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 March 31, 2007
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 April 30, 2007:
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Class
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Number of Shares Outstanding |
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Common Stock
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2,167,273,357 |
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
(Unaudited, $ in millions except per share amounts)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Sales |
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$ |
5,769.4 |
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$ |
5,409.8 |
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Costs, Expenses and Other |
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Materials and production |
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1,525.8 |
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1,342.7 |
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Marketing and administrative |
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1,802.0 |
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1,715.0 |
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Research and development |
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1,030.0 |
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942.0 |
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Restructuring costs |
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65.8 |
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43.7 |
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Equity income from affiliates |
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(652.6 |
) |
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(503.4 |
) |
Other (income) expense, net |
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(256.0 |
) |
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(100.6 |
) |
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3,515.0 |
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3,439.4 |
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Income Before Taxes |
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2,254.4 |
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1,970.4 |
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Taxes on Income |
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550.1 |
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450.4 |
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Net Income |
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$ |
1,704.3 |
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$ |
1,520.0 |
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Basic Earnings per Common Share |
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$ |
0.79 |
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$ |
0.70 |
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Earnings per Common Share Assuming Dilution |
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$ |
0.78 |
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$ |
0.69 |
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Dividends Declared per Common Share |
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$ |
0.38 |
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$ |
0.38 |
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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
(Unaudited, $ in millions)
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March 31, |
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December 31, |
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2007 |
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2006 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
2,101.9 |
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$ |
5,914.7 |
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Short-term investments |
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1,954.3 |
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2,798.3 |
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Accounts receivable |
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4,016.2 |
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3,314.8 |
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Inventories (excludes inventories of $413.7 in 2007 and $416.1
in 2006 classified in Other assets see Note 3) |
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1,726.8 |
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1,769.4 |
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Prepaid expenses and taxes |
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1,942.5 |
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1,433.0 |
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Total current assets |
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11,741.7 |
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15,230.2 |
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Investments |
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7,839.1 |
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7,788.2 |
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Property, Plant and Equipment, at cost, net of allowance for
depreciation of $11,426.2 in 2007 and $11,015.4 in 2006 |
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12,939.8 |
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13,194.1 |
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Goodwill |
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1,431.6 |
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1,431.6 |
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Other Intangibles, Net |
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887.1 |
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943.9 |
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Other Assets |
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8,153.2 |
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5,981.8 |
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$ |
42,992.5 |
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$ |
44,569.8 |
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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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$ |
930.7 |
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$ |
1,285.1 |
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Trade accounts payable |
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430.3 |
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496.6 |
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Accrued and other current liabilities |
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5,229.7 |
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6,653.3 |
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Income taxes payable |
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444.5 |
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3,460.8 |
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Dividends payable |
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826.1 |
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826.9 |
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Total current liabilities |
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7,861.3 |
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12,722.7 |
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Long-Term Debt |
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5,545.3 |
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5,551.0 |
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Deferred Income Taxes and Noncurrent Liabilities |
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8,671.4 |
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6,330.3 |
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Minority Interests |
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2,435.2 |
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2,406.1 |
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Stockholders Equity |
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Common stock, one cent par value
Authorized 5,400,000,000 shares
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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7,221.3 |
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7,166.5 |
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Retained earnings |
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40,054.8 |
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39,095.1 |
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Accumulated other comprehensive loss |
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(1,092.6 |
) |
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(1,164.3 |
) |
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46,213.3 |
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45,127.1 |
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Less treasury stock, at cost
811,668,416 shares March 31, 2007
808,437,892 shares December 31, 2006 |
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27,734.0 |
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27,567.4 |
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Total stockholders equity |
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18,479.3 |
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17,559.7 |
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$ |
42,992.5 |
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$ |
44,569.8 |
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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
(Unaudited, $ in millions)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Cash Flows from Operating Activities |
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Net income |
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$ |
1,704.3 |
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$ |
1,520.0 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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500.4 |
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623.4 |
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Deferred income taxes |
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40.9 |
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(200.2 |
) |
Equity income from affiliates |
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(652.6 |
) |
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(503.4 |
) |
Dividends and distributions from equity affiliates |
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440.3 |
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473.5 |
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Share-based compensation |
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97.0 |
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121.3 |
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Other |
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(28.3 |
) |
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29.6 |
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Taxes paid for IRS settlement |
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(2,788.1 |
) |
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Net changes in assets and liabilities |
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(642.8 |
) |
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(757.4 |
) |
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Net Cash (Used by) Provided by Operating Activities |
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(1,328.9 |
) |
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1,306.8 |
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Cash Flows from Investing Activities |
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Capital expenditures |
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(200.7 |
) |
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(197.6 |
) |
Purchases of securities, subsidiaries and other investments |
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(3,825.1 |
) |
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(5,808.2 |
) |
Acquisition
of Sirna Therapeutics, Inc. |
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(1,134.0 |
) |
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Proceeds from sales of securities, subsidiaries and other investments |
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3,880.9 |
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7,511.1 |
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Other |
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(2.5 |
) |
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(0.4 |
) |
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Net Cash (Used by) Provided by Investing Activities |
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(1,281.4 |
) |
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1,504.9 |
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Cash Flows from Financing Activities |
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Net change in short-term borrowings |
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497.2 |
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(1,348.5 |
) |
Payments on debt |
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(854.8 |
) |
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(0.8 |
) |
Purchases of treasury stock |
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(244.4 |
) |
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(247.2 |
) |
Dividends paid to stockholders |
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(826.6 |
) |
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(829.8 |
) |
Proceeds from exercise of stock options |
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44.9 |
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301.2 |
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Other |
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167.4 |
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(96.6 |
) |
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Net Cash Used by Financing Activities |
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(1,216.3 |
) |
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(2,221.7 |
) |
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Effect of Exchange Rate Changes on Cash and Cash Equivalents |
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13.8 |
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11.9 |
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Net (Decrease) Increase in Cash and Cash Equivalents |
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(3,812.8 |
) |
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|
601.9 |
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Cash and Cash Equivalents at Beginning of Year |
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5,914.7 |
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|
9,585.3 |
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Cash and Cash Equivalents at End of Period |
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$ |
2,101.9 |
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$ |
10,187.2 |
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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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Basis of Presentation |
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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 the current
year presentation. |
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In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157,
Fair Value Measurements (FAS 157), which will be effective January 1, 2008. FAS 157
clarifies the definition of fair value, establishes a framework for measuring fair value, and
expands the disclosures on fair value measurements. The effect of adoption of FAS 157 on the
Companys financial position and results of operations is not expected to be material. |
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2. |
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Restructuring |
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In November 2005, the Company announced 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 announced 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 the first quarter of 2007, three of the
manufacturing facilities had been closed, sold or had ceased operations and the two
preclinical sites were closed. The Company has also sold or closed certain other facilities
and related assets in connection with the restructuring program. 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 of the program are expected to range from $1.9 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 March 31, 2007, the Company
has recorded total pre-tax accumulated costs of $1.5 billion and eliminated approximately
5,100 positions which are comprised of employee separations and the elimination of contractors
and vacant positions. However, the Company continues to hire new employees as the Companys
business requires it. For segment reporting purposes, restructuring charges are unallocated
expenses. |
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The following table summarizes the charges related to restructuring activities by type of cost
for the three months ended March 31, 2007 and 2006: |
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2007 |
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2006 |
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Separation |
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Accelerated |
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Separation |
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Accelerated |
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($ in millions) |
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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 |
|
Depreciation |
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Other |
|
Total |
|
Materials and
production |
|
$ |
|
|
|
$ |
118.1 |
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|
$ |
|
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|
$ |
118.1 |
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|
$ |
|
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$ |
198.6 |
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$ |
6.4 |
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$ |
205.0 |
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Research and
development |
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2.3 |
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(0.1 |
) |
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2.2 |
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55.4 |
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|
55.4 |
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Restructuring
costs |
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46.9 |
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|
18.9 |
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|
65.8 |
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|
27.8 |
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|
15.9 |
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|
43.7 |
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$ |
46.9 |
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$ |
120.4 |
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$ |
18.8 |
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$ |
186.1 |
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|
$ |
27.8 |
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|
$ |
254.0 |
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$ |
22.3 |
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$ |
304.1 |
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Separation costs are associated with actual headcount reductions, as well as those headcount
reductions which were probable and could be reasonably estimated. In the first quarter of
2007, approximately 230 positions were eliminated and in the first quarter of 2006
approximately 1,800 positions were eliminated. |
- 5 -
Notes to Consolidated Financial Statements (continued)
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Accelerated depreciation costs primarily relate to the manufacturing and preclinical
facilities expected to be sold or closed by the end of 2008. |
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Other activity primarily relates to termination charges on the Companys pension and other
postretirement benefit plans (see Note 8), as well as asset impairments. |
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The following table summarizes the charges and spending relating to restructuring activities
for the three months ended March 31, 2007: |
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Separation |
|
Accelerated |
|
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|
($ in millions) |
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Restructuring reserves as of January 1, 2007 |
|
$ |
177.7 |
|
|
$ |
|
|
|
$ |
|
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|
$ |
177.7 |
|
Expense |
|
|
46.9 |
|
|
|
120.4 |
|
|
|
18.8 |
|
|
|
186.1 |
|
(Payments) receipts, net |
|
|
(51.7 |
) |
|
|
|
|
|
|
(16.9 |
) |
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|
(68.6 |
) |
Non-cash activity |
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|
(120.4 |
) |
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|
(1.9 |
) |
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|
(122.3 |
) |
|
Restructuring reserves as of March 31, 2007 |
|
$ |
172.9 |
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|
$ |
|
|
|
$ |
|
|
|
$ |
172.9 |
|
|
3. |
|
Inventories |
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|
Inventories consisted of: |
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|
|
March 31, |
|
December 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Finished goods |
|
$ |
436.3 |
|
|
$ |
403.8 |
|
Raw materials and work in process |
|
|
1,615.7 |
|
|
|
1,688.9 |
|
Supplies |
|
|
88.5 |
|
|
|
92.8 |
|
|
Total (approximates current cost) |
|
|
2,140.5 |
|
|
|
2,185.5 |
|
Reduction to LIFO cost for domestic inventories |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,140.5 |
|
|
$ |
2,185.5 |
|
|
Recognized as: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
1,726.8 |
|
|
$ |
1,769.4 |
|
Other assets |
|
$ |
413.7 |
|
|
$ |
416.1 |
|
|
|
|
Amounts recognized as Other assets are comprised entirely of raw materials and work in process
inventories, which include inventories for products not expected to be sold within one year,
principally vaccines. |
|
4. |
|
Joint Ventures and Other Equity Method Affiliates |
|
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|
Equity income from affiliates reflects the performance of the Companys joint ventures and other
equity method affiliates and was comprised of the following: |
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|
|
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|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Merck/Schering-Plough |
|
$ |
(347.2 |
) |
|
$ |
(188.0 |
) |
AstraZeneca LP |
|
|
(211.9 |
) |
|
|
(213.5 |
) |
Other (1) |
|
|
(93.5 |
) |
|
|
(101.9 |
) |
|
|
|
$ |
(652.6 |
) |
|
$ |
(503.4 |
) |
|
|
|
|
(1) |
|
Primarily reflects results from Merial Limited, and joint ventures with
Sanofi Pasteur and Johnson & Johnson. |
5. |
|
Debt and Financial Instruments |
|
|
|
In February 2007, the Company redeemed $500 million of notes that were subject to annual
interest rate resets upon notification from the remarketing agent that, due to an overall rise
in interest rates, it would not exercise its annual option to remarket the notes. |
- 6 -
Notes to Consolidated Financial Statements (continued)
|
|
In March 2007, $350 million of 2.5% notes, along with an associated pay-floating,
receive-fixed interest rate swap, matured and were retired. |
|
6. |
|
Contingencies |
|
|
|
The Company is involved in various claims and legal proceedings of a nature considered normal
to its business, including product liability, intellectual property, and commercial
litigation, as well as additional matters such as antitrust actions. |
|
|
|
Vioxx Litigation |
|
|
|
Product Liability Lawsuits
|
|
|
|
As previously disclosed, individual and putative class actions have been filed against the
Company in state and federal courts alleging personal injury and/or economic loss with respect
to the purchase or use of Vioxx. All such actions filed in federal court are coordinated in a
multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the
MDL) before District Judge Eldon E. Fallon. A number of such actions filed in state court are
coordinated in separate coordinated proceedings in state courts in New Jersey, California and
Texas, and the counties of Philadelphia, Pennsylvania and Clark County, Nevada. As of March 31,
2007, the Company had been served or was aware that it had been named as a defendant in
approximately 27,250 lawsuits, which include approximately 45,700 plaintiff groups, alleging
personal injuries resulting from the use of Vioxx, and in approximately 266 putative class
actions alleging personal injuries and/or economic loss. (All of the actions discussed in this
paragraph are collectively referred to as the Vioxx Product Liability Lawsuits.) Of these
lawsuits, approximately 8,400 lawsuits representing approximately 23,450 plaintiff groups are or
are slated to be in the federal MDL and approximately 16,550 lawsuits representing approximately
16,550 plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court
before Judge Carol E. Higbee. |
|
|
|
In addition to the Vioxx Product Liability Lawsuits discussed above, the claims of over 4,600
plaintiffs had been dismissed as of March 31, 2007. Of these, there have been over 1,050
plaintiffs whose claims were dismissed with prejudice (i.e., they cannot be brought again)
either by plaintiffs themselves or by the courts. Over 3,550 additional plaintiffs have had
their claims dismissed without prejudice (i.e., they can be brought again). |
|
|
|
In the MDL, Judge Fallon scheduled a series of trials concluding in December 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. The
next scheduled trial in the MDL is a re-trial in Barnett v. Merck. Judge Fallon had originally
ruled that the re-trial would be on the issue of damages only, but Merck has moved to re-try all
issues including liability. That motion was argued on March 28, 2007 and a decision is pending. |
|
|
|
On March 22, 2007, Judge Fallon denied Mercks motion for summary judgment on statute of
limitations grounds in three individual cases (Edmonds v. Merck, Stinson v. Merck, and Watson v.
