 2005, a New Jersey state trial court certified a
nationwide class of third-party payors (such as unions and health insurance plans) that paid
in whole or in part for the Vioxx used by their plan members or insureds. The named plaintiff
in that case 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.
The trial courts ruling is procedural only; it does not address the merits of plaintiffs
allegations, which the Company intends to defend vigorously. On March 31, 2006, the New
Jersey state Superior Court, Appellate Division, affirmed the class certification order.
Recently, the New Jersey Supreme Court has decided to exercise its discretion to hear the
Companys appeal of the appellate court decision affirming the trial courts ruling which
certified the class of third-party payors seeking reimbursement of amounts they paid for Vioxx
prescriptions. The trial in this case is currently scheduled to be held in March 2007 and it
is not known at this time whether the New Jersey Supreme Courts decision will affect the
trial date. |
|
|
|
As previously reported, the Company has also been named as a defendant in separate lawsuits
brought by the Attorneys General of Alaska, Louisiana, Mississippi, Montana, and Texas. The
Attorney General of Utah has also recently filed a lawsuit. These actions allege that the
Company misrepresented the safety of Vioxx and seek (i) recovery of the cost of Vioxx
purchased or reimbursed by the state and its agencies; (ii) reimbursement of all sums paid by
the state and its agencies for medical services for the treatment of persons injured by Vioxx;
(iii) damages under various common law theories; and/or (iv) remedies under various state
statutory theories, including state consumer fraud and/or fair business practices or Medicaid
fraud statutes, including civil penalties. |
|
|
|
Shareholder Lawsuits |
|
|
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, the Company and
various current and former officers and directors are defendants in various putative class
actions and individual lawsuits under the federal securities laws (the Vioxx Securities
Lawsuits), all of which have been transferred by the JPML to the United States District Court
for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a
nationwide MDL (the Shareholder MDL). Judge Chesler has consolidated the Vioxx Securities
Lawsuits for all purposes. Plaintiffs request certification of a class of purchasers of
Company stock between May 21, 1999 and October 29, 2004. The complaint 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. Defendants have filed a motion to
dismiss the complaint, which is pending. |
- 12 -
Notes to Consolidated Financial Statements (continued)
|
|
As previously disclosed, on August 15, 2005, a complaint was filed in Oregon state court by
the State of Oregon through the Oregon state treasurer on behalf of the Oregon Public Employee
Retirement Fund against the Company and certain current and former officers and directors.
The complaint, which was brought under Oregon securities law, alleges that plaintiff has
suffered damages in connection with its purchases of Merck common stock
at artificially inflated prices due to the Companys alleged violations of law related to
disclosures about Vioxx. On July 19, 2006, the Court denied the Companys motion to dismiss
the complaint. The current and former officers and directors have entered into a tolling
agreement in exchange for plaintiffs dismissal, without prejudice, of the claims against
them. |
|
|
|
As previously disclosed, various shareholder derivative actions filed in federal court have
been transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler
(the Vioxx Derivative Lawsuits). The consolidated complaint arises 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
certain members of the Board past and present and certain executive officers for breach of
fiduciary duty, waste of corporate assets, unjust enrichment, abuse of control and gross
mismanagement. On May 5, 2006, Judge Chesler granted defendants motion to dismiss and denied
plaintiffs request for leave to amend their complaint. Plaintiffs have appealed to the
United States Court of Appeals for the Third Circuit. |
|
|
|
As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Board to take legal action against Mr. Raymond Gilmartin, former Chairman, President and Chief
Executive Officer and other individuals for allegedly causing damage to the Company with
respect to the allegedly improper marketing of Vioxx. In 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. The Board has
recently received another shareholder letter demanding that the Board take legal action
against the Board and management of Merck for allegedly causing damage to the Company relating
to the Companys allegedly improper marketing of Vioxx. |
|
|
|
In addition, as previously disclosed, various putative class actions filed in federal court
against the Company and certain current and former officers and directors (the Vioxx ERISA
Lawsuits and, together with the Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits,
the Vioxx Shareholder Lawsuits) have been transferred to the Shareholder MDL and
consolidated for all purposes. The consolidated complaint asserts claims on behalf of certain
of the Companys current and former employees who are participants in certain of the Companys
retirement plans for breach of fiduciary duty under the Employee Retirement Income Security
Act (ERISA). The lawsuits make similar allegations to the allegations contained in the
Vioxx Securities Lawsuits. On October 7, 2005, defendants moved to dismiss the ERISA
complaint. On July 11, 2006, Judge Chesler granted in part and denied in part defendants
motion to dismiss. The Court dismissed plaintiffs claim of breach of fiduciary duty based on
continued investment in Merck stock as to all defendants except the five individuals who were
members of Mercks Management Pension Investment Committee (MPIC) during the purported class
period. The Court dismissed plaintiffs claim for breach of fiduciary duty based on alleged
failure to provide complete or accurate information to participants to the extent it related
to specific communications cited in the complaint, but declined to dismiss the claim before
discovery to the extent plaintiffs allege that adverse information was withheld from
participants. The Court dismissed plaintiffs claim for failure to monitor as to all
defendants except the members of the Compensation and Benefits Committee of Mercks Board of
Directors who had supervisory responsibility for the MPIC. The Court declined to dismiss
plaintiffs claim for co-fiduciary liability, absent factual development, but dismissed as
duplicative plaintiffs claim for knowing participation in breach of fiduciary duty. |
|
|
|
International Lawsuits |
|
|
As previously disclosed, in addition to the lawsuits discussed above, the Company has been
named as a defendant in litigation relating to Vioxx in various countries (collectively, the
Vioxx Foreign Lawsuits) in Europe as well as Canada, Brazil, 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 |
- 13 -
Notes to Consolidated Financial Statements (continued)
|
|
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 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, the Companys upper level excess insurers (which provide excess
insurance potentially applicable to all of the Vioxx Lawsuits) have 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. A
second arbitration against one of the Companys upper level excess insurers has also been
commenced. 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 SEC
that it was commencing an informal inquiry concerning Vioxx. On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect
to Vioxx in a federal health care investigation under criminal statutes. As previously
disclosed, the Companys United Kingdom 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 European Union (EU) adverse experience
reporting requirements in connection with Vioxx. In April 2006, the MHRA advised the Company that
its investigation has been completed and no enforcement action will be taken with respect to
the matter. In addition, as previously disclosed, investigations are being conducted by local
authorities in certain cities in Europe in order to determine whether any criminal charges
should be brought concerning Vioxx. The Company is cooperating with these governmental
entities in their respective investigations (the Vioxx Investigations). The Company cannot
predict the outcome of these inquiries; however, they could result in potential civil and/or
criminal dispositions. |
|
|
|
As previously disclosed, the Company has received a number of Civil Investigative Demands
(CID) from a group of Attorneys General from 31 states and the District of Columbia who are
investigating whether the Company violated state consumer protection laws when marketing
Vioxx. The Company is cooperating with the Attorneys General in responding to the CIDs. |
|
|
|
Reserves |
|
|
The Company currently anticipates that a number of Vioxx Product Liability Lawsuits will be
tried in 2006. 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, including for those
cases in which a verdict or judgment has been entered against the Company, and are now in
post-verdict proceedings or on appeal. In each of those cases the Company believes it has
strong points to raise on appeal and therefore that unfavorable outcomes in such cases are not
probable. |
|
|
|
Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. 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. |
|
|
|
During 2005, the Company spent $285 million in the aggregate in legal defense costs worldwide
related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits,
(iii) the Vioxx Foreign Lawsuits, and (iv) the Vioxx Investigations (collectively, the Vioxx
Litigation). In the fourth quarter, the Company recorded a charge of $295 million to
increase the reserve solely for its future legal defense costs related to the Vioxx Litigation
to $685 million at December 31, 2005. This reserve is based on certain assumptions and is the
best estimate of the amount that the Company believes, at this time, it can reasonably
estimate will be spent through 2007. Some of the significant factors considered in the
establishment and ongoing review of the reserve for the Vioxx legal defense |
- 14 -
Notes to Consolidated Financial Statements (continued)
|
|
costs 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 scope of the Vioxx Litigation;
the number of cases being brought against the Company; the costs and outcomes of completed
trials and the anticipated timing, progression, and related costs of pre-trial activities and
trials in the Vioxx Product Liability Lawsuits. Events such as scheduled trials, that are
expected to occur throughout 2006 and into 2007, and the inherent inability to predict the
ultimate outcomes of such trials, limit the Companys ability to reasonably estimate its legal
costs beyond the end of 2007. The Company will continue to monitor its legal defense costs and review the adequacy of the
associated reserves and may determine to increase its reserves for legal defense costs at any
time in the future if, based upon the factors set forth above, it believes it would be
appropriate to do so. Unfavorable outcomes in the Vioxx Litigation could have a material
adverse effect on the Companys financial position, liquidity and results of operations. |
|
|
|
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, including nominal pricing
programs and samples. The Company has been advised that the activities being investigated by
the DOJ are also the subject of a qui tam complaint. The Company has also reported that it
has received a CID from the Attorney General of Texas regarding the Companys marketing and
selling activities relating to Texas. As previously disclosed, the Company received another
CID from the Attorney General of Texas asking for additional information regarding the
Companys marketing and selling activities related to Texas; the second CID includes requests
with respect to nominal pricing programs and samples. In April 2004, the Company received a
subpoena from the office of the Inspector General for the District of Columbia in connection
