10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 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 July 31, 2007:
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Class
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Number of Shares Outstanding |
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Common Stock
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2,169,064,468 |
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):
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Large accelerated filer þ
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Accelerated filer o
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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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Six Months Ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Sales |
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$ |
6,111.4 |
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$ |
5,771.7 |
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$ |
11,880.7 |
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$ |
11,181.5 |
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Costs, Expenses and Other |
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Materials and production |
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1,552.3 |
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1,445.2 |
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3,078.1 |
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2,787.9 |
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Marketing and administrative |
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2,083.7 |
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1,734.0 |
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3,885.7 |
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3,449.0 |
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Research and development |
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1,030.5 |
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1,172.5 |
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2,060.6 |
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2,114.5 |
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Restructuring costs |
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55.8 |
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(6.9 |
) |
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121.6 |
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36.8 |
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Equity income from affiliates |
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(759.1 |
) |
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(611.3 |
) |
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(1,411.7 |
) |
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(1,114.7 |
) |
Other (income) expense, net |
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(84.0 |
) |
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(70.1 |
) |
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(340.2 |
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(170.7 |
) |
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3,879.2 |
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3,663.4 |
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7,394.1 |
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7,102.8 |
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Income Before Taxes |
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2,232.2 |
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2,108.3 |
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4,486.6 |
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4,078.7 |
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Taxes on Income |
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555.8 |
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609.0 |
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1,105.9 |
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1,059.4 |
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Net Income |
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$ |
1,676.4 |
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$ |
1,499.3 |
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$ |
3,380.7 |
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$ |
3,019.3 |
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Basic Earnings per Common Share |
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$ |
0.77 |
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$ |
0.69 |
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$ |
1.56 |
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$ |
1.38 |
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Earnings per Common Share Assuming Dilution |
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$ |
0.77 |
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$ |
0.69 |
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$ |
1.55 |
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$ |
1.38 |
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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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$ |
0.76 |
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$ |
0.76 |
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The accompanying notes are an integral part of this consolidated financial statement.
- 2 -
MERCK & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, $ in millions)
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June 30, |
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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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$ |
3,469.5 |
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$ |
5,914.7 |
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Short-term investments |
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2,034.5 |
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2,798.3 |
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Accounts receivable |
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3,607.5 |
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3,314.8 |
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Inventories (excludes inventories of $413.3 in 2007 and $416.1
in 2006 classified in Other assets see Note 4) |
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1,759.5 |
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1,769.4 |
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Prepaid expenses and taxes |
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1,564.7 |
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1,433.0 |
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Total current assets |
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12,435.7 |
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15,230.2 |
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Investments |
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7,643.0 |
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7,788.2 |
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Property, Plant and Equipment, at cost, net of allowance for
depreciation of $11,793.9 in 2007 and $11,015.4 in 2006 |
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12,767.4 |
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13,194.1 |
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Goodwill |
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1,431.6 |
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1,431.6 |
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Other Intangibles, Net |
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828.5 |
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943.9 |
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Other Assets |
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9,076.6 |
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5,981.8 |
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$ |
44,182.8 |
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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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$ |
2,169.2 |
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$ |
1,285.1 |
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Trade accounts payable |
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454.6 |
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496.6 |
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Accrued and other current liabilities |
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6,106.5 |
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6,653.3 |
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Income taxes payable |
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723.5 |
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3,460.8 |
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Dividends payable |
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827.2 |
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826.9 |
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Total current liabilities |
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10,281.0 |
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12,722.7 |
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Long-Term Debt |
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4,133.6 |
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5,551.0 |
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Deferred Income Taxes and Noncurrent Liabilities |
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7,888.0 |
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6,330.3 |
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Minority Interests |