Merck), concluding that there were factual issues precluding summary judgment. |
|
|
|
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 March 31, 2007, approximately 13,700 claimants had entered into Tolling
Agreements. The parties have agreed that April 9, 2007 was the deadline for filing Tolling
Agreements and no additional Tolling Agreements will be accepted. |
|
|
|
The following sets forth the results of trials and certain significant rulings that occurred in
the first quarter with respect to the Vioxx Product Liability Lawsuits. |
|
|
|
The Company previously disclosed that in April 2006, in Garza v. Merck, a jury in Rio Grande
City, Texas returned a verdict in favor of the plaintiff. In September 2006, the Texas state
court granted the Companys request to investigate possible jury bias because a juror admitted
that he had, prior to the trial, on several occasions borrowed money from the plaintiff. On
December 21, 2006, the court entered judgment for plaintiff in the amount of $7.75 million, plus
interest, reduced from the original award of $32 million because of the Texas state cap on
punitive |
- 7 -
Notes to Consolidated Financial Statements (continued)
|
|
damages. The Company filed a motion for new trial on January 22, 2007, which was heard
on February 12, 2007. Judge Gabert took the matter under advisement but did not rule within the
statutory deadline. As a result, Mercks motion was denied by operation of law. The Company
has appealed. |
|
|
|
On January 18, 2007, Judge Victoria Chaney declared a mistrial in a consolidated trial of two
cases, Appell v. Merck and Arrigale v. Merck, which had commenced on October 31, 2006 in
California state court in Los Angeles, after the jury indicated that it could not reach a
verdict. |
|
|
|
A consolidated trial, Hermans v. Merck and Humeston v. Merck, began on January 17, 2007, in the
coordinated proceeding in New Jersey Superior Court before Judge Higbee. Humeston v. Merck was
first tried in 2005, but Judge Higbee set aside the November 2005 jury verdict in favor of Merck
and ordered a new trial on the grounds of newly discovered evidence. The Hermans/Humeston trial
was separated into two phases: a general phase regarding Mercks conduct and a
plaintiff-specific phase. The jury found for Merck in phase I on the Hermans failure to warn
claim, and the consumer fraud claim is being submitted to Judge Higbee for decision later this
month. The jury found for plaintiff in the Humeston case, awarding compensatory damages to Mr.
Humeston in the amount of $18 million and to Mrs. Humeston in the amount of $2 million. The
jury also awarded $27.5 million in punitive damages. Merck has moved for a judgment
notwithstanding the verdict, a new trial, or reduction of the award. |
|
|
|
On March 27, 2007, a jury found for Merck on all counts in Schwaller v. Merck, which was tried
in state court in Madison County, Illinois. |
|
|
|
On September 28, 2006, the New Jersey Superior Court, Appellate Division, heard argument on
plaintiffs appeal of Judge Higbees dismissal of the Sinclair v. Merck case. This putative
class action was originally filed in December 2004 and sought the creation of a medical
monitoring fund. Judge Higbee had granted the Companys motion to dismiss in May 2005. On
January 16, 2007, the Appellate Division reversed the decision and remanded the case back to
Judge Higbee for further factual inquiry. On April 4, 2007, the New Jersey Supreme Court
granted the Companys petition for review of the Appellate Divisions decision. |
|
|
|
On April 19, 2007, Judge Randy Wilson, who presides over the Texas Vioxx coordinated proceeding,
dismissed the failure to warn claim of plaintiff Ruby Ledbetter, whose case was scheduled to be
tried on May 14. Judge Wilson relied on a Texas statute enacted in 2003 that provides that
there can be no failure to warn regarding a prescription medicine if the medicine is distributed
with U.S. Food and Drug Administration (FDA)-approved labeling. There is an exception in the statute if
required, material, and relevant information was withheld from the FDA that would have led to a
different decision regarding the approved labeling, but Judge Wilson found that the
exception is preempted by federal law unless the FDA finds that such
information was withheld. Judge Wilson is currently presiding over 1,300 Vioxx
suits in Texas in which a principal allegation is failure to warn. Judge Wilson certified the
decision for an expedited appeal to the Texas Court of Civil Appeals. |
|
|
|
Juries have now found in favor of Merck 10 times and in favor of plaintiffs five times. There
are two unresolved mistrials as a result of hung juries after plaintiffs failed to prove their
claims. In addition, another 15 cases scheduled for trial were either dismissed or withdrawn
from the trial calendar by plaintiffs before a jury could be selected. |
|
|
|
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 Superior Court,
Appellate Division, affirmed the class certification order. On July 19, 2006, the New Jersey
Supreme Court decided to exercise its discretion to hear the Companys appeal of the Appellate
Divisions decision. On August 24, 2006, the Appellate Division ordered a stay of the
proceedings in Superior Court pending a ruling by the Supreme Court. Oral argument before the
New Jersey Supreme Court took place in March 2007. |
|
|
|
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, Texas and Utah.
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 |
- 8 -
Notes to Consolidated Financial Statements (continued)
|
|
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 and state securities laws (the
Vioxx Securities Lawsuits). All of the Vioxx Securities Lawsuits pending in federal court
have been transferred by the Judicial Panel on Multidistrict Litigation (the JPML) to the
United States District Court for the District of New Jersey before District Judge Stanley R.
Chesler for inclusion in a nationwide MDL (the Shareholder MDL). Judge Chesler has
consolidated the Vioxx Securities Lawsuits for all purposes. 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. On
April 12, 2007, Judge Chesler granted defendants motion to dismiss, and dismissed the complaint
with prejudice. Plaintiffs counsel has stated that plaintiffs plan to appeal the dismissal of
the complaint. |
|
|
|
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. The current
and former officers and directors have entered into a tolling agreement and, on June 30, 2006,
were dismissed without prejudice from the case. On July 19, 2006, the Court denied the
Companys motion to dismiss the complaint, but required plaintiff to amend the complaint.
Plaintiff filed an amended complaint on September 21, 2006. Merck filed a motion to require
plaintiffs to make the complaint more definite and certain, which was denied by the Court.
Merck filed an answer to the complaint in January 2007. |
|
|
|
As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the
Vioxx Derivative Lawsuits). The consolidated complaint arose out of substantially the same
factual allegations that are made in the Vioxx Securities Lawsuits. The Vioxx Derivative
Lawsuits, which were 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 appeal of the District
Courts decision refusing them leave to amend the complaint is currently pending before the
United States Court of Appeals for the Third Circuit and was argued on April 12, 2007. |
|
|
|
In addition, as previously disclosed, various putative class actions filed in federal court
under the Employee Retirement Income Security Act (ERISA) against the Company and certain
current and former officers and directors (the Vioxx ERISA Lawsuits and, together with the
Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits, the Vioxx Shareholder Lawsuits)
have been transferred to the Shareholder MDL and consolidated for all purposes. The
consolidated complaint asserts claims on behalf of certain of the Companys current and former
employees who are participants in certain of the Companys retirement plans for breach of
fiduciary duty. The lawsuits make similar allegations to the allegations contained in the Vioxx
Securities Lawsuits. On 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. |
|
|
|
International Lawsuits |
|
|
|
As previously disclosed, in addition to the lawsuits discussed above, the Company has been named
as a defendant in litigation relating to Vioxx in various countries (collectively, the Vioxx
Foreign Lawsuits) in Europe, as well as Canada, Brazil, Argentina, Australia, Turkey, and
Israel. |
- 9 -
Notes to Consolidated Financial Statements (continued)
|
|
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 had 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. The Companys 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. 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. Pursuant to negotiated agreements, two of the
Companys insurers, which represent approximately 23% of the product liability insurance, have committed to pay
approximately $100 million with respect to such insurance. Most of
the funds have been received. The amounts recovered from the two
insurers substantially offset previously established receivables and
therefore have not and will not impact Net Income in periods
received. Remaining receivables for product liability
insurance, including amounts subject to the arbitration, are immaterial. |
|
|
|
Investigations |
|
|
|
As previously disclosed, in November 2004, the Company was advised by the staff of the SEC that
it was commencing an informal inquiry concerning Vioxx. On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect to
Vioxx in a federal health care investigation under criminal statutes. In addition, as
previously disclosed, investigations are being conducted by local authorities in certain cities
in Europe in order to determine whether any criminal charges should be brought concerning Vioxx.
The Company is cooperating with these governmental entities in their respective investigations
(the Vioxx Investigations). The Company cannot predict the outcome of these inquiries;
however, they could result in potential civil and/or criminal dispositions. |
|
|
|
As previously disclosed, the Company has received a number of Civil Investigative Demands
(CID) from a group of Attorneys General from 31 states and the District of Columbia who are
investigating whether the Company violated state consumer protection laws when marketing Vioxx.