with an investigation of the Companys interactions with physicians in the District of
Columbia, Maryland, and Virginia. In November 2004, the Company received a letter request
from the DOJ in connection with its investigation of the Companys pricing of Pepcid. In
September 2005, the Company received a subpoena from the Illinois Attorney General. The
subpoena seeks information related to repackaging of prescription drugs. |
|
|
|
As previously disclosed, 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 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 or the
Companys business practices in inquiries other than the investigations discussed in this
section. It is not feasible to predict the outcome of any such inquiries. |
|
8. |
|
As previously disclosed, in October 2004, the American Jobs Creation Act of 2004 (the AJCA)
was signed into law. The AJCA created 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 recorded an income tax charge of $740 million in Taxes
on Income in the second quarter of 2005 related to the $15.9 billion repatriated during
2005. This charge was partially offset by a $100 million benefit 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. In addition, the Company has subsidiaries operating in
Puerto Rico and Singapore under tax incentive grants that expire in 2015 and 2026,
respectively. |
|
9. |
|
The Companys federal income tax returns have been audited through 1992. As previously
disclosed, the Internal Revenue Service (IRS) has substantially completed its examination of
the Companys tax returns for the years 1993 to 1996 and on April 28, 2004, in connection
with its examination, the IRS issued a preliminary notice of deficiency with respect to a
partnership transaction entered into in 1993. On December 13, 2005, the Company received a
final notice of deficiency with respect to the transaction with regard to the 1993 tax
return. Specifically, the IRS disallowed certain royalty and other expenses claimed as
deductions on the 1993 tax return. The preliminary notice proposed disallowing similar type
expenses on the 1994-1996 tax returns. The Company anticipates receiving a similar notice
of deficiency for 1997-1999. If the IRS ultimately prevails in its positions, the Companys
income tax due for year 1993 would increase by approximately $60 million plus interest of
approximately $70 million and penalties of approximately $12 million. For the years
1994-1999, the tax would increase by approximately $910 million plus interest of
approximately $630 million. The IRS will likely make similar claims for years subsequent to |
- 15 -
Notes to Consolidated Financial Statements (continued)
|
|
1999 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 $100 million. The IRS has proposed penalties on the
Company with respect to all periods that were the subject of the preliminary notice of
adjustment 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. |
|
|
|
As previously disclosed, in January 2006, the IRS issued a summons requesting certain information in connection with a
minority interest equity financing transaction entered into in 1995. Merck has cooperated
with the terms of the summons. In April 2006, certain current executives received summonses
and have appeared before the IRS in connection with this matter. |
|
|
|
Merck Canadas tax returns for the years 1998 through 2004 are being examined by the Canada
Revenue Agency (CRA). CRA has provided the Company with preliminary proposed adjustments
related to certain intercompany pricing matters. The Company disagrees with the positions
taken by CRA and believes they are without merit. The examination may be concluded as early
as September 2006 and a formal assessment notice may be issued at that time. The Company could
be required to post a deposit of half the tax and interest assessed. The Company intends to
vigorously contest it through the CRA appeals process and the courts if necessary. |
|
10. |
|
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, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service Cost |
|
$ |
90.3 |
|
|
$ |
79.1 |
|
|
$ |
180.3 |
|
|
$ |
161.1 |
|
Interest Cost |
|
|
85.3 |
|
|
|
78.3 |
|
|
|
170.1 |
|
|
|
157.3 |
|
Expected return on plan assets |
|
|
(109.3 |
) |
|
|
(100.0 |
) |
|
|
(217.3 |
) |
|
|
(201.2 |
) |
Net amortization |
|
|
42.5 |
|
|
|
38.1 |
|
|
|
84.9 |
|
|
|
76.6 |
|
Termination Benefits |
|
|
2.7 |
|
|
|
1.6 |
|
|
|
16.2 |
|
|
|
4.5 |
|
Curtailments |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
111.5 |
|
|
$ |
97.1 |
|
|
$ |
234.4 |
|
|
$ |
198.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: |
- 16 -
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service Cost |
|
$ |
20.7 |
|
|
$ |
21.2 |
|
|
$ |
41.9 |
|
|
$ |
44.1 |
|
Interest Cost |
|
|
24.8 |
|
|
|
26.1 |
|
|
|
50.2 |
|
|
|
52.8 |
|
Expected return on plan assets |
|
|
(28.2 |
) |
|
|
(25.8 |
) |
|
|
(56.4 |
) |
|
|
(51.7 |
) |
Net amortization |
|
|
0.8 |
|
|
|
5.2 |
|
|
|
1.8 |
|
|
|
10.8 |
|
Termination Benefits |
|
|
0.8 |
|
|
|
0.4 |
|
|
|
2.2 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18.9 |
|
|
$ |
27.1 |
|
|
$ |
39.7 |
|
|
$ |
56.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with restructuring actions (see Note 2), the Company recorded termination
charges for the three and six months ended June 30, 2006 and 2005 on its pension plans and its
other postretirement benefit plans related to expanded eligibility for certain employees
exiting the Company. Also, in connection with these restructuring actions, the Company
recorded curtailment losses for the six months ended June 30, 2006 on its pension plans. |
|
11. |
|
Other (income) expense, net, consisted of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Interest income |
|
$ |
(187.9 |
) |
|
$ |
(98.7 |
) |
|
$ |
(369.6 |
) |
|
$ |
(192.5 |
) |
Interest expense |
|
|
91.9 |
|
|
|
93.1 |
|
|
|
190.1 |
|
|
|
177.6 |
|
Exchange losses/(gains) |
|
|
7.4 |
|
|
|
(8.4 |
) |
|
|
7.0 |
|
|
|
(9.1 |
) |
Minority interests |
|
|
30.0 |
|
|
|
30.3 |
|
|
|
59.9 |
|
|
|
60.7 |
|
Other, net |
|
|
(11.5 |
) |
|
|
(2.3 |
) |
|
|
(58.1 |
) |
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(70.1 |
) |
|
$ |
14.0 |
|
|
$ |
(170.7 |
) |
|
$ |
40.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest income reflects interest income generated from the Companys
investment portfolio derived from higher interest rates and higher average investment
portfolio balances. |
|
|
|
Interest paid for the six months ended June 30, 2006 and 2005 was $220.3 million and $151.6
million, respectively. |
|
12. |
|
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, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Average common shares outstanding |
|
|
2,181.3 |
|
|
|
2,201.8 |
|
|
|
2,182.5 |
|
|
|
2,204.4 |
|
Common shares issuable(1) |
|
|
6.4 |
|
|
|
4.3 |
|
|
|
6.7 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
assuming dilution |
|
|
2,187.7 |
|
|
|
2,206.1 |
|
|
|
2,189.2 |
|
|
|
2,208.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Issuable primarily under share-based compensation plans. |
|
|
For the three and six months ended June 30, 2006, 227.6 million, and for the three and
six months ended June 30, 2005, 215.3 million and 212.1 million, respectively, common shares
issuable under the Companys share-based compensation plans were excluded from the computation
of earnings per common share assuming dilution because the effect would have been
antidilutive. |
- 17 -
Notes to Consolidated Financial Statements (continued)
13. |
|
Comprehensive income for the three months ended June 30, 2006 and 2005, representing all
changes in stockholders equity during the period other than changes resulting from the
Companys stock, was $1,470.9 million
and $798.8 million, respectively. Comprehensive income for the six months ended June 30, 2006
and 2005 was $2,986.3 million and $2,141.9 million, respectively. |
|
14. |
|
The Companys operations are principally managed on a products basis. The Merck
Pharmaceutical segment includes products marketed either directly or through joint ventures.
These products consist of therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. Other segment revenues include non-reportable human and
animal health segments. |
|
|
|
Revenues and profits for these segments are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Segment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merck Pharmaceutical |
|
$ |
5,338.3 |
|
|
$ |
5,166.2 |
|
|
$ |
10,409.5 |
|
|
$ |
10,238.5 |
|
Other segment revenues |
|
|
361.9 |
|
|
|
260.7 |
|
|
|
626.5 |
|
|
|
493.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,700.2 |
|
|
$ |
5,426.9 |
|
|
$ |
11,036.0 |
|
|
$ |
10,732.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merck Pharmaceutical |
|
$ |
3,759.9 |
|
|
$ |
3,234.9 |
|
|
$ |
7,257.6 |
|
|
$ |
6,397.4 |
|
Other segment profits |
|
|
256.6 |
|
|
|
264.2 |
|
|
|
505.5 |
|
|
|
504.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,016.5 |
|
|
$ |
3,499.1 |
|
|
$ |
7,763.1 |
|
|
$ |
6,902.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of total segment revenues to consolidated sales is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Segment revenues |
|
$ |
5,700.2 |
|
|
$ |
5,426.9 |
|
|
$ |
11,036.0 |
|
|
$ |
10,732.1 |
|
Other revenues |
|
|
71.5 |
|
|
|
40.6 |
|
|
|
145.5 |
|
|
|
97.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,771.7 |
|
|
$ |
5,467.5 |
|
|
$ |
11,181.5 |
|
|
$ |
10,829.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues are primarily comprised of miscellaneous corporate revenues, sales related
to divested products or businesses and other supply sales. |
- 18 -
Notes to Consolidated Financial Statements (continued)
|
|
Sales (1) of the Companys products were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Zocor |
|
$ |
989.6 |
|
|
$ |
1,151.5 |
|
|
$ |
2,053.1 |
|
|
$ |
2,257.5 |
|
Singulair |
|
|
949.8 |
|
|
|
729.6 |
|
|
|
1,751.2 |
|
|
|
1,464.6 |
|
Fosamax |
|
|
820.9 |
|
|
|
852.7 |
|
|
|
1,574.4 |
|
|
|
1,624.6 |
|
Cozaar/Hyzaar |
|
|
783.7 |
|
|
|
784.7 |
|
|
|
1,484.8 |
|
|
|
1,503.7 |
|
Proscar |
|
|
183.0 |
|
|
|
188.1 |
|
|
|
371.2 |
|
|
|
363.2 |
|
Primaxin |
|
|
172.1 |
|
|
|
181.4 |
|
|
|
341.7 |
|
|
|
366.2 |
|
Cosopt/Trusopt |
|
|
175.4 |
|
|
|
153.3 |
|
|
|
327.0 |
|
|
|
293.5 |
|
Vasotec/Vaseretic |
|
|
140.2 |
|
|
|
163.9 |
|
|
|
276.3 |
|
|
|
322.1 |
|
Cancidas |
|
|
123.8 |
|
|
|
140.0 |
|
|
|
270.0 |
|
|
|
270.3 |
|
Maxalt |
|
|
97.2 |
|
|
|
84.2 |
|
|
|
190.1 |
|
|
|
161.9 |
|
Propecia |
|
|
84.8 |
|
|
|
68.8 |
|
|
|
160.1 |
|
|
|
138.9 |
|
Vaccines/Biologicals |
|
|
349.1 |
|
|
|
247.3 |
|
|
|
620.6 |
|
|
|
471.1 |
|
Other |
|
|
902.1 |
|
|
|
722.0 |
|
|
|
1,761.0 |
|
|
|
1,592.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,771.7 |
|
|
$ |
5,467.5 |
|
|
$ |
11,181.5 |
|
|
$ |
10,829.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Presented net of discounts and returns |
|
|
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 primarily relating to sales of Nexium and Prilosec. |
|
|
|
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. |
|
|
|
A reconciliation of segment profits to Income Before Taxes is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Segment profits |
|
$ |
4,016.5 |
|
|
$ |
3,499.1 |
|
|
$ |
7,763.1 |
|
|
$ |
6,902.0 |
|
Other profits |
|
|
47.9 |
|
|
|
46.6 |
|
|
|
106.1 |
|
|
|
112.0 |
|
Adjustments |
|
|
109.2 |
|
|
|
129.4 |
|
|
|
265.2 |
|
|
|
249.8 |
|
Unallocated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
187.9 |
|
|
|
98.7 |
|
|
|
369.6 |
|
|
|
192.5 |
|
Interest expense |
|
|
(91.9 |
) |
|
|
(93.1 |
) |
|
|
(190.1 |
) |
|
|
(177.6 |
) |
Equity income from affiliates |
|
|
68.4 |
|
|
|
11.0 |
|
|
|
137.9 |
|
|
|
73.8 |
|
Depreciation and amortization |
|
|
(495.6 |
) |
|
|
(359.8 |
) |
|
|
(1,078.4 |
) |
|
|
(700.0 |
) |
Research and development |
|
|
(1,172.5 |
) |
|
|
(946.8 |
) |
|
|
(2,114.5 |
) |
|
|
(1,793.4 |
) |
Other expenses, net |
|
|
(561.6 |
) |
|
|
(460.2 |
) |
|
|
(1,180.2 |
) |
|
|
(1,013.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,108.3 |
|
|
$ |
1,924.9 |
|
|
$ |
4,078.7 |
|
|
$ |
3,845.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
- 19 -
Notes to Consolidated Financial Statements (continued)
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.