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2,407.9 |
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2,406.1 |
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Stockholders Equity |
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Common stock, one cent par value |
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Authorized - 5,400,000,000 shares |
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Issued - 2,976,223,337 shares |
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29.8 |
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29.8 |
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Other paid-in capital |
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7,353.3 |
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7,166.5 |
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Retained earnings |
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40,905.1 |
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39,095.1 |
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Accumulated other comprehensive loss |
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(1,112.6 |
) |
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(1,164.3 |
) |
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47,175.6 |
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45,127.1 |
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Less treasury stock, at cost |
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808,434,585 shares June 30, 2007 |
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808,437,892 shares December 31, 2006 |
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27,703.3 |
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27,567.4 |
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Total stockholders equity |
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19,472.3 |
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17,559.7 |
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$ |
44,182.8 |
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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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Six Months Ended |
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June 30, |
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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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$ |
3,380.7 |
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$ |
3,019.3 |
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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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1,000.5 |
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1,162.1 |
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Deferred income taxes |
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(78.0 |
) |
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203.7 |
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Equity income from affiliates |
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(1,411.7 |
) |
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(1,114.7 |
) |
Dividends and distributions from equity affiliates |
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882.6 |
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997.1 |
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Share-based compensation |
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178.2 |
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182.3 |
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Acquired research |
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296.3 |
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Other |
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(8.3 |
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(1.4 |
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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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469.6 |
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(1,236.7 |
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Net Cash Provided by Operating Activities |
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1,625.5 |
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3,508.0 |
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Cash Flows from Investing Activities |
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Capital expenditures |
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(473.1 |
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(460.7 |
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Purchases of securities, subsidiaries and other investments |
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(6,508.6 |
) |
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(11,905.3 |
) |
Acquisition of Sirna Therapeutics, Inc. |
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(1,135.9 |
) |
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Proceeds from sales of securities, subsidiaries and other investments |
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6,228.6 |
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11,145.6 |
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Other |
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(3.0 |
) |
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(0.8 |
) |
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Net Cash Used by Investing Activities |
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(1,892.0 |
) |
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(1,221.2 |
) |
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Cash Flows from Financing Activities |
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Net change in short-term borrowings |
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357.6 |
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(1,606.6 |
) |
Proceeds from issuance of debt |
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5.1 |
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Payments on debt |
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(856.5 |
) |
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(0.8 |
) |
Purchases of treasury stock |
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(491.9 |
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(500.0 |
) |
Dividends paid to stockholders |
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(1,651.8 |
) |
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(1,663.1 |
) |
Proceeds from exercise of stock options |
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349.3 |
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311.9 |
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Other |
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86.8 |
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(227.0 |
) |
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Net Cash Used by Financing Activities |
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(2,206.5 |
) |
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(3,680.5 |
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Effect of Exchange Rate Changes on Cash and Cash Equivalents |
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27.8 |
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21.7 |
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Net Decrease in Cash and Cash Equivalents |
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(2,445.2 |
) |
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(1,372.0 |
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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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$ |
3,469.5 |
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$ |
8,213.3 |
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The accompanying notes are an integral part of this consolidated financial statement.
- 4 -
Notes to Consolidated Financial Statements (unaudited)
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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In June 2007, the Financial Accounting Standards Board (FASB) ratified the consensus reached
by the Emerging Issues Task Force on Issue No. 07-3, Accounting for Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities (Issue 07-3), which
is effective January 1, 2008 and is applied prospectively for new contracts entered into on or
after the effective date. Issue 07-3 addresses nonrefundable advance payments for goods or
services that will be used or rendered for future research and development activities. Issue
07-3 will require these payments be deferred and capitalized and recognized as an expense as the
related goods are delivered or the related services are performed. The Company is assessing the
effects of adoption of Issue 07-3 on its financial position and results of operations. |
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In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115 (FAS 159), which
is effective January 1, 2008. FAS 159 permits companies to choose to measure certain financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings at each subsequent reporting
date. The effect of adoption of FAS 159 on the Companys financial position and results of
operations is not expected to be material. |
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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. |
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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 second quarter of 2007, four 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 June 30, 2007, the Company has recorded total pre-tax
accumulated costs of $1.7 billion and eliminated approximately 5,700 positions which are
comprised of employee separations and the elimination of contractors and vacant positions.