The Company is cooperating with the Attorneys General in responding to the CIDs. |
|
|
|
In addition, the Company received a subpoena in September 2006 from the State of California
Attorney General seeking documents and information related to the placement of Vioxx on
Californias Medi-Cal formulary. The Company is cooperating with the Attorney General in
responding to the subpoena. |
|
|
|
Reserves |
|
|
|
The Company currently anticipates that a number of Vioxx Product Liability Lawsuits will be
tried throughout 2007. A trial in the Oregon securities case is scheduled for 2007, but the
Company cannot predict whether this trial will proceed on schedule or the timing of any of the
other Vioxx Shareholder Lawsuit trials. The Company believes that it has meritorious defenses
to the Vioxx Lawsuits and will vigorously defend against them. In view of the inherent
difficulty of predicting the outcome of litigation, particularly where there are many claimants
and the claimants seek indeterminate damages, the Company is unable to predict the outcome of
these matters, and at this time cannot reasonably estimate the possible loss or range of loss
with respect to the Vioxx Lawsuits. 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 verdicts or judgments have been entered against the Company, and are now in
post-verdict proceedings or on appeal. In each of those cases the Company believes it has
strong points to raise on appeal and therefore that unfavorable outcomes in such cases are not
probable. Unfavorable outcomes in the Vioxx Litigation (as |
- 10 -
Notes to Consolidated Financial Statements (continued)
|
|
defined below) could have a material adverse effect on the Companys financial position,
liquidity and results of operations. |
|
|
|
Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2006, the Company had a reserve of
$858 million solely for its future legal defense costs related to the Vioxx Litigation. During
the first quarter of 2007, the Company spent approximately $121 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). As a result, as of March 31, 2007, the Company had a
reserve of $737 million solely for its future legal defense costs related to the Vioxx
Litigation. |
|
|
|
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; 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 most current information regarding anticipated timing,
progression, and related costs of pre-trial activities and trials in the Vioxx Product Liability
Lawsuits. Events such as scheduled trials, that are expected to occur throughout 2007 and into
2008, 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 2008. 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. |
|
|
|
Other Product Liability Litigation |
|
|
|
As previously disclosed, the Company is a defendant in product liability lawsuits in the United
States involving Fosamax (the Fosamax Litigation). As of March 31, 2007, 156 cases had been
filed against Merck in either federal or state court, including 4 cases which seek class action
certification, as well as damages and medical monitoring. In these actions, plaintiffs allege,
among other things, that they have suffered osteonecrosis of the jaw, generally subsequent to
invasive dental procedures such as tooth extraction or dental implants, and/or delayed healing,
in association with the use of Fosamax. On August 16, 2006, the JPML ordered that the Fosamax
product liability cases pending in federal courts nationwide should be transferred and
consolidated into one multidistrict litigation (the Fosamax MDL) for coordinated pre-trial
proceedings. The Fosamax MDL has been transferred to Judge John Keenan in the United States
District Court for the Southern District of New York. As a result of the JPML order, over 130
cases (which are included in the 156 cased noted above) are now before Judge Keenan. Judge
Keenan has issued a Case Management Order setting forth a schedule governing the proceedings
which focuses primarily upon resolving the class action certification motions in 2007 and the
start of substantive fact discovery relating to the class action motions and to the factual
merits of the cases. The Company intends to defend against these lawsuits. |
|
|
|
As of December 31, 2006, the Company established a reserve of approximately $48 million solely
for its future legal defense costs for the Fosamax Litigation through 2008. Spending in the
first quarter of 2007 was not significant. Some of the significant factors considered in the
establishment of the reserve for the Fosamax Litigation legal defense costs were as follows: the
actual costs incurred by the Company thus far; the development of the Companys legal defense
strategy and structure in light of the creation of the Fosamax MDL; the number of cases being
brought against the Company; and the anticipated timing, progression, and related costs of
pre-trial activities in the Fosamax Litigation. The Company will continue to monitor its legal
defense costs and review the adequacy of the associated reserves 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. Due to the uncertain nature of litigation,
the Company is unable to estimate its costs beyond the end of 2008. The Company has not
established any reserves for any potential liability relating to the Fosamax Litigation.
Unfavorable outcomes in the Fosamax Litigation could have a material adverse effect on the
Companys financial position, liquidity and results of operations. |
|
|
|
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 also reported that it has received a CID from the
Attorney General of Texas regarding the Companys marketing and selling activities relating to
Texas. As previously disclosed, the Company received another CID from the Attorney General of
Texas asking for additional information regarding the Companys marketing and selling activities
related to Texas, including with respect to certain of its nominal pricing programs and samples.
In April 2004, the Company received a subpoena from the office of the Inspector General for the
District of Columbia in connection with an investigation of the Companys interactions with
physicians in the District of Columbia, Maryland, and Virginia. In |
- 11 -
Notes to Consolidated Financial Statements (continued)
|
|
November 2004, the Company received a letter request from the DOJ in connection with its
investigation of the Companys pricing of Pepcid. |
|
|
|
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 note. It is not
feasible to predict the outcome of any such inquiries. |
|
|
|
As previously disclosed, on February 23, 2004, the Italian Antitrust Authority (ICA) adopted a
measure commencing a formal investigation of Merck Sharp & Dohme (Italia) S.p.A. (MSD Italy)
and the Company under Article 14 of the Italian Competition Law and Article 82 EC to ascertain
whether the Company and MSD Italy committed an abuse of a dominant position by refusing to grant
to ACS Dobfar S.p.A. (Dobfar), an Italian company, a voluntary license under the Companys
Italian Supplementary Protection Certificate (SPC), pursuant to domestic legislation passed in
2002, to permit Dobfar to manufacture imipenem and cilastatin (I&C), the active ingredients in
Tienam, in Italy for sale outside Italy in countries where patent protection had expired or
never existed. On March 21, 2007, the ICA adopted a Commitment Decision in which it accepted
the Companys commitment to grant non-exclusive licenses under
its Italian SPC for finasteride with respect to finasteride 5 mg for
the treatment of benign prostate hyperplasia and closed the case without a finding of infringement. |
|
7. |
|
Share-Based Compensation |
|
|
|
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. The Company recognizes the fair value of
share-based compensation in net income on a straight-line basis over the requisite service
period. |
|
|
|
The following table provides amounts of share-based compensation cost recorded in the
Consolidated Statement of Income: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Pre-tax share-based compensation expense |
|
$ |
97.0 |
|
|
$ |
121.3 |
|
Income tax benefits |
|
|
(30.4 |
) |
|
|
(37.3 |
) |
|
Total share-based compensation expense, net of tax |
|
$ |
66.6 |
|
|
$ |
84.0 |
|
|
|
|
During the first three months of 2007 and 2006, the Company granted 31.1 million options and
27.8 million options, respectively, related to its annual grant and other grants. The weighted
average fair value of options granted for the first three months of 2007 and 2006 was $9.04 and
$6.90 per option, respectively, and was determined using the following assumptions: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
|
Expected dividend yield |
|
|
3.4 |
% |
|
|
4.3 |
% |
Risk-free interest rate |
|
|
4.4 |
% |
|
|
4.6 |
% |
Expected volatility |
|
|
24.3 |
% |
|
|
26.4 |
% |
Expected life (years) |
|
|
6 |
|
|
|
6 |
|
|
|
|
At March 31, 2007, there was $541.4 million of total pre-tax unrecognized compensation
expense related to nonvested stock options, RSU and PSU awards which will be recognized over a
weighted average period of 2.5 years. For segment reporting, share-based compensation costs are
unallocated expenses. |
- 12 -
Notes to Consolidated Financial Statements (continued)
8. |
|
Pension and Other Postretirement Benefit Plans |
|
|
|
The Company has defined benefit pension plans covering eligible employees in the United States
and in certain of its international subsidiaries. The net cost of such plans consisted of the
following components: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Service cost |
|
$ |
92.1 |
|
|
$ |
90.0 |
|
Interest cost |
|
|
92.0 |
|
|
|
84.8 |
|
Expected return on plan assets |
|
|
(121.4 |
) |
|
|
(108.0 |
) |
Net amortization |
|
|
34.2 |
|
|
|
42.4 |
|
Termination benefits |
|
|
7.1 |
|
|
|
13.5 |
|
Curtailments |
|
|
|
|
|
|
0.2 |
|
|
|
|
$ |
104.0 |
|
|
$ |
122.9 |
|
|
|
|
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
benefit plans. The net cost of such plans consisted of the following components: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Service cost |
|
$ |
21.1 |
|
|
$ |
21.2 |
|
Interest cost |
|
|
25.9 |
|
|
|
25.4 |
|
Expected return on plan assets |
|
|
(30.3 |
) |
|
|
(28.2 |
) |
Net amortization |
|
|
(2.5 |
) |
|
|
1.0 |
|
Termination benefits |
|
|
0.9 |
|
|
|
1.4 |
|
|
|
|
$ |
15.1 |
|
|
$ |
20.8 |
|
|
|
|
In connection with restructuring actions (see Note 2), the Company recorded termination
charges for the three months ended March 31, 2007 and 2006 on its pension and 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 three months ended March 31, 2006 on its pension plans. |
9. |
|
Other (Income) Expense, Net |
|
|
Other (income) expense, net, consisted of: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Interest income |
|
$ |
(181.7 |
) |
|
$ |
(181.7 |
) |
Interest expense |
|
|
102.4 |
|
|
|
98.2 |
|
Exchange gains |
|
|
(19.6 |
) |
|
|
(0.4 |
) |
Minority interests |
|
|
30.6 |
|
|
|
29.9 |
|
Other, net |
|
|
(187.7 |
) |
|
|
(46.6 |
) |
|
|
|
$ |
(256.0 |
) |
|
$ |
(100.6 |
) |
|
|
|
The increase in Other, net primarily reflects the favorable impact of gains on sales of assets
and product divestitures. Interest paid for the three months ended March 31, 2007 and 2006
was $101.7 million and $147.1 million, respectively. |
- 13 -
Notes to Consolidated Financial Statements (continued)
10. |
|
Taxes on Income |
|
|
|
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, (FIN 48). FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 requires that the Company determine whether the benefits of tax positions are more likely
than not of being sustained upon audit based on the technical merits of the tax position. For
tax positions that are more likely than not of being sustained upon audit, the Company
recognizes the largest amount of the benefit that is more likely than not of being sustained in
the financial statements. For tax positions that are not more likely than not of being
sustained upon audit, the Company does not recognize any portion of the benefit in the financial
statements. As a result of the implementation of FIN 48, the Company recognized an $81 million
decrease in its existing liability for unrecognized tax benefits, with a corresponding increase
to the January 1, 2007 Retained earnings balance. |
|
|
|
As of January 1, 2007, after the implementation of FIN 48, the Companys liability for
unrecognized tax benefits was $5.01 billion, excluding liabilities for interest and penalties.
If the Company were to recognize these benefits, the effective tax rate would reflect a
favorable net impact of $3.95 billion. In addition, at January 1, 2007, liabilities for accrued
interest and penalties relating to the unrecognized tax benefits totaled $2.40 billion. As of
March 31, 2007, the Companys Consolidated Balance Sheet reflects a liability for unrecognized
tax benefits of $3.44 billion. If the Company were to recognize these benefits, the effective
tax rate would reflect a favorable net impact of $2.38 billion. Accrued interest and penalties
included in the Consolidated Balance Sheet were $1.50 billion as of March 31, 2007. The
declines from January 1, 2007 were primarily due to the settlement with the Internal Revenue
Service (IRS) discussed below. |
|
|
|
The Company recognizes interest and penalties associated with uncertain tax positions as a
component of Taxes on Income in the Consolidated Statement of Income. |
|
|
|
As previously disclosed, the IRS has examined the Companys tax returns for the years 1993 to
2001 and issued notices of deficiency with respect to a partnership transaction entered into in
1993, and two minority interest equity financings entered into in 1995 and 2000, respectively.
On February 13, 2007, the Company entered into closing agreements with the IRS covering several
specific items, including the 1993 partnership transaction and the minority interest financings.
The closing agreements effectively closed the examination of the Companys tax returns for the
period 1993 through 2001 resulting in a settlement of all open tax matters for these years.