- 20 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Management
In July 2006, Merck announced that Brad Sheares, formerly President, U.S. Human Health, and Per
Wold-Olsen, formerly President, Human Health Intercontinental were
leaving the Company. Their
responsibilities have been redistributed to other executives.
Acquisitions
In May 2006, Merck acquired Abmaxis, Inc. (Abmaxis), a privately-held biopharmaceutical company
dedicated to the discovery and optimization of monoclonal antibody (MAb) products for human
therapeutics and diagnostics, for $80 million in cash. In June 2006, Merck acquired GlycoFi,
Inc. (GlycoFi), a privately-held biotechnology company that is a leader in the field of yeast
glycoengineering, that is the addition of specific carbohydrate
modifications to the proteins in yeast, and optimization of biologic drug molecules, for $373 million in cash ($400
million purchase price net of $25 million of shares already owned and net transaction costs). The
Company recorded a $296.3 million charge for acquired research in connection with the acquisition
which is not deductible for tax purposes. While each of the acquisitions has independent
scientific merits, the combination of the GlycoFi and Abmaxis platforms is potentially
synergistic, giving Merck the ability to operate across the entire spectrum of therapeutic
antibody discovery, development and commercialization. (See Note 4).
Global Restructuring Program
In November 2005, the Company commenced the initial phase of its global restructuring program
designed to reduce the Companys cost structure, increase efficiency, and enhance
competitiveness. As part of this program, Merck plans to sell or close five manufacturing sites
and two preclinical sites by the end of 2008, and eliminate approximately 7,000 positions
company-wide. There have been approximately 3,400 positions eliminated throughout the Company
since inception of the program (approximately 2,300 of which were eliminated during the six
months ended June 30, 2006). Through the end of 2008, when the initial phase of the global
restructuring program is expected to be substantially complete, the cumulative pre-tax costs are
expected to range from $1.8 billion to $2.2 billion. The Company expects to record charges of
approximately $800 million to $1 billion during 2006, based on estimated time of completion, as
the sales/closures of the facilities occur. Cumulative pre-tax savings are expected to be $4.5 to
$5.0 billion from 2006 through 2010. The Company recorded pre-tax restructuring costs of $160.6
million ($102.5 million after tax or $0.05 per share) and $464.7 million ($297.4 after tax or
$0.14 per share) for the three and six months ended June 30, 2006, respectively. These costs
related primarily to the global restructuring program which was comprised primarily of
accelerated depreciation and separation costs, partially offset by gains on sales of facilities
in connection with this restructuring action (See Note 2).
Share-Based Compensation
Effective January 1, 2006, the Company adopted Financial Accounting Standards No. 123R,
Share-Based Payments (FAS 123R). Employee stock option expense was previously recognized using
the intrinsic value method which measures share-based compensation expense as the amount at which
the market price of the stock at the date of grant exceeds the exercise price. FAS 123R requires
the recognition of the fair value of share-based compensation in net income, which the Company
will recognize on a straight-line basis over the requisite service period. Additionally, the
Company elected the modified prospective transition method for adopting FAS 123R, and therefore,
prior periods were not restated. Under this method, the provisions for FAS 123R apply to all
awards granted or modified after January 1, 2006. In addition, the unrecognized expense of awards
that have not yet vested at the date of adoption shall be recognized in net income in the periods
after the date of adoption. The Company recorded share-based compensation cost in the amount of
$61.0 million and $182.3 million for the three and six months ended June 30, 2006, respectively,
of which $41.9 million and $140.5 million, respectively, was incremental due to the adoption of
FAS 123R (see Note 3). Incremental share-based compensation expense for full year 2006 is
expected to be approximately $220 million.
At June 30, 2006, there was $385.9 million of total pre-tax unrecognized compensation expense
related to nonvested awards which will be recognized over a weighted average period of 2.4 years.
For segment reporting, share-based compensation expense is recorded in unallocated expense.
American Jobs Creation Act of 2004 Repatriation
As previously disclosed, in October 2004, the American Jobs Creation Act of 2004 (the AJCA) was
signed into law. The AJCA created 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 recorded an income tax charge of $740 million in Taxes on Income in the
second quarter of 2005 related to the $15.9 billion repatriated during 2005. This charge was
partially offset by a $100 million benefit in connection 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
- 21 -
income tax liability. In addition, the Company has subsidiaries operating in Puerto Rico and
Singapore under tax incentive grants that expire in 2015 and 2026, respectively.
Operating Results
Summary
Earnings
per share assuming dilution (EPS) for the quarter ended June 30,
2006 and six months ended June 30, 2006 were
$0.69 and $1.38, respectively, compared to $0.33 and $0.95 for the quarter ended June 30,
2005 and six months ended
June 30, 2005, respectively. Net income for the quarter ended June 30,
2006 and six months ended June 30, 2006 was $1.50 billion and
$3.02 billion, respectively, compared to $720.6 million and $2.09 billion for the quarter ended June 30,
2005 and six
months ended June 30, 2005, respectively. EPS and Net income for the quarter ended June 30,
2006 and six months ended June 30, 2006
were negatively affected by the acquired research charge related to the GlycoFi acquisition, the
charges primarily related to the global restructuring program, as well as the impact of adopting
FAS 123R. EPS and Net income for the quarter ended June 30,
2005 and six months ended June 30, 2005 were negatively
impacted by the net tax charge primarily related to the repatriation of foreign earnings in
accordance with the AJCA.
Worldwide sales were $5.77 billion for the quarter, compared to $5.47 billion for the second
quarter of 2005, representing an increase of 6%. Global sales performance includes a greater
than 4% volume increase, a 2% favorable effect from price changes, and a 1% unfavorable effect
from foreign exchange for the quarter. Worldwide sales were $11.18 billion for the first six
months of 2006, compared to $10.83 billion for the first six months of 2005, representing an
increase of 3%. Global sales performance includes a 3% volume increase, a 2% favorable effect
from price changes, and a 2% unfavorable effect from foreign exchange.
Materials and production costs were $1.45 billion for the second quarter of 2006, an increase of
25% from the second quarter of 2005, including $167.5 million recorded in the current quarter for
costs associated with the global restructuring program. The increase also reflects $4.6 million
related to the expensing of stock options. For the six months ended June 30, 2006, Materials and
production costs were $2.79 billion, which includes the impact of $372.5 million in restructuring
costs and $15.2 million related to the expensing of stock options.
The gross margin was 75.0% in the second quarter of 2006 compared to 78.8% in the second quarter
of 2005. The 2006 gross margin reflects a 2.9 percentage point unfavorable impact from the $167.5
million of costs recorded in Materials and production relating to the global restructuring
program as noted above. For the first six months of 2006, the gross margin was 75.1% compared to
77.5% for the comparable prior period, reflecting a 3.3 percentage point unfavorable impact of
the costs associated with the global restructuring program.
Marketing and administrative expenses were $1.73 billion, a decrease of 1% in the second quarter
of 2006. Marketing and administration includes the impact of $25.3 million in the quarter
related to the expensing of stock options. The results reflect the increase in activities to
support three recently-approved vaccines, offset by reduced spending in support of Zocor. For the
six months ended June 30, 2006, Marketing and administrative expenses increased 3%, which
includes the impact of $87.9 million related to the expensing of stock options.
Research and development expenses were $1.17 billion for the quarter, representing an increase of
24% including $296.3 million recorded for acquired research resulting from the GlycoFi
acquisition, and $11.1 million for the expensing of stock options recorded in the second quarter.