However, the Company continues to hire new employees as the Companys business requires it. For
segment reporting purposes, restructuring charges are unallocated expenses. |
- 5 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
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The following tables summarize the charges related to restructuring activities by type of cost: |
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Three Months Ended June 30, |
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2007 |
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2006 |
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Separation |
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Accelerated |
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Separation |
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Accelerated |
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($ 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 |
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Depreciation |
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Other |
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Total |
|
Materials and production |
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$ |
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$ |
118.2 |
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$ |
0.5 |
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$ |
118.7 |
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$ |
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$ |
163.0 |
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$ |
4.5 |
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$ |
167.5 |
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Research and development |
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(2.3 |
) |
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(2.3 |
) |
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Restructuring costs |
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38.1 |
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17.7 |
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|
55.8 |
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21.9 |
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(28.8 |
) |
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(6.9 |
) |
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$ |
38.1 |
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$ |
115.9 |
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$ |
18.2 |
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|
$ |
172.2 |
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|
$ |
21.9 |
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$ |
163.0 |
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$ |
(24.3 |
) |
|
$ |
160.6 |
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Six Months Ended June 30, |
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2007 |
|
2006 |
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Separation |
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Accelerated |
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Separation |
|
Accelerated |
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($ in millions) |
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Materials and production |
|
$ |
|
|
|
$ |
236.3 |
|
|
$ |
0.5 |
|
|
$ |
236.8 |
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|
$ |
|
|
|
$ |
361.6 |
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|
$ |
10.9 |
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|
$ |
372.5 |
|
Research and development |
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|
|
|
|
|
|
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|
(0.1 |
) |
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|
(0.1 |
) |
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|
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|
55.4 |
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|
|
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|
55.4 |
|
Restructuring costs |
|
|
85.0 |
|
|
|
|
|
|
|
36.6 |
|
|
|
121.6 |
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|
|
49.7 |
|
|
|
|
|
|
|
(12.9 |
) |
|
|
36.8 |
|
|
|
|
$ |
85.0 |
|
|
$ |
236.3 |
|
|
$ |
37.0 |
|
|
$ |
358.3 |
|
|
$ |
49.7 |
|
|
$ |
417.0 |
|
|
$ |
(2.0 |
) |
|
$ |
464.7 |
|
|
|
|
Separation costs are associated with actual headcount reductions, as well as those headcount
reductions that were probable and could be reasonably estimated. In the second quarter of 2007,
approximately 625 positions were eliminated and in the second quarter of 2006 approximately 500
positions were eliminated. In the first half of 2007, approximately 855 positions were
eliminated compared with approximately 2,300 positions in the first half of 2006. |
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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 reflects $18.2 million and $15.2 million for the second quarter of 2007 and 2006,