Under the terms of the settlement, the Company made an aggregate payment of $2.79 billion in
February 2007. This payment will be offset during 2007 by (i) a tax refund of $165 million for
amounts previously paid for these matters and (ii) a federal tax benefit of approximately $360
million related to interest included in the payment, resulting in a net cash cost to the Company
of approximately $2.3 billion. The impact for years subsequent to 2001 of the partnership
transaction and the minority interest equity financings was included in the settlement although
those years remain open in all other respects. The settlement with the IRS did not have a
material impact on the Companys results of operations for the first quarter as these amounts
had been previously provided for. |
|
|
|
The Company must report the results of the IRS adjustments for the years 1993 through 2001 to
various state tax authorities. It is estimated that this will result in additional tax and
interest payments of $80 million and $120 million in the second and third quarters of 2007,
respectively, and an equivalent reduction in the balances of unrecognized tax benefits and
accrued interest reflected in the Consolidated Balance Sheet at March 31, 2007. |
|
|
|
It is anticipated that the amount of unrecognized tax benefits will change in the next 12 months
for items in addition to the state reporting of the IRS settlement; however these changes are
not expected to have a significant impact on the results of operations, cash flows or the
financial position of the Company. |
|
|
|
As previously disclosed, Mercks Canadian tax returns for the year 1998 through 2004 are being
examined by the Canada Revenue Agency (CRA). On October 10, 2006, the CRA issued the Company
a notice of reassessment containing adjustments related to certain intercompany pricing matters,
which result in additional Canadian and provincial tax due of approximately $1.4 billion (U.S.
dollars) plus interest of approximately $470 million (U.S. dollars). The Company disagrees with
the positions taken by the CRA and believes they are without merit. The Company intends to
contest the assessment through the CRA appeals process and the courts if necessary. In
connection with the appeals process, the Company was required to post a deposit of a portion of
the tax and interest assessed. During January 2007, the Company pledged collateral consisting of
cash and cash equivalents valued at $811 million (U.S. dollars) at March 31 to a financial
institution which provided a Letter of Guarantee to the CRA. The collateral is included in
Other Assets in the Consolidated Balance Sheet. The Company anticipates making a similar pledge
in |
- 14 -
Notes to Consolidated Financial Statements (continued)
|
|
connection with the same matters of approximately $288 million (U.S. dollars) in May 2007 to a
financial institution to provide a Letter of Guarantee to the Quebec Ministry of Revenue. The
Company has previously established reserves for these matters. While the resolution of these
matters may result in liabilities higher or lower than the reserves, management believes that
resolution of these matters will not have a material effect on the Companys financial position
or liquidity. However, an unfavorable resolution could have a material effect on the Companys
results of operations or cash flows in the quarter in which an adjustment is recorded or tax is
due. |
|
|
|
The IRS will begin its examination of the Companys 2002 to 2004 federal income tax returns
shortly. In addition, various state and foreign tax examinations are in progress. Tax years
that remain subject to examination by major tax jurisdictions include Germany from 1999, Italy
and Japan from 2000 and the United Kingdom from 2002. |
|
11. |
|
Earnings Per Share |
|
|
|
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 Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
|
Average common shares outstanding |
|
|
2,166.1 |
|
|
|
2,184.3 |
|
Common shares issuable(1) |
|
|
13.9 |
|
|
|
6.2 |
|
|
Average common shares outstanding assuming dilution |
|
|
2,180.0 |
|
|
|
2,190.5 |
|
|
|
|
|
(1) |
|
Issuable primarily under share-based compensation plans. |
|
|
For the three months ended March 31, 2007 and 2006, 207.0 million and 230.5 million,
respectively, of 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. |
|
12. |
|
Comprehensive Income |
|
|
|
Comprehensive income was $1,776.0 million and $1,515.4 million for the three months ended
March 31, 2007 and 2006, respectively. |
|
13. |
|
Segment Reporting |
|
|
|
The Companys operations are principally managed on a products basis and are comprised of two
reportable segments: the Pharmaceutical segment and the Vaccines segment. |
|
|
|
The Pharmaceutical segment includes human health pharmaceutical products marketed either
directly or through joint ventures. These products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human disorders. Merck sells these human
health pharmaceutical products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as health maintenance organizations
and other institutions. The Vaccines segment includes human health vaccine products marketed
either directly or through a joint venture. These products consist of preventative pediatric,
adolescent and adult vaccines, primarily administered at physician offices. Merck sells these
human health vaccines primarily to physicians, wholesalers, physician distributors and
government entities. The Vaccines segment includes the vast majority of the Companys vaccine
sales, but excludes certain sales of vaccines by non-U.S. subsidiaries managed by and included
in the Pharmaceutical segment. A large component of the pediatric and adolescent vaccines is
funded by the U.S. government through the U.S. Centers for Disease Control and Prevention
Vaccines for Children program. |
|
|
|
Other segments include other non-reportable human and animal health segments. |
- 15 -
Notes to Consolidated Financial Statements (continued)
|
|
Revenues and profits for these segments are as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Segment revenues: |
|
|
|
|
|
|
|
|
Pharmaceutical segment |
|
$ |
4,901.6 |
|
|
$ |
5,071.2 |
|
Vaccines segment(1) |
|
|
804.0 |
|
|
|
230.6 |
|
Other segment revenues |
|
|
36.7 |
|
|
|
34.0 |
|
|
|
|
$ |
5,742.3 |
|
|
$ |
5,335.8 |
|
|
|
|
|
|
|
|
|
|
|
Segment profits:(2) |
|
|
|
|
|
|
|
|
Pharmaceutical segment |
|
$ |
3,418.4 |
|
|
$ |
3,497.7 |
|
Vaccines segment |
|
|
491.6 |
|
|
|
115.6 |
|
Other segment profits |
|
|
154.1 |
|
|
|
133.3 |
|
|
|
|
$ |
4,064.1 |
|
|
$ |
3,746.6 |
|
|
|
|
|
(1) |
|
In accordance with segment reporting requirements, Vaccines segment
revenues exclude $98.8 million and $40.9 million for the first quarter of 2007 and
2006, respectively, of vaccines sales by certain non-U.S. subsidiaries managed by and
included in the Pharmaceutical segment. |
|
(2) |
|
Includes the majority of equity income from affiliates. |
|
|
A reconciliation of total segment revenues to consolidated sales is as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Segment revenues |
|
$ |
5,742.3 |
|
|
$ |
5,335.8 |
|
Other revenues |
|
|
27.1 |
|
|
|
74.0 |
|
|
|
|
$ |
5,769.4 |
|
|
$ |
5,409.8 |
|
|
|
|
Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to
divested products or businesses and other supply sales not included in segment results. |
- 16 -
Notes to Consolidated Financial Statements (continued)
|
|
Sales (1) of the Companys products were as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Pharmaceutical: |
|
|
|
|
|
|
|
|
Singulair |
|
$ |
1,002.0 |
|
|
$ |
801.4 |
|
Cozaar/Hyzaar |
|
|
798.0 |
|
|
|
701.1 |
|
Fosamax |
|
|
742.2 |
|
|
|
753.6 |
|
Zocor |
|
|
258.4 |
|
|
|
1,063.5 |
|
Primaxin |
|
|
197.0 |
|
|
|
169.6 |
|
Cosopt/Trusopt |
|
|
186.1 |
|
|
|
151.6 |
|
Cancidas |
|
|
134.1 |
|
|
|
146.3 |
|
Proscar |
|
|
125.3 |
|
|
|
188.2 |
|
Vasotec/Vaseretic |
|
|
121.6 |
|
|
|
136.1 |
|
Maxalt |
|
|
107.4 |
|
|
|
92.9 |
|
Propecia |
|
|
95.3 |
|
|
|
75.3 |
|
Januvia |
|
|
87.0 |
|
|
|
|
|
Crixivan/Stocrin |
|
|
82.3 |
|
|
|
81.6 |
|
Arcoxia |
|
|
80.4 |
|
|
|
59.4 |
|
Other pharmaceutical (2) |
|
|
785.7 |
|
|
|
609.7 |
|
|
|
|
|
4,802.8 |
|
|
|
5,030.3 |
|
|
Vaccines: (3) |
|
|
|
|
|
|
|
|
Gardasil |
|
|
365.4 |
|
|
|
|
|
RotaTeq |
|
|
85.0 |
|
|
|
2.2 |
|
Zostavax |
|
|
42.7 |
|
|
|
|
|
ProQuad/M-M-R II/Varivax |
|
|
246.1 |
|
|
|
159.2 |
|
Hepatitis vaccines |
|
|
71.5 |
|
|
|
53.5 |
|
Other vaccines |
|
|
92.1 |
|
|
|
56.6 |
|
|
|
|
|
902.8 |
|
|
|
271.5 |
|
|
Other (4) |
|
|
63.8 |
|
|
|
108.0 |
|
|
|
|
$ |
5,769.4 |
|
|
$ |
5,409.8 |
|
|
|
|
|
(1) |
|
Presented net of discounts and returns. |
|
(2) |
|
Other pharmaceutical primarily includes sales of other human
pharmaceutical products and revenue from the Companys relationship with AstraZeneca LP
primarily relating to sales of Nexium and Prilosec. Revenue from AstraZeneca LP was
$497.6 million for the first quarter of 2007 and $380.1 million for the first quarter of
2006. |
|
(3) |
|
These amounts do not reflect sales of vaccines sold in most major
European markets through the Companys joint venture, Sanofi Pasteur MSD, the results of
which are reflected in Equity income from affiliates. However, these
amounts do reflect supply sales to Sanofi Pasteur MSD. |
|
(4) |
|
Other primarily includes other pharmaceutical and animal health
joint venture supply sales and other miscellaneous revenues. |
- 17 -
Notes to Consolidated Financial Statements (continued)
|
|
A reconciliation of segment profits to Income Before Taxes is as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Segment profits |
|
$ |
4,064.1 |
|
|
$ |
3,746.6 |
|
Other profits |
|
|
0.2 |
|
|
|
58.2 |
|
Adjustments |
|
|
82.9 |
|
|
|
156.0 |
|
Unallocated: |
|
|
|
|
|
|
|
|
Interest income |
|
|
181.7 |
|
|
|
181.7 |
|
Interest expense |
|
|
(102.4 |
) |
|
|
(98.2 |
) |
Equity income from affiliates |
|
|
47.7 |
|
|
|
69.5 |
|
Depreciation and amortization |
|
|
(466.4 |
) |
|
|
(582.8 |
) |
Research and development |
|
|
(1,030.0 |
) |
|
|
(942.0 |
) |
Other expenses, net |
|
|
(523.4 |
) |
|
|
(618.6 |
) |
|
|
|
$ |
2,254.4 |
|
|
$ |
1,970.4 |
|
|
|
|
Segment profits are comprised of segment revenues less certain elements of materials and
production costs and operating expenses, including the majority of equity income from
affiliates and components of 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. |
|
|
|
Other profits are primarily comprised of miscellaneous corporate profits as well as operating
profits related to divested products or businesses and other supply sales. Adjustments
represent the elimination of the effect of double counting certain items of income and
expense. Equity income from affiliates includes taxes paid at the joint venture level and a
portion of equity income that is not reported in segment profits. Other expenses, net,
includes expenses from corporate and manufacturing cost centers and other miscellaneous income
(expense), net. |
- 18 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Operating Results
Sales
Worldwide sales were $5.8 billion for the first quarter of 2007, an increase of 7% compared with
the first quarter of 2006. Global sales performance included a 6% volume increase and a 1%
favorable effect from foreign exchange for the quarter. Sales performance over 2006 reflects
strong growth of Singulair, a once-a-day oral medicine indicated for the chronic treatment of
asthma and the relief of symptoms of allergic rhinitis, and the Companys vaccines, including
Gardasil, a vaccine to help protect against cervical cancer and genital warts caused by certain
types of human papillomavirus (HPV) and RotaTeq, a vaccine to help protect against rotavirus
gastroenteritis in infants and children, as well as other pediatric vaccines, including ProQuad
the pediatric combination vaccine against measles, mumps, rubella and varicella and Varivax, a
vaccine to help prevent chickenpox. Also contributing to the sales growth were higher revenues
from the Companys relationship with AstraZeneca LP (AZLP) primarily driven by Nexium, and
increased sales of Cozaar/Hyzaar* for high blood pressure, as well as sales of Januvia for the
treatment of type 2 diabetes. Sales growth was partially offset by lower sales of Zocor, the
Companys statin for modifying cholesterol and Proscar, a urology product for the treatment of
symptomatic benign prostate enlargement. Mercks U.S. market exclusivity for Zocor expired on
June 23, 2006, while Mercks U.S. market exclusivity for Proscar expired on June 19, 2006.