For the six months ended June 30, 2006, Research and development expenses increased 18%, which
reflects the acquired research charge associated with the GlycoFi acquisition, $55.4 million
related to the global restructuring program, as well as the impact of $35.5 million related to
the expensing of stock options.
Restructuring costs were a net credit of $6.9 million for the quarter representing separation and
other related costs associated with the global restructuring program, offset by gains on sales of
facilities in connection with the program. For the six months ended June 30, 2006, Restructuring
costs were $36.8 million (See Note 2).
Equity
income from affiliates for the quarter ended June 30, 2006 and six
months ended June 30, 2006 was $611.3 million and $1.11 billion,
respectively, compared to $334.1 million and $650.4 million for the
quarter ended June 30, 2005 and six months ended June 30, 2005,
respectively. The increases in 2006 primarily reflect the successful
performance of Zetia and Vytorin through the
Merck/Schering-Plough partnership and the higher partnership returns
from AstraZeneca LP (AZLP).
The change in Other (income) expense, net for the second quarter and the six months ended June
30, 2006 reflects an increase in interest income generated from the Companys investment
portfolio derived from higher interest rates and higher average investment portfolio balances.
The effective tax rate of 28.9% in the second quarter reflects the impact of the acquired
research charge associated with the GlycoFi acquisition. The effective tax rate of 62.6% for the
comparable 2005 period included a $640 million net tax charge primarily related to the AJCA.
- 22 -
Sales
Sales of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Zocor |
|
$ |
989.6 |
|
|
$ |
1,151.5 |
|
|
$ |
2,053.1 |
|
|
$ |
2,257.5 |
|
Singulair |
|
|
949.8 |
|
|
|
729.6 |
|
|
|
1,751.2 |
|
|
|
1,464.6 |
|
Fosamax |
|
|
820.9 |
|
|
|
852.7 |
|
|
|
1,574.4 |
|
|
|
1,624.6 |
|
Cozaar/Hyzaar |
|
|
783.7 |
|
|
|
784.7 |
|
|
|
1,484.8 |
|
|
|
1,503.7 |
|
Proscar |
|
|
183.0 |
|
|
|
188.1 |
|
|
|
371.2 |
|
|
|
363.2 |
|
Primaxin |
|
|
172.1 |
|
|
|
181.4 |
|
|
|
341.7 |
|
|
|
366.2 |
|
Cosopt/Trusopt |
|
|
175.4 |
|
|
|
153.3 |
|
|
|
327.0 |
|
|
|
293.5 |
|
Vasotec/Vaseretic |
|
|
140.2 |
|
|
|
163.9 |
|
|
|
276.3 |
|
|
|
322.1 |
|
Cancidas |
|
|
123.8 |
|
|
|
140.0 |
|
|
|
270.0 |
|
|
|
270.3 |
|
Maxalt |
|
|
97.2 |
|
|
|
84.2 |
|
|
|
190.1 |
|
|
|
161.9 |
|
Propecia |
|
|
84.8 |
|
|
|
68.8 |
|
|
|
160.1 |
|
|
|
138.9 |
|
Vaccines/Biologicals |
|
|
349.1 |
|
|
|
247.3 |
|
|
|
620.6 |
|
|
|
471.1 |
|
Other |
|
|
902.1 |
|
|
|
722.0 |
|
|
|
1,761.0 |
|
|
|
1,592.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,771.7 |
|
|
$ |
5,467.5 |
|
|
$ |
11,181.5 |
|
|
$ |
10,829.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product 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 $1,072.8 million and $1,177.0 million for the three month period ended June 30, 2006
and 2005, respectively, and by $2,252.4 million and $2,161.0 million for the six months ended
June 30, 2006 and 2005, respectively. 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 AZLP. Inventory levels at key
wholesalers for each of the Companys major products are generally less than one month.
Worldwide sales of Singulair, a once-a-day oral medicine indicated for the treatment of chronic
asthma and the relief of symptoms of allergic rhinitis, were strong, reaching $949.8 million for
the second quarter, representing growth of 30% over the second quarter 2005. Sales for the first
six months were $1.75 billion, a 20% increase over the comparable 2005 period. Singulair
continues to be the number one prescribed product in the United States respiratory market.
Zocor, Mercks statin for modifying cholesterol, achieved worldwide sales of $989.6 million in
the second quarter, representing a decrease of 14% over the second quarter of 2005. Sales for
the first six months were $2.05 billion, a 9% decrease compared to the first six months of 2005.
Mercks U.S. marketing exclusivity for Zocor expired on June 23, 2006, and the Companys
previously signed authorized generic agreement with Dr. Reddys Laboratories went into effect.
The Company expects a significant decline in Zocor sales as a result of the loss of U.S.
marketing exclusivity. Merck continues to offer branded Zocor and to manufacture simvastatin for
branded Zocor, Vytorin, the Companys investigational compound MK-0524B and Dr. Reddys
authorized generic.
Global sales of Mercks antihypertensive medicines, Cozaar and Hyzaar*, were $783.7 million for
the second quarter, comparable to the second quarter 2005. Sales for the first six months were
$1.48 billion, a 1% decrease compared to the first six months of 2005. Cozaar/Hyzaar remained the
number one branded AIIA in Europe and number two branded AIIA in the United States.
|
|
|
* |
|
COZAAR and HYZAAR are registered trademarks of E.I. DuPont de Nemours & Company, Wilmington, Delaware. |
- 23 -
Global sales for Fosamax and Fosamax Plus D (marketed as Fosavance throughout the European
Union (EU)) were $820.9 million for the second quarter, representing a decrease of 4% compared
to the second quarter 2005. U.S. sales for the quarter increased 8%. Sales outside of the
United States were adversely affected by the availability of generic alendronate sodium products
in several markets. Global sales for the first six months were $1.57 billion, a 3% decrease over
the comparable 2005 period. Fosamax and Fosamax Plus D together remain the most-prescribed
medicine worldwide for the treatment of postmenopausal, male and glucocorticoid-induced
osteoporosis.
Total sales of Mercks other promoted medicines and vaccines were $1.59 billion for the second
quarter, representing growth of 8% as compared with the second quarter of 2005. Sales for the
first six months were $3.06 billion, a 7% increase over the comparable 2005 period. These
products treat or prevent a broad range of medical conditions, including infectious disease,
glaucoma, migraine, arthritis and pain. Vaccine sales were $349.1 million for the quarter,
representing growth of 41%. Sales of vaccines for the first six months were $620.6 million, an
increase of 32% over the comparable 2005 period.
Merck earns ongoing revenue based on sales of products that are associated with its alliances,
the most significant of which is AZLP. Revenue from AZLP recorded by Merck was $417.9 million in
the second quarter and $798.0 million for the first six months of the year.
Global sales for RotaTeq, Mercks vaccine to help protect children against rotavirus
gastroenteritis, were $30.7 million for the quarter. The vaccine is covered by the majority of
managed care plans. In April 2006, RotaTeq was made available in the Centers for Disease Control
and Preventions (CDC) Vaccine for Children (VFC) program. VFC provides vaccines to children who
are Medicaid-eligible, uninsured, underinsured or Native American. Eligible children receive the
recommended vaccines through the government-funded VFC once the CDC contracts for the purchase of
the vaccines.
In addition to the United States, RotaTeq is approved in Mexico, Australia and the EU.
Applications for licensure of RotaTeq have been filed in more than 100 countries. Vaccines sold
in most major European markets are sold through the Companys joint venture, Sanofi Pasteur MSD.
On
May 25, 2006, the U.S. Food and Drug Administration (FDA) approved Zostavax, the Companys vaccine for prevention of herpes zoster
(shingles) in individuals 60 years of age and older. It was also approved by regulatory
authorities in the EU and in Australia in May 2006. Zostavax is the first and only medical
option approved for the prevention of shingles.
On June 8, 2006, the FDA approved Gardasil, the Companys
vaccine to prevent cervical cancer and vulvar and vaginal pre-cancers caused by human
papillomavirus (HPV) types 16 and 18 and to prevent low-grade and pre-cancerous lesions and
genital warts caused by HPV types 6, 11, 16 and 18. Gardasil is approved for 9- to 26-year-old
girls and women. U.S. sales for Gardasil, which entered into distribution on June 19, 2006, were
$9.6 million for the quarter.
As previously disclosed, the Company entered into a license agreement and collaboration with CSL
Limited relating to technology used in Gardasil, as well as other agreements with third parties,
including certain academic and research institutions, relating to Gardasil. These agreements
include a previously-disclosed, cross-license and settlement agreement with GlaxoSmithKline for
certain patent rights related to HPV vaccines. As a consequence of these agreements, the Company
will pay royalties on the worldwide sales of Gardasil of approximately 24% to 26% in the
aggregate.
On June 29, 2006, the CDCs Advisory Committee on Immunization Practices (ACIP) voted unanimously
to recommend that girls and women 11 to 26 years old be vaccinated with Gardasil. The Committee
recommended that Gardasil be administered to 11- and 12-year-old females and to females aged 13
to 26 who have not previously been vaccinated, and that nine- and 10-year-old females be
vaccinated with Gardasil at the discretion of their physicians. The ACIP also voted to include
Gardasil in the VFC program. On July 28, 2006, the Company announced that Gardasil received a
positive opinion from the Committee for Medicinal Products for Human Use (CHMP) in Europe. The
CHMP opinion recommends that Gardasil be approved for the immunization of children and
adolescents aged 9 to 15 years and of adult females aged 16 to 26 years for the prevention of
cervical cancer, high-grade cervical dysplasia (CIN 2/3), high-grade vulvar dysplastic lesions
(VIN 2/3) and external genital warts caused by human papillomavirus types 6, 11, 16 and 18.
Following the CHMP review, the opinion for Gardasil is transmitted to the European Commission
(EC). If the EC approves the opinion, the EC then deliberates on the decision for approval. This
decision will be applicable to the 25 countries that are members of the EU, of which the five
largest are the United Kingdom, Germany, France, Italy and Spain.