respectively, and $37.0 million and $37.5 million for the first six months of 2007 and 2006,
respectively, of costs that include termination charges associated with the Companys pension
and other postretirement benefit plans (see Note 9), shut-down and other related costs, as well
as asset impairments. Additionally, other activity in 2006 includes pre-tax gains of $39.5
million resulting from the second quarter sales of facilities. |
|
|
|
The following table summarizes the charges and spending relating to restructuring activities for
the six months ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation |
|
Accelerated |
|
|
|
|
($ in millions) |
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Restructuring reserves as of January 1, 2007 |
|
$ |
177.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
177.7 |
|
Expense |
|
|
85.0 |
|
|
|
236.3 |
|
|
|
37.0 |
|
|
|
358.3 |
|
(Payments) receipts, net |
|
|
(94.0 |
) |
|
|
|
|
|
|
(34.7 |
) |
|
|
(128.7 |
) |
Non-cash activity |
|
|
|
|
|
|
(236.3 |
) |
|
|
(2.3 |
) |
|
|
(238.6 |
) |
|
Restructuring reserves as of June 30, 2007 |
|
$ |
168.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
168.7 |
|
|
3. |
|
Acquisitions and Research Collaborations |
|
|
|
On July 25, 2007, Merck and NovaCardia, Inc. (NovaCardia), a privately held clinical-stage
pharmaceutical company focused on cardiovascular diseases, announced they had entered into a
definitive agreement under which Merck will acquire NovaCardia. Under the agreement, Merck will
acquire all of the outstanding equity of NovaCardia for $350 million plus the amount of cash on
hand at the time of closing, all of which will be paid in Merck stock based on the average
closing stock price on the five days prior to closing of the acquisition. NovaCardias lead
product candidate
KW-3902, an adenosine A1 receptor antagonist, is being studied in Phase III clinical
trials in patients with acute congestive heart failure. KW-3902 is believed to block
adenosine-mediated constriction of blood flow to the kidneys |
- 6 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
and inhibit reabsorption of salt
and water by the kidney, thereby increasing urine volume and maintaining renal function in
patients with acute congestive heart failure. The acquisition is subject to clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. The two companies
expect to close the acquisition within 45 days of the announcement. |
|
|
|
Also in July 2007, Merck and ARIAD Pharmaceuticals, Inc. (ARIAD) announced that they had
entered into a global collaboration to jointly develop and commercialize AP23573, ARIADs novel
mTOR inhibitor, for use in cancer. Each party will fund 50 percent of the cost of global
development of AP23573, except that Merck will fund 100 percent of the cost of ex-U.S.
development that is specific to the development or commercialization of AP23573 outside the U.S.
that is not currently part of the global development plan. It is expected that AP23573 will
enter into Phase III clinical development for the treatment of metastatic sarcomas beginning in
the third quarter of 2007. The agreement provides for an initial payment of $75 million to
ARIAD, which the Company will record as Research and development expense, up to $452 million
more in milestone payments to ARIAD based on the successful development of AP23573 in multiple
cancer indications (including $13.5 million for the initiation of the Phase III clinical trial
in metastatic sarcomas and $114.5 million for the initiation of other Phase II and Phase III
clinical trials), up to $200 million more based on achievement of significant sales thresholds,
at least $200 million in estimated contributions by Merck to global development, up to $200
million in interest-bearing repayable development-cost advances from Merck to cover a portion of
ARIADs share of global-development costs (after ARIAD has paid $150 million in global
development costs), and potential commercial returns from profit sharing in the U.S. or
royalties paid by Merck outside the U.S. In the U.S., ARIAD will distribute and sell AP23573
for all cancer indications, and ARIAD and Merck will co-promote and will each receive 50 percent
of the income from such sales. Outside the U.S., Merck will distribute, sell and promote
AP23573; Merck will pay ARIAD tiered double-digit royalties on such end-market sales of AP23573. |
|
|
|
In June 2006, the Company acquired all of the outstanding equity of GlycoFi, Inc. (GlycoFi)
for approximately $373 million in cash. In connection with the acquisition, the Company
recorded a charge of $296.3 million for acquired research associated with GlycoFis technology
platform to be used in the research and development process, for which, at the acquisition date,
technological feasibility had not been established and no alternative future use existed. This
charge was not deductible for tax purposes. The charge was recorded in Research and development
expense and was determined based upon the present value of expected future cash flows of new