|
|
|
* |
|
Cozaar and Hyzaar are registered trademarks of E.I. DuPont de Nemours & Company,
Wilmington, Delaware. |
- 19 -
Sales of the Companys products were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Pharmaceutical: |
|
|
|
|
|
|
|
|
Singulair |
|
$ |
1,002.0 |
|
|
$ |
801.4 |
|
Cozaar/Hyzaar |
|
|
798.0 |
|
|
|
701.1 |
|
Fosamax |
|
|
742.2 |
|
|
|
753.6 |
|
Zocor |
|
|
258.4 |
|
|
|
1,063.5 |
|
Primaxin |
|
|
197.0 |
|
|
|
169.6 |
|
Cosopt/Trusopt |
|
|
186.1 |
|
|
|
151.6 |
|
Cancidas |
|
|
134.1 |
|
|
|
146.3 |
|
Proscar |
|
|
125.3 |
|
|
|
188.2 |
|
Vasotec/Vaseretic |
|
|
121.6 |
|
|
|
136.1 |
|
Maxalt |
|
|
107.4 |
|
|
|
92.9 |
|
Propecia |
|
|
95.3 |
|
|
|
75.3 |
|
Januvia |
|
|
87.0 |
|
|
|
|
|
Crixivan/Stocrin |
|
|
82.3 |
|
|
|
81.6 |
|
Arcoxia |
|
|
80.4 |
|
|
|
59.4 |
|
Other pharmaceutical (1) |
|
|
785.7 |
|
|
|
609.7 |
|
|
|
|
|
4,802.8 |
|
|
|
5,030.3 |
|
|
Vaccines: (2) |
|
|
|
|
|
|
|
|
Gardasil |
|
|
365.4 |
|
|
|
|
|
RotaTeq |
|
|
85.0 |
|
|
|
2.2 |
|
Zostavax |
|
|
42.7 |
|
|
|
|
|
ProQuad/M-M-R II/Varivax |
|
|
246.1 |
|
|
|
159.2 |
|
Hepatitis |
|
|
71.5 |
|
|
|
53.5 |
|
Other vaccines |
|
|
92.1 |
|
|
|
56.6 |
|
|
|
|
|
902.8 |
|
|
|
271.5 |
|
|
Other (3) |
|
|
63.8 |
|
|
|
108.0 |
|
|
|
|
$ |
5,769.4 |
|
|
$ |
5,409.8 |
|
|
|
|
|
(1) |
|
Other pharmaceutical primarily includes sales of other human pharmaceutical
products, and revenue from the Companys relationship with AZLP primarily relating to sales
of Nexium and Prilosec. Revenue from AZLP was $497.6 million for the first quarter of 2007
and $380.1 million for the first quarter of 2006. |
|
(2) |
|
These amounts do not reflect sales of vaccines sold in most major
European markets through the Companys joint venture, Sanofi Pasteur MSD, the results of
which are reflected in Equity income from affiliates. However, these
amounts do reflect supply sales to Sanofi Pasteur MSD. |
|
(3) |
|
Other primarily includes other pharmaceutical and animal health joint
venture supply sales and other miscellaneous revenues. |
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 $518.7 million in the first quarter of 2007 and $1,179.6 million for the first
quarter of 2006. The reduction in discounts compared with the prior year period resulted
primarily from the significant decline in first quarter 2007 Zocor sales due to the loss of U.S.
market exclusivity in June 2006. Inventory levels at key wholesalers for each of the Companys
major products are generally less than one month.
- 20 -
Segment Revenues
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Pharmaceutical segment |
|
$ |
4,901.6 |
|
|
$ |
5,071.2 |
|
Vaccines segment (1) |
|
|
804.0 |
|
|
|
230.6 |
|
Other segment (2) |
|
|
36.7 |
|
|
|
34.0 |
|
Other (3) |
|
|
27.1 |
|
|
|
74.0 |
|
|
Total revenues |
|
$ |
5,769.4 |
|
|
$ |
5,409.8 |
|
|
|
|
|
(1) |
|
In accordance with segment reporting requirements, Vaccines segment
revenues exclude $98.8 million and $40.9 million for the first quarter of 2007 and 2006,
respectively, of vaccines sales by certain non-U.S. subsidiaries managed by and included
in the Pharmaceutical segment. |
|
(2) |
|
Includes other non-reportable human and animal health segments. |
|
(3) |
|
Other revenues are primarily comprised of miscellaneous corporate revenues, sales
related to divested products or businesses and other supply sales not included in segment
results. |
Pharmaceutical Segment Revenues
Sales of the Pharmaceutical segment decreased 3% in the first quarter of 2007 primarily due to
declines in Zocor and Proscar post-U.S. patent expiration, partially offset by increases in
Singulair, Cozaar/Hyzaar, Januvia and Nexium supply sales.
Worldwide sales were strong for Singulair, reaching $1.0 billion for the first quarter of 2007,
representing growth of 25% over the first quarter of 2006. Singulair continues to be the number
one prescribed product in the U.S. respiratory market. On April 13, 2007, the FDA approved a new indication for Singulair for the prevention of
exercise-induced bronchoconstriction in patients 15 years of age and older.
Global sales of Mercks antihypertensive medicines, Cozaar and Hyzaar were $798.0 million for the
first quarter of 2007, representing an increase of 14% from the first quarter of 2006. Cozaar
and Hyzaar are among the worlds leading angiotensin receptor blockers, the fastest growing class
in the antihypertensive market.
Global sales for Fosamax and Fosamax Plus D (marketed as Fosavance throughout the European Union
(EU) and as Fosamac in Japan) were $742.2 million for the first quarter of 2007, representing a
decline of 2% compared with the first quarter of 2006. Fosamax and Fosamax Plus D together
remain the most prescribed medicine worldwide for the treatment of osteoporosis. U.S. sales of
Fosamax and Fosamax Plus D for the quarter increased 6%. Sales outside the United States were
affected by the availability of generic alendronate sodium products in several key markets.
Fosamax and Fosamax Plus D will lose market exclusivity in the United States in February 2008 and
April 2008, respectively, and the Company expects significant declines in U.S. Fosamax and
Fosamax Plus D sales after each products respective loss of market exclusivity.
Worldwide sales of Zocor, Mercks statin for modifying cholesterol, were $258.4 million in the
first quarter of 2007, representing a decline of 76% over the first quarter of 2006. Sales of
Zocor were significantly negatively affected by the loss of U.S. market exclusivity in June 2006.
Sales of Januvia, a medicine for use in the treatment of type 2 diabetes, were $87.0 million in the
first quarter of 2007. Januvia was approved by the FDA in October 2006. Since the U.S. launch in
October 2006, Januvia has been listed on formulary with managed care plans representing more than
124 million lives and is available on the 2nd or 3rd tier in managed care plans with an additional
75 million lives. Januvia is now approved for use in 42 countries (including the 27 countries of
the EU where it was approved by the European Commission in late March 2007) as the only
dipeptidyl peptidase-4 (DPP-4) inhibitor available for the treatment of type 2 diabetes when diet
and exercise are not enough.
On March 30, 2007, the FDA approved Janumet, Mercks oral antihyperglycemic agent that combines
sitagliptin (Mercks DPP-4 inhibitor) with metformin in a single tablet to address all three key
defects of type 2 diabetes. Janumet has been approved, as an adjunct to diet and exercise, to
improve blood sugar (glucose) control in adult patients with type 2 diabetes who are not
adequately controlled on metformin or sitagliptin alone, or in patients already being treated
with the combination of sitagliptin and metformin. The Company is moving forward with regulatory
filings in countries outside of the United States.
- 21 -
Other products experiencing growth in the first quarter of 2007 include Cosopt to treat glaucoma,
Arcoxia for the treatment of arthritis and pain, Propecia for male pattern hair loss and Maxalt
to treat migraine pain.
On April 26, 2007, the FDA issued a non-approvable letter in response to the Companys New Drug
Application (NDA) for Arcoxia (etoricoxib) for the symptomatic treatment of osteoarthritis.
Arcoxia has been under review by the FDA as an investigational selective COX-2 inhibitor since
the NDA was submitted in December 2003 for a 60 mg once-daily dose along with review of a
separate related NDA for a 30 mg once-daily dose submitted in April 2004. In the non-approvable
letter, the FDA indicated that Merck would need to provide additional data in support of the
benefit-to-risk profile for the proposed doses of Arcoxia in order to gain approval. Arcoxia is
currently available in 63 countries in Europe, Latin America, the Asia-Pacific region and Middle
East/Northern Africa. Merck will continue to market Arcoxia outside the United States, where it
has been approved for a broad range of indications, including osteoarthritis.
Vaccines Segment Revenues
Sales of the Vaccines segment increased to $804.0 million in the first quarter of 2007 compared
with $230.6 million in the same prior year period as a result of new product launches during the
latter part of 2006, as well as the continued success of in-line vaccines.
The following discussion of vaccines includes total vaccines sales, the vast majority of which
are included in the Vaccines segment and the remainder, representing certain sales of vaccines by
non-U.S. subsidiaries, which are managed by and included in the Pharmaceutical segment. These
amounts do not reflect sales of vaccines sold in most major European markets through Sanofi
Pasteur MSD (SPMSD), the Companys joint venture with Sanofi Pasteur, the results of which are
reflected in Equity income from affiliates. However, Vaccines segment
revenues do reflect supply sales to SPMSD.
Total vaccine sales as recorded by Merck (including the $804.0 million reflected in the Vaccines
segment and the $98.8 million reflected in the Pharmaceutical segment) were $902.8 million for
the first quarter of 2007 compared with $271.5 million in the first quarter of 2006. Growth in
vaccines was led by Gardasil, as well as the strong performance of RotaTeq and other pediatric
vaccines, including ProQuad and Varivax.
Total sales as recorded by Merck for Gardasil were $365.4 million for the first quarter of 2007,
which includes initial purchases by many states through the U.S. Centers for Disease Control and
Prevention (CDC) Vaccines for Children program. Gardasil has been approved in 70 countries
with regulatory applications pending in more than 30 countries. Gardasil was approved by the FDA
in June 2006 and is the only approved vaccine for the prevention of cervical cancer and vulvar
and vaginal pre-cancers caused by 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. On March 22, 2007, the CDC
adopted the unanimous recommendation of its Advisory Committee on Immunization Practices (ACIP)
for the use of Gardasil. The vaccination guidelines, published in the CDCs Morbidity and
Mortality Weekly Report, finalize the provisional recommendations issued by the ACIP in June
2006.
In April 2007, Merck announced that it had submitted a supplemental Biologics License Application
for Gardasil to the FDA to update the labeling for Gardasil. The new submission for Gardasil
includes efficacy data showing some protection against additional cervical cancer-causing HPV
types responsible for greater than 10 percent of cervical cancers, data on protection against
additional gynecological cancers (vaginal and vulvar), and data on immune memory.
RotaTeq, Mercks vaccine to help protect against rotavirus gastroenteritis in infants and
children, achieved total sales recorded by Merck of $85.0 million for the first quarter of 2007.
RotaTeq was approved by the FDA in February 2006. RotaTeq has been approved in 46 countries and
applications for licensure have been filed in more than 50 other countries.
As previously disclosed, the Company has been working to resolve an issue related to the bulk
manufacturing process for the Companys varicella zoster virus (VZV)-containing vaccines. As a
result of the manufacturing issue, the production of the VZV bulk has been temporarily suspended
while the Company works on the issue. This situation does not affect the quality of any of Mercks
VZV-containing vaccines currently on the market, any lots of vaccine in inventory that are ready
for release to the market or any vaccines which will be filled and finished from existing VZV bulk.
The Company estimates that its current supply of ProQuad, one of the VZV-containing vaccines, will
no longer be available for order in mid-2007. However, the Company expects to be able to meet market demand through the use of
the component vaccines, Varivax and M-M-R II.
- 22 -
Costs, Expenses and Other
Global Restructuring Program
In November 2005, the Company announced 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 announced 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 the first quarter of 2007, three of the
manufacturing facilities had been closed, sold or had ceased operations, and the two preclinical
sites were closed. The Company has also sold or closed certain other facilities and related
assets in connection with the restructuring program. There have been approximately 5,100
positions eliminated throughout the Company since inception of the program (approximately 230 of
which were eliminated during the first quarter of 2007), which are comprised of actual headcount
reductions, and the elimination of contractors and vacant positions. However the Company
continues to hire new employees as the Companys business requires it. 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 $1.9 billion to $2.2 billion.