- 24 -
Also on June 29, 2006, the ACIP unanimously voted to recommend that children 4 to 6 years of
age receive a second dose of varicella (chickenpox) vaccine. Mercks Varivax and ProQuad are the
only vaccines to protect against chickenpox in the United States. The ACIP also voted to
recommend that children, adolescents and adults who previously
received only one dose of varicella
vaccine should receive a second dose. The ACIP voted to include the second dose of chickenpox
vaccine in the VFC program.
The Company announced on July 11, 2006 that the FDA approved Emend for the prevention of
postoperative nausea and vomiting (PONV) as a single 40 mg oral dose given within three hours
prior to anesthesia. The approval of Emend, an NK-1 receptor antagonist, represents the
availability of the first new class of therapy for the management of PONV in over 10 years.
Proscar, the Companys product to treat symptomatic benign prostate enlargement, lost patent
protection in the United States on June 19, 2006. Mercks U.S. sales of Proscar for the second
quarter were $89.0 million. The Company expects a significant decline in U.S. Proscar sales.
Merck has in place an agreement with Dr. Reddys Laboratories which will allow it to distribute
and sell a generic version of Proscar.
Global sales of Zetia and Vytorin, as reported by the Merck/Schering-Plough partnership, in
the aggregate reached $973.4 million for the second quarter as compared to $506.9 million for the
same period last year. Combined new prescriptions attained more than 15% of the U.S.
lipid-lowering market, according to the June 2006 monthly IMS Health data. Sales for the first
six months were $1.77 billion compared to $1.02 billion for the comparable 2005 period.
Global sales of Zetia, the cholesterol-absorption inhibitor also marketed as Ezetrol outside the
United States, reached $476.0 million in the second quarter, an increase of 51% compared with the
second quarter of 2005. In the second quarter, Zetia was approved by the FDA for
co-administration with fenofibrate, offering a new treatment alternative for patients with mixed
hyperlipidemia. Sales for the first six months were $890.8 million, an increase of 38% over the
comparable 2005 period.
Global sales of Vytorin, also developed and marketed by the Merck/Schering-Plough partnership,
reached $497.4 million in the second quarter. Vytorin, marketed outside the United States as
Inegy, is the first single cholesterol treatment to provide LDL cholesterol lowering through dual
inhibition of cholesterol production and absorption. Sales for the
first six months were $875.8
million.
In June 2006, the Merck/Schering-Plough partnership announced new data from two clinical trials.
Data presented at the International Symposium on Atherosclerosis meeting showed that Vytorin was
significantly more effective than Crestor in reducing LDL cholesterol across all study dose
comparisons and an analysis of the data showed that, when averaged across all study doses,
Vytorin brought more patients at high risk of cardiovascular disease to LDL cholesterol levels
less than 70 mg/dl compared to Crestor. Also in June 2006, new data released at the American
Diabetes Associations (ADA) 66th Annual Scientific Sessions showed that at the recommended usual
starting doses Vytorin was superior to Lipitor in the lowering of LDL cholesterol in patients
with type 2 diabetes.
The Company records the results from its interest in the Merck/Schering-Plough partnership in
Equity income from affiliates.
Research and Development
In June 2006, Merck announced that the New Drug Application (NDA) for Zolinza (vorinostat), an
investigational histone deacetylase inhibitor, had been accepted for priority review by the FDA
for the treatment of advanced cutaneous T-cell-lymphoma (CTCL). The FDAs goal is to review and
act on NDAs designated with priority review within six months of receipt. Merck anticipates FDA
action on the NDA by early October 2006.
In addition, results of the pivotal Phase IIb open-label study in patients with advanced,
refractory CTCL were presented at the 33rd annual meeting of the American Society of
Clinical Oncology in June 2006. Study results showed 30 percent of the patients responded to
treatment with Zolinza as measured by the objective response rate (complete and partial
responses). CTCL is a type of non-Hodgkins lymphoma in which some of the bodys white blood
cells become malignant.
Mercks new drug application for MK-0517, the intravenous (IV) prodrug formulation of Emend for
the treatment of chemotherapy-induced nausea and vomiting (CINV), was accepted for standard
review by the FDA in June 2006.
In data released at the ADA in June 2006, Januvia, Mercks investigational oral, once-daily drug
for treating patients with type 2 diabetes, was shown to significantly reduce blood sugar
(glucose) levels when used as monotherapy or as an add-on treatment to metformin or pioglitazone.
In a head-to-head study in patients with type 2 diabetes who had
- 25 -
inadequate glucose control on metformin monotherapy, the addition of Januvia was non-inferior to
the addition of glipizide (a sulfonylurea) in significantly reducing blood sugar levels at 52
weeks versus baseline. Patients on Januvia had a significantly lower incidence of hypoglycemia
vs. glipizide.
Merck anticipates FDA action on the NDA for Januvia by mid-October 2006. If approved, Januvia
would potentially be the first in a new class of oral medications (DPP-4 inhibitors) that
enhances the bodys own ability to lower blood sugar when it is elevated. The Company is moving
forward as planned with filings in countries outside of the United States.
On July 31, 2006, Merck announced that the NDA for MK-0431A, the Companys investigational oral
medicine combining Januvia with metformin for type 2 diabetes, had been accepted for standard
review by the FDA. Merck expects FDA action on the NDA by the end of March 2007. The Company
is also moving forward as planned with regulatory filings in countries outside the United States.
The following chart reflects the Companys research pipeline as of August 1, 2006. Candidates
shown in Phase III include specific products. Candidates shown in Phase I and II include the
most advanced compound with a specific mechanism in a given therapeutic area. Small molecules
and biologics are given MK-number designations and vaccine candidates are given V-number
designations. Back-up compounds, regardless of their phase of development, additional
indications in the same therapeutic area and additional line extensions or formulations for
in-line products are not shown. The Companys programs are generally designed to focus on the
development of novel medicines to address large, unmet medical needs. As announced in December
2005, the Company intends to focus its research efforts primarily on the following nine priority
areas: Alzheimers disease; atherosclerosis; cardiovascular disease; diabetes; novel vaccines;
obesity; oncology; pain; and sleep disorders.
|
Phase I |
Alzheimers Dis., MK-0952 |
Arthritis, MK-0822 |
Atherosclerosis, MK-0633 |
Cancer, MK-0429 |
Cancer, MK-0752 |
Cancer, MK-4721* |
Cancer, MK-0731 |
Cancer, MK-0646* |
Cancer, MK-0822 |
Cancer, V930 |
Cardiovascular, MK-0448 |
Cardiovascular, MK-8141* |
Diabetes, MK-0941 |
Diabetes, MK-0893 |
Diabetes, MK-3887 |
Endocrine, MK-0867 |
Endocrine, MK-0974 |
Glaucoma, MK-0994 |
Infect. Dis. (Flu), V512 |
Infect.
Dis. (S. aureus), V710 |
Infect. Dis., MK-2764* |
Insomnia, MK-0454 |
Obesity, MK-0249 |
Osteoporosis, MK-0773 |
Pain, MK-2295* |
Parkinsons Dis.,MK-0657 |
Psychiatric Dis., MK-0249 |
Respiratory Dis., MK-0633 |
|
Phase II |
Atherosclerosis, MK-0859 |
Atherosclerosis, MK-0354* |
Cancer, MK-0457* |
Diabetes, MK-0533 |
Endocrine, MK-0677 |
HIV, V526 |
HPV, V502** |
Hypertension, MK-0736 |
Infect. Dis. (Pediatric), V419* |
Obesity, MK-0364 |
Osteoporosis, MK-0822 |
Pain, MK-0759 |
Pain, MK-0974 |
Pain, MK-6721* |
Psychiatric Dis., MK-3756* |
Stroke, MK-0724* |
Urinary Incont., MK-0634 |
Urinary-Incont., MK-0594 |
|
Phase III |
Athero., MK-0524B |
Athero., MK-0524A |
Insomnia |
Gaboxadol* |
HIV, MK-0518 |
|
Under Review by FDA |
Diabetes, MK-0431A |
CINV, MK-0517 |
Cancer (CTCL) |
ZOLINZA* |
Diabetes |
JANUVIA |
|
Approvable |
Arthritis/Pain |
ARCOXIA |
|
2006 Approvals |
Rotavirus |
Gastroenteritis |
ROTATEQ |
Shingles |
ZOSTAVAX |
HPV and related |
cervical cancer and |
genital warts |
GARDASIL** |
|
|
|
* |
|
Licensed, alliance, or acquisition |
|
** |
|
Multiple Licenses, including CSL, Ltd. |
- 26 -
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
June 30, 2006 |
|
December 31, 2005 |
Cash and Investments |
|
$ |
15,729.9 |
|
|
$ |
16,745.5 |
|
Working Capital |
|
$ |
5,387.8 |
|
|
$ |
7,806.9 |
|
Total debt to total liabilities and equity |
|
|
14.9 |
% |
|
|
18.1 |
% |
The decrease in working capital primarily reflects a change in the mix of the Companys
investments from short-term to long-term. The decrease in the ratio of total debt to total
liabilities and equity primarily reflects the repayment of commercial paper in the first half of
2006.
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 $3.5
billion and $3.1 billion for the six months ended June 30, 2006 and 2005, respectively. In
2005, the Company repatriated $15.9 billion in connection with the AJCA and recorded an income
tax charge of $766.5 million ($740 million recorded in the second quarter of 2005) related to
this repatriation, $185.0 million of which was paid in the fourth quarter of 2005 and the
remainder was paid in the first quarter of 2006 (see Note 8).
Capital expenditures totaled $460.7 million and $662.4 million for the first six months of 2006
and 2005, respectively. Capital expenditures for the full year 2006 are expected to approximate
$1.3 billion.
Dividends paid to stockholders were $1.7 billion for both the first six months of 2006 and 2005.
In May and July 2006, 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 2006, respectively.