The Company expects to record charges of approximately $300 to $500 million during 2007. Merck
continues to expect the initial phase of its cost reduction program to yield cumulative pre-tax
savings of $4.5 to $5.0 billion from 2006 through 2010. The Company recorded pre-tax
restructuring costs of $186.1 million ($123.6 million after tax or $0.06 per share) and $304.1
million ($194.9 million after tax or $0.09 per share) for the three months ended March 31, 2007
and 2006, respectively. These costs were comprised primarily of accelerated depreciation and
separation costs recorded in Materials and production, Research and development and Restructuring
costs (see Note 2).
Materials and production costs were $1.53 billion for the first quarter of 2007, an increase of
14% from the first quarter of 2006. Included in the first quarter of 2007 and 2006 were costs
associated with restructuring activities, primarily accelerated depreciation and asset impairment
costs of $118.1 million and $205.0 million, respectively.
The gross margin was 73.6% in the first quarter of 2007 compared with 75.2% in the first quarter
of 2006, which reflect 2.0 and 3.8 percentage point unfavorable impacts, respectively, relating
to costs associated with restructuring activities. Changes in product mix had an unfavorable
impact on the first quarter gross margin compared with the same prior year quarter, including the
decline in branded Zocor sales in first quarter 2007 compared with 2006 as a result of the loss
of U.S. market exclusivity in June 2006.
Marketing and administrative expenses were $1.80 billion in the first quarter of 2007, an
increase of 5% compared with the first quarter of 2006. The increase is largely attributable to
the level of activity required to support the worldwide launches of Gardasil and Januvia.
Research and development expenses totaled $1.03 billion for the first quarter of 2007, an
increase of 9% over the first quarter of 2006. The first quarter of 2007 and 2006 included $2.2
million and $55.4 million of costs related to the global restructuring program, respectively.
Excluding these costs, the increase in research and development costs reflects an increase in
basic research and development spending in support of the continued advancement of the research
pipeline.
In April 2007, Merck announced that MK-0974, Mercks calcitonin gene-related peptide antagonist,
was entering Phase III of development for the acute treatment of migraine pain. Phase II data
will be presented for the first time at the American Headache Society and the International
Headache Society meeting in June 2007. Merck continues to anticipate filing the NDA for MK-0974
in 2009.
In March 2007, the Company presented the results from two ongoing Phase III studies of Isentress
(raltegravir), Mercks oral investigational integrase inhibitor at the 14th Annual
Conference on Retroviruses and Opportunistic Infections. The data demonstrated significantly
greater antiretroviral activity of Isentress when used in combination with optimized background
therapy (OBT) versus placebo plus OBT in treatment-experienced HIV-infected patients who had
failed antiretroviral therapies (ARTs), and who had HIV virus resistant to at least one drug in
each of the three available classes of oral ARTs. These data were collected from the 16-week
primary analysis time point called for in the 156 week-long study protocol. Both studies also
showed that after 16 weeks of treatment, Isentress plus OBT was generally safe and well
tolerated. Isentress is the first in a new class of investigational antiretroviral agents called
integrase inhibitors that inhibit the insertion of the HIV viral DNA into human DNA. Inhibiting
integrase from performing this essential function blocks the ability of the virus to replicate
and infect new cells. Isentress has been previously referred to as MK-0518. The brand name
Isentress is currently under review by the FDA.
Also in March 2007, Merck and H. Lundbeck A/S announced the discontinuation of their joint
development program for gaboxadol, an investigational new medicine for the treatment of insomnia
that was in Phase III development. Data from
- 23 -
recently completed clinical studies suggest that the overall clinical profile for gaboxadol in
insomnia does not support further development. As a result of this new information, Merck and
Lundbeck will not file an NDA for gaboxadol for the treatment of insomnia with
the FDA, or other regulatory agencies worldwide, and have terminated ongoing clinical studies.
Amounts included in Restructuring costs, primarily representing separation costs associated with
the Companys global restructuring program, were $65.8 million for the first quarter of 2007
compared with $43.7 million for the first quarter of 2006 (see Note 2).
Equity income from affiliates, which reflects the performance of the Companys joint ventures and
other equity method affiliates, was $652.6 million for the first quarter of 2007 and $503.4
million for the first quarter of 2006. The increase in 2007 primarily reflects the successful
performance of Zetia and Vytorin through the Merck/Schering-Plough partnership. See Note 4 and
"Selected Joint Venture and Affiliate Information below.
The change in Other (income) expense, net for the first quarter of 2007 primarily reflects the
favorable impact of gains on sales of assets and product divestitures.
Segment Profits
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Pharmaceutical segment |
|
$ |
3,418.4 |
|
|
$ |
3,497.7 |
|
Vaccines segment |
|
|
491.6 |
|
|
|
115.6 |
|
Other segment |
|
|
154.1 |
|
|
|
133.3 |
|
Other |
|
|
(1,809.7 |
) |
|
|
(1,776.2 |
) |
|
Income before income taxes |
|
$ |
2,254.4 |
|
|
$ |
1,970.4 |
|
|
Segment profits are comprised of segment revenues less certain elements of materials and
production costs and operating expenses, including the majority of equity income from affiliates
and components of depreciation and amortization expenses. For internal management reporting
presented to the chief operating decision maker, the Company does not allocate the vast majority
of indirect production costs, research and development expenses and general and administrative
expenses, as well as the cost of financing these activities. Separate divisions maintain
responsibility for monitoring and managing these costs, including depreciation related to fixed
assets utilized by these divisions and, therefore, they are not included in segment profits.
Also excluded from the determination of segment profits are taxes paid at the joint venture level
and a portion of equity income. Additionally, segment profits do not reflect other expenses from
corporate and manufacturing cost centers and other miscellaneous income (expense). These
unallocated items are reflected in Other in the above table. Also included in Other are
miscellaneous corporate profits, operating profits related to divested products or businesses,
other supply sales and adjustments to eliminate the effect of double counting certain items of
income and expense.
Pharmaceutical segment profits decreased 2% in the first quarter of 2007 compared with the first
quarter of 2006. The decrease largely reflects the loss of U.S. market exclusivity for Zocor and
Proscar, partially offset by higher equity income, primarily driven by the strong performance of
the Merck/Schering-Plough partnership.
Vaccines segment profits were $491.6 million in the first quarter of 2007 compared with $115.6 in
the first quarter of 2006 driven by the launches of three new vaccines in the latter part of
2006, as well as the successful performance of in-line vaccines. Vaccines segment profits also
reflect the results from SPMSD included in Equity income from affiliates.
The effective tax rate was 24.4% for the first quarter of 2007 compared with 22.9% for the first
quarter of 2006. The effective tax rates reflect the impact of costs associated with the global
restructuring program.
Net income was $1.70 billion for the first quarter of 2007 compared with $1.52 billion for the
first quarter of 2006. Earnings per common share assuming dilution
(EPS) for the first quarter
of 2007 were $0.78 compared with $0.69 in the first quarter of 2006. These results reflect
strong performance across a range of the Companys products, solid performance from the
Merck/Schering-Plough partnership, as well as gains from certain asset and product divestitures
as discussed above.
- 24 -
Selected Joint Venture and Affiliate Information
The Merck/Schering-Plough partnership reported combined global sales of Zetia and Vytorin of
$1.17 billion for the first quarter of 2007, representing growth of 47% over the first quarter of
2006. Global sales of Zetia, the cholesterol-absorption inhibitor also marketed as Ezetrol
outside the United States, reached $544.0 million in the first quarter of 2007, an increase of
31% compared with the first quarter of 2006. Global sales of Vytorin, marketed outside the
United States as Inegy, reached $623.8 million in the first quarter of 2007, an increase of 65%
compared with the first quarter of 2006.
Total vaccine sales reported by SPMSD were $194.8 million for the first quarter of 2007 compared
with $172.7 for the first quarter of 2006. SPMSD sales for the first quarter of 2007 included
sales of Gardasil of $30.2 million.
The Company records the results from its interest in the Merck/Schering-Plough partnership and
SPMSD in Equity income from affiliates.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Cash and investments |
|
$ |
11,895.3 |
|
|
$ |
16,501.2 |
|
Working capital |
|
$ |
3,880.4 |
|
|
$ |
2,507.5 |
|
Total debt to total liabilities and equity |
|
|
15.1 |
% |
|
|
15.3 |
% |
|
The decline in cash and investments at March 31, 2007, primarily reflects the payment made under
the terms of a settlement with the Internal Revenue Service
(IRS) for certain tax matters (see below) and the January 3,
2007 payment made in connection with the December 2006 acquisition of Sirna Therapeutics, Inc.
(Sirna).
During the first quarter of 2007 cash used by operating activities of $1.3 billion largely
reflects the payment referenced above for certain tax matters. This compares with cash provided
by operations of $1.3 billion in the first quarter of 2006. On an ongoing basis, cash provided
by operations will continue to be the Companys primary source of funds to finance operating
needs and capital expenditures. Cash used in investing activities of $1.3 billion in the first
quarter of 2007 largely reflects the $1.1 billion payment made in connection with the Sirna
acquisition.
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, (FIN 48). As a result of the implementation of FIN 48, the Company
recognized an $81 million decrease in its existing liability for unrecognized tax benefits, with
a corresponding increase to the January 1, 2007 Retained earnings balance.
As of January 1, 2007, after the implementation of FIN 48, the Companys liability for
unrecognized tax benefits was $5.01 billion, excluding liabilities for interest and penalties.
If the Company were to recognize these benefits, the effective tax rate would reflect a favorable
net impact of $3.95 billion. In addition, at January 1, 2007, liabilities for accrued interest
and penalties relating to the unrecognized tax benefits totaled $2.40 billion. As of March 31,
2007, the Companys Consolidated Balance Sheet reflects a liability for unrecognized tax benefits
of $3.44 billion. If the Company were to recognize these benefits, the effective tax rate would
reflect a favorable net impact of $2.38 billion. Accrued interest and penalties included in the
Consolidated Balance Sheet were $1.50 billion as of March 31, 2007. The declines from January 1,
2007 were primarily due to the settlement with the IRS discussed
below.
As
previously disclosed, the IRS has examined the Companys tax returns for the years 1993 to
2001 and issued notices of deficiency with respect to a partnership transaction entered into in
1993, and two minority interest equity financings entered into in 1995 and 2000, respectively.
On February 13, 2007, the Company entered into closing agreements with the IRS covering several
specific items, including the 1993 partnership transaction and the minority interest financings.
The closing agreements effectively closed the examination of the Companys tax returns for the
period 1993 through 2001 resulting in a settlement of all open tax matters for these years.
Under the terms of the settlement, the Company made an aggregate payment of $2.79 billion in
February 2007. This payment will be offset during 2007 by (i) a tax refund of $165 million for
amounts previously paid for these matters and (ii) a federal tax benefit of approximately $360
million related to interest included in the payment, resulting in a net cash cost to the Company
of approximately $2.3 billion. The impact for years subsequent to 2001 of the partnership
transaction and the minority interest equity financings was included in the settlement although
those years remain open in all other respects. The
- 25 -
settlement with the IRS did not have a material impact on the Companys results of operations for
the first quarter as these amounts had been previously provided for.
As previously disclosed, Mercks Canadian tax returns for the year 1998 through 2004 are being
examined by the Canada Revenue Agency (CRA). On October 10, 2006, the CRA issued the Company a
notice of reassessment containing adjustments related to certain intercompany pricing matters,
which result in additional Canadian and provincial tax due of approximately $1.4 billion (U.S.
dollars) plus interest of approximately $470 million (U.S. dollars). The Company disagrees with
the positions taken by the CRA and believes they are without merit. The Company intends to
contest the assessment through the CRA appeals process and the courts if necessary. In
connection with the appeals process, the Company was required to post a deposit of a portion of
the tax and interest assessed. During January 2007, the Company pledged collateral consisting of
cash and cash equivalents valued at $811 million (U.S. dollars) at March 31 to a financial
institution which provided a Letter of Guarantee to the CRA. The collateral is included in Other
Assets in the Consolidated Balance Sheet. The Company anticipates making a similar pledge in
connection with the same matters of approximately $288 million (U.S. dollars) in May 2007 to a
financial institution to provide a Letter of Guarantee to the Quebec Ministry of Revenue. The
Company has previously established reserves for these matters. While the resolution of these
matters may result in liabilities higher or lower than the reserves, management believes that
resolution of these matters will not have a material effect on the Companys financial position
or liquidity. However, an unfavorable resolution could have a material effect on the Companys
results of operations or cash flows in the quarter in which an adjustment is recorded or tax is
due.
Capital expenditures totaled $200.7 million and $197.6 million for the first three months of 2007
and 2006, respectively. Capital expenditures for full year 2007 are estimated to be $1.2 billion.
Dividends paid to stockholders were $826.6 million and $829.8 million for the first three months
of 2007 and 2006, respectively. In February 2007, the Board of Directors declared a quarterly
dividend of $0.38 per share on the Companys common stock for the second quarter of 2007.
The Company purchased $244.4 million of its common stock (5.5 million shares) for its Treasury
during the first three months of 2007. The Company has approximately $6.3 billion remaining
under the July 2002 treasury stock purchase authorization.
In February 2007, the Company redeemed $500 million of notes that were subject to annual interest
rate resets upon notification from the remarketing agent that, due to an overall rise in interest
rates, it would not exercise its annual option to remarket the notes.
In March 2007, $350 million of 2.5% notes, along with an associated pay-floating, receive-fixed
interest rate swap, matured and were retired.
In April 2007, the Company extended the maturity date of its $1.5 billion, 5-year revolving
credit facility from 2011 to 2012. 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 Annual Report
on Form 10-K for the year ended December 31, 2006. 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 2006 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 FIN 48, as discussed above (see also
Note 10), there have been no significant changes in the Companys critical accounting policies
since December 31, 2006.
Recently Issued Accounting Standards
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157), which
will be effective January 1, 2008. FAS 157 clarifies the definition of fair value, establishes a
framework for measuring fair value, and expands the disclosures on fair value measurements. The
effect of adoption of FAS 157 on the Companys financial position and results of operations is not
expected to be material.
- 26 -
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 6 to
the consolidated financial statements of this report and the Companys Annual Report on Form 10-K
for the year ended December 31, 2006.
Vioxx Litigation
Product Liability Lawsuits
As previously disclosed, individual and putative class actions have been filed against the
Company in state and federal courts alleging personal injury and/or economic loss with respect to
the purchase or use of Vioxx. All such actions filed in federal court are coordinated in a
multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the
MDL) before District Judge Eldon E. Fallon. A number of such actions filed in state court are
coordinated in separate coordinated proceedings in state courts in New Jersey, California and
Texas, and the counties of Philadelphia, Pennsylvania and Clark County, Nevada. As of March 31,
2007, the Company had been served or was aware that it had been named as a defendant in
approximately 27,250 lawsuits, which include approximately 45,700 plaintiff groups, alleging
personal injuries resulting from the use of Vioxx, and in approximately 266 putative class
actions alleging personal injuries and/or economic loss. (All of the actions discussed in this
paragraph are collectively referred to as the Vioxx Product Liability Lawsuits.) Of these
lawsuits, approximately 8,400 lawsuits representing approximately 23,450 plaintiff groups are or
are slated to be in the federal MDL and approximately 16,550 lawsuits representing approximately
16,550 plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court
before Judge Carol E. Higbee.
In addition to the Vioxx Product Liability Lawsuits discussed above, the claims of over 4,600
plaintiffs had been dismissed as of March 31, 2007. Of these, there have been over 1,050
plaintiffs whose claims were dismissed with prejudice (i.e., they cannot be brought again) either
by plaintiffs themselves or by the courts. Over 3,550 additional plaintiffs have had their
claims dismissed without prejudice (i.e., they can be brought again).
In the MDL, Judge Fallon scheduled a series of trials concluding in December 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. The next
scheduled trial in the MDL is a re-trial in Barnett v. Merck. Judge Fallon had originally ruled
that the re-trial would be on the issue of damages only, but Merck has moved to re-try all issues
including liability. That motion was argued on March 28, 2007 and a decision is pending.
On March 22, 2007, Judge Fallon denied Mercks motion for summary judgment on statute of
limitations grounds in three individual cases (Edmonds v. Merck, Stinson v. Merck, and Watson v.
Merck), concluding that there were factual issues precluding summary judgment.
Several Vioxx Product Liability Lawsuits are currently scheduled for trial in 2007. 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 March 31, 2007, approximately 13,700 claimants had entered into Tolling
Agreements. The parties have agreed that April 9, 2007 was the deadline for filing Tolling
Agreements and no additional Tolling Agreements will be accepted.
The following sets forth the results of trials and certain significant rulings that occurred in
the first quarter with respect to the Vioxx Product Liability Lawsuits.
The Company previously disclosed that in April 2006, in Garza v. Merck, a jury in Rio Grande
City, Texas returned a verdict in favor of the plaintiff. In September 2006, the Texas state
court granted the Companys request to investigate
- 27 -
possible jury bias because a juror admitted that he had, prior to the trial, on several occasions
borrowed money from the plaintiff. On December 21, 2006, the court entered judgment for
plaintiff in the amount of $7.75 million, plus interest, reduced from the original award of $32
million because of the Texas state cap on punitive damages. The Company filed a motion for new
trial on January 22, 2007, which was heard on February 12, 2007. Judge Gabert took the matter
under advisement but did not rule within the statutory deadline. As a result, Mercks motion was
denied by operation of law. The Company has appealed.
On January 18, 2007, Judge Victoria Chaney declared a mistrial in a consolidated trial of two
cases, Appell v. Merck and Arrigale v. Merck, which had commenced on October 31, 2006 in
California state court in Los Angeles, after the jury indicated that it could not reach a
verdict.
A consolidated trial, Hermans v. Merck and Humeston v. Merck, began on January 17, 2007, in the
coordinated proceeding in New Jersey Superior Court before Judge Higbee. Humeston v. Merck was
first tried in 2005, but Judge Higbee set aside the November 2005 jury verdict in favor of Merck
and ordered a new trial on the grounds of newly discovered evidence. The Hermans/Humeston trial
was separated into two phases: a general phase regarding Mercks conduct and a plaintiff-specific
phase. The jury found for Merck in phase I on the Hermans failure to warn claim, and the
consumer fraud claim is being submitted to Judge Higbee for decision later this month. The jury
found for plaintiff in the Humeston case, awarding compensatory damages to Mr. Humeston in the
amount of $18 million and to Mrs. Humeston in the amount of $2 million. The jury also awarded
$27.5 million in punitive damages. Merck has moved for a judgment notwithstanding the verdict, a
new trial, or reduction of the award.
On March 27, 2007, a jury found for Merck on all counts in Schwaller v. Merck, which was tried in
state court in Madison County, Illinois.
On September 28, 2006, the New Jersey Superior Court, Appellate Division, heard argument on
plaintiffs appeal of Judge Higbees dismissal of the Sinclair v. Merck case. This putative
class action was originally filed in December 2004 and sought the creation of a medical
monitoring fund. Judge Higbee had granted the Companys motion to dismiss in May 2005. On
January 16, 2007, the Appellate Division reversed the decision and remanded the case back to
Judge Higbee for further factual inquiry. On April 4, 2007, the New Jersey Supreme Court granted
the Companys petition for review of the Appellate Divisions decision.
On April 19, 2007, Judge Randy Wilson, who presides over the Texas Vioxx coordinated proceeding,
dismissed the failure to warn claim of plaintiff Ruby Ledbetter, whose case was scheduled to be
tried on May 14. Judge Wilson relied on a Texas statute enacted in 2003 that provides that there
can be no failure to warn regarding a prescription medicine if the medicine is distributed with
FDA-approved labeling. There is an exception in the statute if
required, material, and relevant information was withheld from the FDA that would have led to a
different decision regarding the approved labeling, but Judge Wilson found that the
exception is preempted by federal law unless the FDA finds that such
information was withheld. Judge Wilson is currently presiding over 1,300 Vioxx
suits in Texas in which a principal allegation is failure to warn. Judge Wilson certified the
decision for an expedited appeal to the Texas Court of Civil Appeals.
Juries have now found in favor of Merck 10 times and in favor of plaintiffs five times. There
are two unresolved mistrials as a result of hung juries after plaintiffs failed to prove their
claims. In addition, another 15 cases scheduled for trial were either dismissed or withdrawn
from the trial calendar by plaintiffs before a jury could be selected.
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 Superior Court, Appellate
Division, affirmed the class certification order. On July 19, 2006, the New Jersey Supreme Court
decided to exercise its discretion to hear the Companys appeal of the Appellate Divisions
decision. On August 24, 2006, the Appellate Division ordered a stay of the proceedings in
Superior Court pending a ruling by the Supreme Court. Oral argument before the New Jersey
Supreme Court took place in March 2007.
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, Texas and Utah.
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
- 28 -
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 and state securities laws (the
Vioxx Securities Lawsuits). All of the Vioxx Securities Lawsuits pending in federal court have
been transferred by the Judicial Panel on Multidistrict Litigation (the JPML) to the United
States District Court for the District of New Jersey before District Judge Stanley R. Chesler for
inclusion in a nationwide MDL (the Shareholder MDL). Judge Chesler has consolidated the Vioxx
Securities Lawsuits for all purposes. 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. On April 12, 2007, Judge Chesler granted
defendants motion to dismiss, and dismissed the complaint with prejudice. Plaintiffs counsel
has stated that plaintiffs plan to appeal the dismissal of the complaint.
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. The current
and former officers and directors have entered into a tolling agreement and, on June 30, 2006,
were dismissed without prejudice from the case. On July 19, 2006, the Court denied the Companys
motion to dismiss the complaint, but required plaintiff to amend the complaint. Plaintiff filed
an amended complaint on September 21, 2006. Merck filed a motion to require plaintiffs to make
the complaint more definite and certain, which was denied by the Court. Merck filed an answer to
the complaint in January 2007.
As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the Vioxx
Derivative Lawsuits). The consolidated complaint arose out of substantially the same factual
allegations that are made in the Vioxx Securities Lawsuits. The Vioxx Derivative Lawsuits, which
were 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 appeal of the District Courts decision refusing
them leave to amend the complaint is currently pending before the United States Court of Appeals
for the Third Circuit and was argued on April 12, 2007.
In addition, as previously disclosed, various putative class actions filed in federal court under
the Employee Retirement Income Security Act (ERISA) against the Company and certain current and
former officers and directors (the Vioxx ERISA Lawsuits and, together with the Vioxx Securities
Lawsuits and the Vioxx Derivative Lawsuits, the Vioxx Shareholder Lawsuits) have been
transferred to the Shareholder MDL and consolidated for all purposes. The consolidated complaint
asserts claims on behalf of certain of the Companys current and former employees who are
participants in certain of the Companys retirement plans for breach of fiduciary duty. The
lawsuits make similar allegations to the allegations contained in the Vioxx Securities Lawsuits.
On 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.
International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, the Company has been named
as a defendant in litigation relating to Vioxx in various countries (collectively, the Vioxx
Foreign Lawsuits) in Europe, as well as Canada, Brazil, Argentina, Australia, Turkey, and
Israel.
- 29 -
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 had 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. The Companys 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. 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. Pursuant to negotiated agreements, two of the
Companys insurers, which represent approximately 23% of the product liability insurance, have committed to pay
approximately $100 million with respect to such insurance. Most of
the funds have been received. The amounts recovered from the two
insurers substantially offset previously established receivables and
therefore have not and will not impact Net Income in periods
received. Remaining receivables for product liability
insurance, including amounts subject to the arbitration, are immaterial.
Investigations
As previously disclosed, in November 2004, the Company was advised by the staff of the SEC that
it was commencing an informal inquiry concerning Vioxx. On January 28, 2005, the Company
announced that it received notice that the SEC issued a formal notice of investigation. Also,
the Company has received subpoenas from the U.S. Department of Justice (the DOJ) requesting
information related to the Companys research, marketing and selling activities with respect to
Vioxx in a federal health care investigation under criminal statutes. In addition, as previously
disclosed, investigations are being conducted by local authorities in certain cities in Europe in
order to determine whether any criminal charges should be brought concerning Vioxx. The Company
is cooperating with these governmental entities in their respective investigations (the Vioxx
Investigations). The Company cannot predict the outcome of these inquiries; however, they could
result in potential civil and/or criminal dispositions.