The Company purchased $500.0 million of its Common Stock (14.5 million shares) for its Treasury
during the first six months of 2006. The Company has approximately $7.0 billion remaining under
the July 2002 treasury stock purchase authorization.
In
July 2006, $500 million of 5.25% notes, along with an associated pay-floating,
receive-fixed interest rate swap, matured and were retired.
In April 2006, the Company extended the maturity date of its $1.5 billion, 5-year revolving
credit facility from 2010 to 2011. The facility provides backup liquidity for the Companys
commercial paper borrowing facility and is to be used for general corporate purposes. The
Company has not drawn funding from this facility.
Critical Accounting Policies
The Companys significant accounting policies, which include managements best estimates and
judgments, are included in Note 2 to the consolidated financial statements of the 2005 Annual
Report on Form 10-K for the year ended December 31, 2005. Certain of these accounting policies
are considered critical as disclosed in the Critical Accounting Policies and Other Matters
section of Managements Discussion and Analysis in the Companys 2005 Annual Report on Form 10-K
because of the potential for a significant impact on the financial statements due to the inherent
uncertainty in such estimates. Other than the adoption of FAS 123R, as discussed in Note 3,
there have been no significant changes in the Companys critical accounting policies since
December 31, 2005.
Recently Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48),
which is effective January 1, 2007. FIN 48 clarifies the accounting for the uncertainty in tax
positions by requiring companies to recognize in their financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit based on the
technical merits of the position. Among other provisions, FIN 48 also requires expanded
disclosures at the end of each annual period presented. The adoption of FIN 48 may result in the
cumulative effect of the change in accounting principle recorded as an adjustment to opening
retained earnings. The effect of adoption of FIN 48 on the Companys financial position and
results of operations has not yet been determined.
In April 2006, the FASB issued Staff Position (FSP) No. FIN 46R-6, Determining the Variability to
Be Considered in Applying FASB Interpretation No. 46R. The FSP clarifies when an entity should
use a by design approach when applying FASB Interpretation No. 46R, Consolidation of Variable
Interest Entities. This approach includes evaluating whether an interest is variable based on a
thorough understanding of the design of the potential variable interest entity (VIE), including
the nature of the risk that the potential VIE was designed to create and pass along to interest
holders in the entity. This FSP also included guidance to assist companies in analyzing the
design of potential VIE to determine
- 27 -
whether variability exists. The FSP is effective for the first reporting period beginning after
June 15, 2006 and the effects of this FSP on the Companys financial position or results of
operations is not expected to be material.
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. The following discussion is limited to
recent developments concerning legal proceedings and should be read in conjunction with Note 7 to
the consolidated financial statements of this report and the Companys 2005 Annual Report on Form
10-K for the year ended December 31, 2005.
Vioxx Litigation
Product Liability Lawsuits
As previously disclosed, federal and state product liability lawsuits involving individual
claims, as well as putative class actions, have been filed against the Company with respect to
Vioxx. As of June 30, 2006, the Company has been served or is aware that it has been named as a
defendant in approximately 14,200 lawsuits, which include approximately 27,100 plaintiff groups,
alleging personal injuries resulting from the use of Vioxx. Of these lawsuits, approximately
5,700 lawsuits representing approximately 16,100 plaintiff groups are or are slated to be in the
federal MDL (discussed below) and approximately 7,100 lawsuits representing approximately 7,100
plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court before
Judge Carol E. Higbee. 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 190 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, Texas, New Jersey,
and Philadelphia, Pennsylvania, respectively, have been transferred to a single judge in each
state for coordinated proceedings.
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.
Judge Fallon has indicated that he intends to try a series of cases during the period November
2005 through 2006, in the following categories: (i) heart attack with short term use; (ii) heart
attack with long term use; (iii) stroke; and (iv) cardiovascular injury involving a prescription
written after April 2002 when the labeling for Vioxx was revised to include the results of the
VIGOR trial.
Several Vioxx Product Liability Lawsuits are currently scheduled for trial in 2006. The Company
has provided a list of such trials at its website at www.Merck.com which it will
periodically update as appropriate. The Company has included its website address only as an
inactive textual reference and does not intend it to be an active link to its website nor does it
incorporate by reference the information contained therein.
Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that 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. The Tolling Agreement applies to individuals who have not filed lawsuits and
may or may not eventually file lawsuits and only to those claimants who seek to toll claims
alleging injuries resulting from a thrombotic cardiovascular event that results in a myocardial
infarction or ischemic stroke. The Tolling Agreement provides counsel additional time to
evaluate potential claims. The Tolling Agreement requires any tolled claims to be filed in
federal court. As of June 30, 2006, approximately 5,800 claimants had entered into Tolling
Agreements.
The Company has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits
that were tried prior to March 31, 2006. In April 2006, in a trial involving two plaintiffs,
Thomas Cona and John McDarby, in Superior Court of New Jersey, Law Division, Atlantic County, the
jury returned a split verdict. The jury determined that Vioxx did not substantially contribute
to the heart attack of Mr. Cona, but did substantially contribute to the heart attack of Mr.
McDarby. In addition, the jury concluded that, in each case, Merck violated New Jerseys
consumer fraud statute, which allows plaintiffs to receive their expenses for purchasing the
drug, trebled, as well as reasonable attorneys fees. The jury awarded $4.5 million in
compensatory damages to Mr. McDarby and his wife, who also was a plaintiff in that case,
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as well as punitive damages of $9 million. The Company intends to appeal this verdict after the
completion of post-trial proceedings in the trial court.
Also in April 2006, in Garza v. Merck, a jury in state court in Rio Grande City, Texas returned a
verdict in favor of the family of decedent Leonel Garza. The jury awarded a total of $7 million
in compensatory damages to Mr. Garzas widow and three sons. The jury also purported to award
$25 million in punitive damages. Under Texas law, in this case the punitive damages are capped
at $750,000. The Company intends to appeal this verdict after completion of post-trial
proceedings in the trial court.
In July 2006, in Doherty v. Merck, in Superior Court of New Jersey, Law Division, Atlantic
County, a jury returned a verdict in favor of the Company on all counts. The jury rejected a
claim by the plaintiff that her nearly three years of Vioxx use caused her heart attack. The jury
also found in Mercks favor on the plaintiffs consumer fraud claim.
In August
2006, in the first case to go to trial in the California coordinated
proceeding, Grossberg v. Merck, the jury returned a verdict for Merck
on all counts.
In
addition to these trials, there is a Vioxx Product Liability trial currently ongoing
in Barnett v. Merck in federal court in New
Orleans, Louisiana. In New Jersey, Judge Higbee has cancelled the trial previously set for
September 2006 in Atlantic City, New Jersey. The next trial in New Jersey is currently scheduled
to start on January 16, 2007, and the Court has stated that it will involve multiple plaintiffs.
The specific plaintiffs cases to be tried have not yet been selected. The Company expects a
number of additional Vioxx Product Liability lawsuits to be tried in 2006.
Merck voluntarily withdrew Vioxx from the market on September 30, 2004. Many states have a
two-year statute of limitations for product liability claims, requiring that claims must be filed
within two years after the plaintiffs learned or could have learned of their potential cause of
action. As a result, some may view September 30, 2006 as a deadline for filing Vioxx cases. It
is important to note, however, that the law regarding statutes of limitations can be complex,
varies from state to state, can be fact-specific, and in some cases, might be affected by the
existence of pending class actions. For example, some states have three year statutes of
limitations and, in some instances, the statute of limitations is even longer. Merck expects
that there will be legal arguments concerning the proper application of these statutes, and the
decisions will be up to the judges presiding in individual cases in state and federal
proceedings. As referred to above, as of June 30, 2006, Merck has also entered into agreements
with approximately 5,800 plaintiffs to toll the statute of limitations, so the September 30, 2006
date would not apply in those instances.
Other Lawsuits
As previously disclosed, on July 29, 2005, a New Jersey state trial court certified a nationwide
class of third-party payors (such as unions and health insurance plans) that paid in whole or in
part for the Vioxx used by their plan members or insureds. The named plaintiff in that case
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. The trial courts ruling
is procedural only; it does not address the merits of plaintiffs allegations, which the Company
intends to defend vigorously. On March 31, 2006, the New Jersey state Superior Court, Appellate
Division, affirmed the class certification order. Recently, the New Jersey Supreme Court has
decided to exercise its discretion to hear the Companys appeal of the appellate court decision
affirming the trial courts ruling which certified the class of third-party payors seeking
reimbursement of amounts they paid for Vioxx prescriptions. The trial in this case is currently
scheduled to be held in March 2007 and it is not known at this time whether the New Jersey
Supreme Courts decision will affect the trial date.
As previously reported, the Company has also been named as a defendant in separate lawsuits
brought by the Attorneys General of Alaska, Louisiana, Mississippi, Montana and Texas. The
Attorney General of Utah has also recently filed a lawsuit. These actions allege that the
Company misrepresented the safety of Vioxx and seek (i) recovery of the cost of Vioxx purchased
or reimbursed by the state and its agencies; (ii) reimbursement of all sums paid by the state and
its agencies for medical services for the treatment of persons injured by Vioxx; (iii) damages
under various common law theories; and/or (iv) remedies under various state statutory theories,
including state consumer fraud and/or fair business practices or Medicaid fraud statutes,
including civil penalties.
Shareholder Lawsuits
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, the Company and
various current and former officers and directors are defendants in various putative class
actions and individual lawsuits under the federal securities laws (the Vioxx Securities
Lawsuits), all of which have been transferred by the JPML to the United States District Court
for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a
nationwide MDL (the Shareholder MDL). Judge Chesler has consolidated the Vioxx Securities
Lawsuits for all purposes. Plaintiffs request certification of a class of purchasers of Company
stock between May 21, 1999 and October 29, 2004. The complaint 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
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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. Defendants have filed a motion to dismiss the complaint, which is
pending.