As previously disclosed, the Company has received a number of Civil Investigative Demands (CID)
from a group of Attorneys General from 31 states and the District of Columbia who are
investigating whether the Company violated state consumer protection laws when marketing Vioxx.
The Company is cooperating with the Attorneys General in responding to the CIDs.
In addition, the Company received a subpoena in September 2006 from the State of California
Attorney General seeking documents and information related to the placement of Vioxx on
Californias Medi-Cal formulary. The Company is cooperating with the Attorney General in
responding to the subpoena.
Reserves
The Company currently anticipates that a number of Vioxx Product Liability Lawsuits will be tried
throughout 2007. A trial in the Oregon securities case is scheduled for 2007, but the Company
cannot predict whether this trial will proceed on schedule or the timing of any of the other
Vioxx Shareholder Lawsuit trials. The Company believes that it has meritorious defenses to the
Vioxx Lawsuits and will vigorously defend against them. In view of the inherent difficulty of
predicting the outcome of litigation, particularly where there are many claimants and the
claimants seek indeterminate damages, the Company is unable to predict the outcome of these
matters, and at this time cannot reasonably estimate the possible loss or range of loss with
respect to the Vioxx Lawsuits. 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 verdicts or judgments have been entered against the Company, and are now in post-verdict
proceedings or on appeal. In each of those cases the Company believes it has strong points to
raise on appeal and therefore that unfavorable outcomes in such cases are not probable.
Unfavorable outcomes in the Vioxx Litigation (as defined below) could have a material adverse
effect on the Companys financial position, liquidity and results of operations.
- 30 -
Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2006, the Company had a reserve of
$858 million solely for its future legal defense costs related to the Vioxx Litigation. During
the first quarter of 2007, the Company spent approximately $121 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). As a result, as of March 31, 2007, the Company had a
reserve of $737 million solely for its future legal defense costs related to the Vioxx
Litigation.
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; 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 most current information regarding anticipated timing, progression,
and related costs of pre-trial activities and trials in the Vioxx Product Liability Lawsuits.
Events such as scheduled trials, that are expected to occur throughout 2007 and into 2008, 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 2008. 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.
Other Product Liability Litigation
As previously disclosed, the Company is a defendant in product liability lawsuits in the United
States involving Fosamax (the Fosamax Litigation). As of March 31, 2007, 156 cases had been
filed against Merck in either federal or state court, including 4 cases which seek class action
certification, as well as damages and medical monitoring. In these actions, plaintiffs allege,
among other things, that they have suffered osteonecrosis of the jaw, generally subsequent to
invasive dental procedures such as tooth extraction or dental implants, and/or delayed healing,
in association with the use of Fosamax. On August 16, 2006, the JPML ordered that the Fosamax
product liability cases pending in federal courts nationwide should be transferred and
consolidated into one multidistrict litigation (the Fosamax MDL) for coordinated pre-trial
proceedings. The Fosamax MDL has been transferred to Judge John Keenan in the United States
District Court for the Southern District of New York. As a result of the JPML order, over 130
cases (which are included in the 156 cases referenced above) are now before Judge Keenan. Judge
Keenan has issued a Case Management Order setting forth a schedule governing the proceedings
which focuses primarily upon resolving the class action certification motions in 2007 and the
start of substantive fact discovery relating to the class action motions and to the factual
merits of the cases. The Company intends to defend against these lawsuits.
As of December 31, 2006, the Company established a reserve of approximately $48 million solely
for its future legal defense costs for the Fosamax Litigation through 2008. Spending in the
first quarter of 2007 was not significant. Some of the significant factors considered in the
establishment of the reserve for the Fosamax Litigation legal defense costs were as follows: the
actual costs incurred by the Company thus far; the development of the Companys legal defense
strategy and structure in light of the creation of the Fosamax MDL; the number of cases being
brought against the Company; and the anticipated timing, progression, and related costs of
pre-trial activities in the Fosamax Litigation. The Company will continue to monitor its legal
defense costs and review the adequacy of the associated reserves 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. Due to the uncertain nature of litigation,
the Company is unable to estimate its costs beyond the end of 2008. The Company has not
established any reserves for any potential liability relating to the Fosamax Litigation.
Unfavorable outcomes in the Fosamax Litigation could have a material adverse effect on the
Companys financial position, liquidity and results of operations.
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 also reported that it has received a CID from the Attorney
General of Texas regarding the Companys marketing and selling activities relating to Texas. As
previously disclosed, the Company received another CID from the Attorney General of Texas asking
for additional information regarding the Companys marketing and selling activities related to
Texas, including with respect to certain of its nominal pricing programs and samples. In April
2004, the Company received a subpoena from the office of the Inspector General for the District
of Columbia in connection with an investigation of the Companys interactions with physicians in
the District of Columbia, Maryland, and Virginia. In November 2004, the Company received a
letter request from the DOJ in connection with its investigation of the Companys pricing of
Pepcid.
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
- 31 -
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.
As previously disclosed, on February 23, 2004, the Italian Antitrust Authority (ICA) adopted a
measure commencing a formal investigation of Merck Sharp & Dohme (Italia) S.p.A. (MSD Italy)
and the Company under Article 14 of the Italian Competition Law and Article 82 EC to ascertain
whether the Company and MSD Italy committed an abuse of a dominant position by refusing to grant
to ACS Dobfar S.p.A. (Dobfar), an Italian company, a voluntary license under the Companys
Italian Supplementary Protection Certificate (SPC), pursuant to domestic legislation passed in
2002, to permit Dobfar to manufacture imipenem and cilastatin (I&C), the active ingredients in
Tienam, in Italy for sale outside Italy in countries where patent protection had expired or never
existed. On March 21, 2007, the ICA adopted a Commitment Decision in which it accepted the
Companys commitment to grant non-exclusive licenses under its
Italian SPC for finasteride with respect to finasteride 5 mg for the
treatment of benign prostate hyperplasia and closed the case without a finding of infringement.
Patent Litigation
From time
to time, generic manufacturers of pharmaceutical products file
Abbreviated New Drug Applications (ANDAs) with the FDA
seeking to market generic forms of the Companys products prior to the expiration of relevant
patents owned by the Company. Generic pharmaceutical manufacturers have submitted ANDAs to the
FDA seeking to market in the United States a generic form of Fosamax, Prilosec, Nexium, Propecia,
Zetia, Singulair, Trusopt and Cosopt prior to the expiration of the Companys (and Schering
Ploughs in the case of Zetia 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.
In February 2007, Schering Plough received a notice from Glenmark Pharmaceuticals (Glenmark), a
generic company, indicating that it had filed an ANDA for Zetia and that it is challenging the
U.S. patents that are listed for Zetia. Merck and Schering Plough market Zetia through a joint
venture, MSP Singapore LLC. On March 22, 2007 Schering Plough and MSP Singapore LLC filed a
patent infringement suit against Glenmark. The lawsuit automatically stays FDA approval of
Glenmarks ANDA for 30 months or until an adverse court decision, whichever may occur earlier.
On February 22, 2007, the Company received a notice from Teva Pharmaceuticals (Teva), a generic
company, indicating that it had filed an ANDA for montelukast and that it is challenging the U.S.
patent that is listed for Singulair. On April 2, 2007 the Company filed a patent infringement
action against Teva. The lawsuit automatically stays FDA approval of Tevas ANDA for 30 months
or until an adverse court decision, whichever may occur earlier.
As previously disclosed, in September 2004, the Company appealed a decision of the Opposition
Division of the European Patent Office (EPO) that revoked the Companys patent in Europe that
covers the once-weekly administration of alendronate. On March 14, 2006, the Board of Appeal of
the EPO upheld the decision of the Opposition Division revoking the patent. On March 28, 2007,
the EPO issued another patent in Europe to the Company that covers the once-weekly administration
of alendronate. Under its terms, this new patent is effective until July 2018. An opposition
has been filed in the EPO against this patent. Additionally, Merck has brought patent
infringement suits in various European jurisdictions based upon this patent. Mercks basic
patent covering the use of alendronate has been challenged in several European countries. The
Company has received adverse decisions in Germany, Holland and the United Kingdom. The decision
in the United Kingdom was upheld on appeal. The Company has appealed the decisions in Germany
and Holland.
In addition, as previously disclosed, in Japan a proceeding has been filed challenging the
validity of the Companys Japanese patent for the once-weekly administration of alendronate. The
patent office in Japan has issued a decision invalidating the Companys once-weekly patent in
Japan. This decision is under appeal.
In May 2005, the Federal Court of Canada Trial Division issued a decision refusing to bar the
approval of generic alendronate on the ground that Mercks patent for weekly alendronate was
likely invalid. This decision cannot be
- 32 -
appealed and generic alendronate was launched in Canada in June 2005. In July 2005, Merck was
sued in the Federal Court of Canada by Apotex seeking damages for lost sales of generic weekly
alendronate due to the patent proceeding.
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. In that case, the District Court entered judgment in Mercks favor and
Hi-Tech appealed. A hearing of the appeal was conducted in December 2006. A decision was
entered on March 29, 2007 affirming the validity of the Companys dorzolamide patent. 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. 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.
Other Litigation
There are various other legal proceedings, principally product liability and intellectual
property suits involving the Company, which are pending. While it is not feasible to predict the
outcome of such proceedings or the proceedings discussed in this Item, in the opinion of the
Company, all such proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability that would have a material adverse effect on the
financial position, liquidity or results of operations of the Company, other than proceedings for
which a separate assessment is provided in this Item.
Environmental Matters
As previously reported, federal and state environmental authorities have been investigating the
release on June 13, 2006 of potassium thiocyanate from the West Point facility that resulted in a
fish kill. Merck and those agencies are currently engaged in negotiating settlement of the
government claims and Mercks liability. Merck expects that the resulting settlement will
include payment of penalties and Supplemental Environmental Projects designated by the agencies,
as well as remedial actions to improve the sites wastewater collection facilities.
- 33 -
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.
However, the Company is undergoing a multi-year initiative to replace a number of its information systems,
as well as moving certain transaction processing activities into a shared service environment.
These initiatives will support efforts to create a leaner organization with more standardized
information systems.
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 1A. Risk Factors of the Companys Annual Report on Form 10-K for the year ended
December 31, 2006, as filed on February 28, 2007, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities for the three months ended March 31, 2007 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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) |
January 1 January 31, 2007 |
|
|
1,782,000 |
|
|
$ |
45.05 |
|
|
$ |
6,447.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1 February 28, 2007 |
|
|
1,728,500 |
|
|
$ |
44.14 |
|
|
$ |
6,370.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 March 31, 2007 |
|
|
1,997,600 |
|
|
$ |
43.94 |
|
|
$ |
6,283.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,508,100 |
|
|
$ |
44.36 |
|
|
$ |
6,283.1 |
|
|
|
|
(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 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 |
|
|
|
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 |
- 35 -
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: May 8, 2007 |
/s/ Kenneth C. Frazier
|
|
|
KENNETH C. FRAZIER |
|
|
Executive Vice President and General Counsel |
|
|
|
|
|
Date: May 8, 2007 |
/s/ John Canan
|
|
|
JOHN CANAN |
|
|
Vice President, Controller |
|
- 36 -
EXHIBIT INDEX
|
|
|
Number |
|
Description |
|
3.1
|
|
Restated Certificate of Incorporation of Merck & Co., Inc. (October 1, 2004)
Incorporated by reference to
Form 10-Q Quarterly Report for the period ended September
30, 2004 |
|
|
|
3.2
|
|
By-Laws of Merck & Co., Inc. (as amended effective May 24, 2005)
Incorporated by reference to Current Report on Form 8-K dated May 24, 2005 |
|
|
|
12
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
- 37 -