As previously disclosed, on August 15, 2005, a complaint was filed in Oregon state court by the
State of Oregon through the Oregon state treasurer on behalf of the Oregon Public Employee
Retirement Fund against the Company and certain current and former officers and directors. The
complaint, which was brought under Oregon securities law, alleges that plaintiff has suffered
damages in connection with its purchases of Merck common stock at artificially inflated prices
due to the Companys alleged violations of law related to disclosures about Vioxx. On July 19,
2006, the Court denied the Companys motion to dismiss the compliant. The current and former
officers and directors have entered into a tolling agreement in exchange for plaintiffs
dismissal, without prejudice, of the claims against them.
As previously disclosed, various shareholder derivative actions filed in federal court have been
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the Vioxx
Derivative Lawsuits). The consolidated complaint arises 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 certain members of the
Board past and present and certain executive officers for breach of fiduciary duty, waste of
corporate assets, unjust enrichment, abuse of control and gross mismanagement. On May 5, 2006,
Judge Chesler granted defendants motion to dismiss and denied plaintiffs request for leave to
amend their complaint. Plaintiffs have appealed to the United States Court of Appeals for the
Third Circuit.
As previously disclosed, on October 29, 2004, two individual shareholders made a demand on the
Board to take legal action against Mr. Raymond Gilmartin, former Chairman, President and Chief
Executive Officer and other individuals for allegedly causing damage to the Company with respect
to the allegedly improper marketing of Vioxx. In 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. The Board has recently received
another shareholder letter demanding that the Board take legal action against the Board and
management of Merck for allegedly causing damage to the Company relating to the Companys
allegedly improper marketing of Vioxx.
In addition, as previously disclosed, various putative class actions filed in federal court
against the Company and certain current and former officers and directors (the Vioxx ERISA
Lawsuits and, together with the Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits, the
Vioxx Shareholder Lawsuits) have been transferred to the Shareholder MDL and consolidated for
all purposes. The consolidated complaint asserts claims on behalf of certain of the Companys
current and former employees who are participants in certain of the Companys retirement plans
for breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). The
lawsuits make similar allegations to the allegations contained in the Vioxx Securities Lawsuits.
On October 7, 2005, defendants moved to dismiss the ERISA complaint. On July 11, 2006, Judge
Chesler granted in part and denied in part defendants motion to dismiss. The Court dismissed
plaintiffs claim of breach of fiduciary duty based on continued investment in Merck stock as to
all defendants except the five individuals who were members of Mercks Management Pension
Investment Committee (MPIC) during the purported class period. The Court dismissed plaintiffs
claim for breach of fiduciary duty based on alleged failure to provide complete or accurate
information to participants to the extent it related to specific communications cited in the
complaint, but declined to dismiss the claim before discovery to the extent plaintiffs allege
that adverse information was withheld from participants. The Court dismissed plaintiffs claim
for failure to monitor as to all defendants except the members of the Compensation and Benefits
Committee of Mercks Board of Directors who had supervisory responsibility for the MPIC. The
Court declined to dismiss plaintiffs claim for co-fiduciary liability, absent factual
development, but dismissed as duplicative plaintiffs claim for knowing participation in breach
of fiduciary duty.
International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, the Company has been named
as a defendant in litigation relating to Vioxx in various countries (collectively, the Vioxx
Foreign Lawsuits) in Europe as well as Canada, Brazil, 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.
- 30 -
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 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, the Companys upper level excess insurers (which provide excess
insurance potentially applicable to all of the Vioxx Lawsuits) have 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. A second
arbitration against one of the Companys upper level excess insurers has also been commenced.
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 SEC that
it was commencing an informal inquiry concerning Vioxx. On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect to
Vioxx in a federal health care investigation under criminal statutes. As previously disclosed,
the Companys United Kingdom 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. In April 2006, the MHRA advised the Company that its investigation has been
completed and no enforcement action will be taken with respect to the matter. In addition, as
previously disclosed, investigations are being conducted by local authorities in certain cities
in Europe in order to determine whether any criminal charges should be brought concerning Vioxx.
The Company is cooperating with these governmental entities in their respective investigations
(the Vioxx Investigations). The Company cannot predict the outcome of these inquiries;
however, they could result in potential civil and/or criminal dispositions.
As previously disclosed, the Company has received a number of Civil Investigative Demands (CID)
from a group of Attorneys General from 31 states and the District of Columbia who are
investigating whether the Company violated state consumer protection laws when marketing Vioxx.
The Company is cooperating with the Attorneys General in responding to the CIDs.
Reserves
The Company currently anticipates that a number of Vioxx Product Liability Lawsuits will be tried
in 2006. 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, including for those cases
in which a verdict or judgment has been entered against the Company, and are now in post-verdict
proceedings or on appeal. In each of those cases the Company believes it has strong points to
raise on appeal and therefore that unfavorable outcomes in such cases are not probable.
Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. 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.
During 2005, the Company spent $285 million in the aggregate in legal defense costs worldwide
related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii)
the Vioxx Foreign Lawsuits, and (iv) the Vioxx Investigations (collectively, the Vioxx
Litigation). In the fourth quarter, the Company recorded a charge of $295 million
- 31 -
to increase the reserve solely for its future legal defense costs related to the Vioxx Litigation
to $685 million at December 31, 2005. This reserve is based on certain assumptions and is the
best estimate of the amount that the Company believes, at this time, it can reasonably estimate
will be spent through 2007. Some of the significant factors considered in the establishment and
ongoing review of the reserve for the Vioxx legal defense costs 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 scope of the Vioxx Litigation; the number of cases being
brought against the Company; the costs and outcomes of completed trials and the anticipated
timing, progression, and related costs of pre-trial activities and trials in the Vioxx Product
Liability Lawsuits. Events such as scheduled trials, that are expected to occur throughout 2006
and into 2007, and the inherent inability to predict the ultimate outcomes of such trials, limit
the Companys ability to reasonably estimate its legal costs beyond the end of 2007. The Company
will continue to monitor its legal defense costs and review the adequacy of the associated
reserves and may determine to increase its reserves for legal defense costs at any time in the
future if, based upon the factors set forth, it believes it would be appropriate to do so.
Unfavorable outcomes in the Vioxx Litigation could have a material adverse effect on the
Companys financial position, liquidity and results of operations.
Other Product Liability Litigation
The Company is a defendant in product liability lawsuits in the United States involving Fosamax.
As of June 30, 2006, approximately 35 cases have been filed against Merck, including two cases
which seek class action certification, as well as damages and medical monitoring. In these
actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw,
generally with tooth extraction and/or delayed healing, in association with the use of Fosamax.
The Company will vigorously defend against these lawsuits.
Commercial Litigation
As
previously disclosed, in April 2005, the Company was named in a
qui tam lawsuit under the Nevada
False Claims Act. The suit, in which the Nevada Attorney General has intervened, alleges that the
Company inappropriately offered nominal pricing and other marketing and pricing inducements to
certain customers and also failed to comply with its obligations under the Medicaid Best Price
scheme related to such arrangements. In May, the Companys motion to dismiss this action was
denied by the district court. The Company is vigorously defending 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, including nominal pricing
programs and samples. The Company has been advised that the activities being investigated by the
DOJ are also the subject of a qui tam complaint. The Company has also reported that it has
received a CID from the Attorney General of Texas regarding the Companys marketing and selling
activities relating to Texas. As previously disclosed, the Company received another CID from the
Attorney General of Texas asking for additional information regarding the Companys marketing and
selling activities related to Texas; the second CID includes requests with respect to nominal
pricing programs and samples. In April 2004, the Company received a subpoena from the office of
the Inspector General for the District of Columbia in connection with an investigation of the
Companys interactions with physicians in the District of Columbia, Maryland, and Virginia. In
November 2004, the Company received a letter request from the DOJ in connection with its
investigation of the Companys pricing of Pepcid. In September 2005, the Company received a
subpoena from the Illinois Attorney General. The subpoena seeks information related to
repackaging of prescription drugs.
As previously disclosed, 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 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 or the Companys business
practices in inquiries other than the investigations discussed in this section. It is not
feasible to predict the outcome of any such inquiries.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file ANDAs with the FDA
seeking to market generic forms of the Companys products prior to the expiration of relevant
patents owned by the Company. Generic
- 32 -
pharmaceutical manufacturers have submitted ANDAs to the FDA seeking to market in the United
States a generic form of Fosamax, Prilosec, Nexium, Propecia, Trusopt and Cosopt prior to the
expiration of the Companys (and AstraZenecas in the case of Prilosec and Nexium) 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
(Fosamax), finasteride (Propecia), dorzolamide (Trusopt) and dorzolamide/timolol (Cosopt), and
AstraZeneca and the Company have filed patent infringement suits in federal court against
companies filing ANDAs for generic omeprazole (Prilosec) and esomeprazole (Nexium). 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.
As previously disclosed, the Company filed an infringement action against Cobalt Pharmaceuticals,
Inc. (Cobalt) in the U.S. in response to Cobalts filing of an ANDA with a Paragraph IV
certification challenging the Companys basic patent covering the use of alendronate. That case
has now been dismissed in view of Cobalts decision to withdraw its Paragraph IV challenge.
In June 2006, the Company filed lawsuits against Barr Laboratories, Inc. and Teva Pharmaceutical
Industries Ltd. (Teva) asserting that their respective manufacturing processes for making their
alendronate products would infringe one or more process patents of the Company.
As previously disclosed, in September 2004 the Company appealed a decision of the Opposition
Division (the Opposition Division) of the European Patent Office (the EPO) that revoked the
Companys patent in Europe that covers the once-weekly administration of alendronate. On March
14, 2006, the Board of Appeal of the EPO upheld the decision of the Opposition Division. Thus,
presently the Company is not entitled to market exclusivity for Fosamax in most major European
markets after 2007. In addition, Mercks basic patent covering the use of alendronate has been
challenged in several European countries and if the Company is unsuccessful in those countries
the Company could lose exclusivity rights to Fosamax before 2007 in such countries. The Company
has received adverse decisions in Germany, Holland and the United Kingdom. The decision in the
United Kingdom was upheld on appeal. The Company intends to appeal
the decisions in Germany and Holland.
On January 18, 2006, the Company sued Hi-Tech Pharmacal Co., Inc. (Hi-Tech) of Amityville, New
York for patent infringement in response to Hi-Techs application to the FDA seeking approval of
a generic version of Mercks ophthalmic drugs Trusopt and Cosopt, which are used for treating
elevated intraocular pressure in people with ocular hypertension or glaucoma. In the lawsuit,
Merck sued to enforce a patent covering an active ingredient dorzolamide, which is present in
both Trusopt and Cosopt. The trial court has entered a ruling favorable to Mercks position and
Hi-Tech has appealed. The appeal hearing is expected to be held in September 2006. Merck has
elected not to enforce two U.S. patents listed with the FDA which cover the combination of
dorzolamide and timolol, the two active ingredients in Cosopt. This lawsuit will automatically
stay FDA approval of Hi-Techs ANDAs for 30 months or until an adverse court decision, whichever
may occur earlier. The patent covering dorzolamide provides exclusivity for Trusopt and Cosopt
until October 2008 (including six months of pediatric exclusivity). After such time, the Company
expects sales of these products to decline.
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 the Companys patent infringement claims against
certain other generic manufacturers omeprazole products, trial began on April 3, 2006.
The Company and AstraZeneca received notice in October 2005 that Ranbaxy Laboratories Limited
(Ranbaxy) had filed an ANDA for esomeprazole magnesium. The ANDA contains Paragraph IV
challenges to patents on Nexium. On November 21, 2005, the Company and AstraZeneca sued Ranbaxy
in the United States District Court in New Jersey. Accordingly, FDA approval of Ranbaxys ANDA
is stayed for 30 months until April 2008 or until an adverse court decision, if any, whichever
may occur earlier. The Company and AstraZeneca received notice in January 2006 that IVAX
Pharmaceuticals, Inc., subsequently acquired by Teva, had filed an ANDA for esomeprazole
magnesium. The ANDA contains Paragraph IV challenges to patents on Nexium. On March 8, 2006,
the Company and AstraZeneca sued Teva in the United States District Court in New Jersey.
Accordingly, FDA approval of Tevas ANDA is stayed for 30 months until September 2008 or until an
adverse court decision, if any, whichever may occur earlier.
- 33 -
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. That lawsuit has been
settled under terms of which the challenging party, Dr. Reddys, will be able to launch a generic
Propecia beginning January 2013 under a license from Merck.
In Europe, the Company is aware of various companies seeking registration for generic losartan
(the active ingredient for Cozaar). The Company has patent rights to losartan via license from
E.I. du Pont de Nemours and Company (du Pont). The Company and du Pont have filed patent
infringement proceedings against various companies in Portugal.
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. Defendants moved to dismiss plaintiffs amended complaint on April 7, 2006.
On July 21, 2006, the Court granted defendants motion to dismiss based on plaintiffs failure to
make pre-suit demand on Mercks Board of Directors and denied plaintiffs request for leave to
amend.
Environmental Matters
On June 13, 2006, potassium thiocyanate was accidentally discharged from the Companys plant in
West Point, Pennsylvania through the Upper Gwynedd Township Authoritys wastewater treatment
plant into the Wissahickon Creek, causing a fishkill. Federal and State agencies are
investigating the discharge and the Company is currently cooperating with the investigations.
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) and 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.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report and other written reports and oral statements made from time to time by the Company
may contain so-called forward-looking statements, all of which are based on managements
current expectations and are subject to risks and uncertainties which may cause results to differ
materially from those set forth in the statements. One can identify these forward-looking
statements by their use of words such as expects, plans, will, estimates, forecasts,
projects and other words of similar meaning. One can also identify them by the fact that they
do not relate strictly to historical or current facts. These statements are likely to address
the Companys growth strategy, financial results, product development, product approvals, product
potential and development programs. One must carefully consider any such statement and should
understand that many factors could cause actual results to differ materially from the Companys
forward-looking statements. These factors include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and some that are not. No
forward-looking statement can be guaranteed and actual future results may vary materially.
The Company does not assume the obligation to update any forward-looking statement. One should
carefully evaluate such statements in light of factors, including risk factors, described in the
Companys filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and
8-K. In Item 1 of the Companys Annual Report on Form 10-K for the year ended December 31, 2005,
as filed on March 13, 2006, 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.
- 34 -
PART II Other Information
Item 1. Legal Proceedings
Information with respect to certain legal proceedings is incorporated by reference from
Managements Discussion and Analysis of Financial Condition and Results of Operations contained
in Part I of this report.
Item 1A. Risk Factors
Set forth below is an addition to the Risk Factors discussed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2005.
The Company faces pricing pressure with respect to its products.
Our products are subject to increasing price pressures and other restrictions worldwide,
including in the United States. These include (i) practices of managed care groups and
institutional and governmental purchasers and (ii) U.S. federal laws and regulations related to
Medicare and Medicaid, including the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (the 2003 Act).
The 2003 Act included a prescription drug benefit for individuals which first went into effect on
January 1, 2006. The increased purchasing power of entities that negotiate on behalf of Medicare
beneficiaries could result in further pricing pressures. We expect pricing pressures to increase
in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities for the three month period ended June 30, 2006 were as
follows:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Total Number |
|
Average Price |
|
Approximate Dollar Value of Shares |
|
|
of Shares |
|
Paid Per |
|
That May Yet Be Purchased |
Period |
|
Purchased(1) |
|
Share |
|
Under the Plans or Programs (1) |
April 1 - April 30, 2006 |
|
|
2,213,400 |
|
|
$ |
34.56 |
|
|
$ |
7,206.1 |
|
|
May 1 - May 31, 2006 |
|
|
2,560,800 |
|
|
$ |
34.46 |
|
|
$ |
7,117.8 |
|
|
June 1 - June 30, 2006 |
|
|
2,551,000 |
|
|
$ |
34.50 |
|
|
$ |
7,029.8 |
|
|
Total |
|
|
7,325,200 |
|
|
$ |
34.51 |
|
|
$ |
7,029.8 |
|
|
|
|
(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 25,
2006, 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 forth opposite their respective names: |
- 35 -
|
|
|
|
|
|
|
|
|
Names |
|
For |
|
Withheld |
Lawrence A. Bossidy |
|
|
1,710,560,020 |
|
|
|
135,606,286 |
|
William G. Bowen |
|
|
1,714,541,949 |
|
|
|
131,624,357 |
|
Richard T. Clark |
|
|
1,791,797,705 |
|
|
|
54,368,601 |
|
Johnnetta B. Cole |
|
|
1,620,151,690 |
|
|
|
226,014,616 |
|
William B. Harrison, Jr. |
|
|
1,798,757,360 |
|
|
|
47,408,946 |
|
William N. Kelley |
|
|
1,715,612,623 |
|
|
|
130,553,683 |
|
Rochelle B. Lazarus |
|
|
1,654,348,579 |
|
|
|
191,817,727 |
|
Thomas E. Shenk |
|
|
1,808,797,244 |
|
|
|
37,369,062 |
|
Anne M. Tatlock |
|
|
1,807,781,674 |
|
|
|
38,384,632 |
|
Samuel O. Thier |
|
|
1,790,380,187 |
|
|
|
55,786,119 |
|
Wendell P. Weeks |
|
|
1,791,586,942 |
|
|
|
54,579,364 |
|
Peter C. Wendell |
|
|
1,808,764,954 |
|
|
|
37,401,352 |
|
2. |
|
A proposal to ratify the appointment of an independent registered public accounting firm
for 2006 received 1,815,924,066 votes FOR and 11,553,064 votes AGAINST, with 18,689,176
abstentions. |
|
3. |
|
A proposal to adopt the 2007 Incentive Stock Plan received 1,227,108,455 votes FOR and
223,767,347 votes AGAINST, with 22,998,309 abstentions. |
|
4. |
|
A proposal to adopt the 2006 Non-Employee Directors Stock Option Plan received
1,244,044,876 votes FOR and 206,047,818 votes AGAINST, with 23,780,402 abstentions. |
|
5. |
|
A stockholder proposal concerning stock option awards received 64,018,568 votes FOR and
1,380,408,691 votes AGAINST, with 29,445,652 abstentions and 372,293,395 broker non-votes. |
|
6. |
|
A stockholder proposal concerning non-director shareholder votes received 1,139,195,525
votes FOR and 307,172,872 votes AGAINST, with 27,502,445 abstentions and 372,295,464 broker
non-votes. |
|
7. |
|
A stockholder proposal concerning animal welfare policy report received 66,202,589 votes
FOR and 1,261,402,974 votes AGAINST, with 146,268,534 abstentions and 372,292,209 broker
non-votes. |
Item 6. 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 |
|
|
|
10.1
|
|
2007 Incentive Stock Plan Incorporated by reference to Current Report on Form 8-K dated April 25, 2006 |
|
|
|
10.2
|
|
2006 Non-Employee Directors Stock Option Plan Incorporated by reference to Current Report on Form 8-K dated April 25, 2006 |
|
|
|
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 |
- 36 -
|
|
|
Number |
|
Description |
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
- 37 -
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 7, 2006 |
/s/ Kenneth C. Frazier
|
|
|
KENNETH C. FRAZIER |
|
|
Senior Vice President and General Counsel |
|
|
|
|
|
|
|
|
|
|
Date: August 7, 2006 |
/s/ Richard C. Henriques
|
|
|
RICHARD C. HENRIQUES |
|
|
Vice President, Controller |
|
|
- 38 -
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 |
|
|
|
10.1
|
|
2007 Incentive Stock Plan Incorporated by reference to Current Report on Form 8-K dated April 25, 2006 |
|
|
|
10.2
|
|
2006 Non-Employee Directors Stock
Option Plan Incorporated by reference to Current Report on Form 8-K dated April 25, 2006 |
|
|
|
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 |
- 39 -