product candidates resulting from this technology adjusted for the probability of its technical
and marketing success utilizing an income approach reflecting the appropriate risk-adjusted
discount rate. The Company also recorded a $99.4 million intangible asset ($57.6 million net of
deferred taxes) related to GlycoFis developed technology that can be used immediately in the
research and development process and has alternative future uses. This intangible asset is
being amortized to Research and development expense on a straight-line basis over a five year
useful life. The remaining net assets acquired in this transaction were not material. Because
GlycoFi was a development stage company that had not commenced its planned principal operations,
the transaction was accounted for as an acquisition of assets rather than as a business
combination and, therefore, goodwill was not recorded. GlycoFis results of operations have
been included with the Companys consolidated financial results since the acquisition date. |
|
4. |
|
Inventories |
|
|
|
Inventories consisted of: |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Finished goods |
|
$ |
434.4 |
|
|
$ |
403.8 |
|
Raw materials and work in process |
|
|
1,638.5 |
|
|
|
1,688.9 |
|
Supplies |
|
|
99.9 |
|
|
|
92.8 |
|
|
Total (approximates current cost) |
|
|
2,172.8 |
|
|
|
2,185.5 |
|
Reduction to LIFO cost for domestic inventories |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,172.8 |
|
|
$ |
2,185.5 |
|
|
Recognized as: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
1,759.5 |
|
|
$ |
1,769.4 |
|
Other assets |
|
$ |
413.3 |
|
|
$ |
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. |
- 7 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
5. |
|
Joint Ventures and Other Equity Method Affiliates |
|
|
|
Equity income from affiliates reflects the performance of the Companys joint ventures and other
equity method affiliates and was comprised of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Merck/Schering-Plough |
|
$ |
465.1 |
|
|
$ |
320.0 |
|
|
$ |
812.2 |
|
|
$ |
508.0 |
|
AstraZeneca LP |
|
|
215.1 |
|
|
|
215.4 |
|
|
|
427.1 |
|
|
|
428.9 |
|
Other (1) |
|
|
78.9 |
|
|
|
75.9 |
|
|
|
172.4 |
|
|
|
177.8 |
|
|
|
|
$ |
759.1 |
|
|
$ |
611.3 |
|
|
$ |
1,411.7 |
|
|
$ |
1,114.7 |
|
|
|
|
|
(1) |
|
Primarily reflects results from Merial Limited, and joint ventures with
Sanofi Pasteur and Johnson & Johnson. |
|
|
As previously disclosed, the 1999 AstraZeneca merger triggers a partial redemption of
Mercks limited partnership interest in AZLP in 2008. Upon this redemption, Merck will
receive from AZLP an amount based primarily on a multiple of Mercks average annual variable
returns derived from sales of the former Astra USA, Inc. products for the three years prior
to the redemption (the Limited Partner Share of Agreed Value). |
|
|
|
Also, as a result of the merger, in exchange for Mercks relinquishment of rights to future Astra
products with no existing or pending U.S. patents at the time of the merger, Astra paid
$967.4 million (the Advance Payment), which is subject to a true-up calculation (the
True-Up Amount) in 2008 that may require repayment of all or a portion of this amount.
The True-Up Amount is directly dependent on the fair market value in 2008 of the Astra
product rights retained by the Company. Accordingly, recognition of this contingent income
has been deferred until the realizable amount, if any, is determinable, which is not
anticipated prior to 2008. In the second quarter of 2007, the Company reclassified this
amount to Accrued and other current liabilities from non-current liabilities as this true-up
calculation will occur within the next twelve months. |
|
|
|
In 1998, Astra purchased an option (the Asset Option) to buy Mercks interest in the KBI
products, excluding the gastrointestinal medicines Nexium and Prilosec (the Non-PPI
Products), for a payment of $443.0 million, which was deferred. The Asset Option is
exercisable in 2010 at an exercise price equal to the net present value as of March 31, 2008
of projected future pre-tax revenue to be received by the Company from the Non-PPI Products
(the Appraised Value). Merck also has the right to require Astra to purchase such
interest in 2008 at the Appraised Value. |
|
|
|
The sum of the Limited Partner Share of Agreed Value, the Appraised Value and the True-Up
Amount is guaranteed to be a minimum of $4.7 billion. Distribution of the Limited Partner
Share of Agreed Value and payment of the True-Up Amount will occur in 2008. AstraZenecas
purchase of Mercks interest in the Non-PPI Products is contingent upon the exercise of
either Mercks option in 2008 or AstraZenecas option in 2010 and, therefore, payment of the
Appraised Value may or may not occur. |
|
6. |
|
Debt and Financial Instruments |
|
|
|
During the second quarter of 2007, the Company reclassified the $1.38 billion Astra Note due in
2008 from Long-term debt to Loans payable and current portion of long-term debt. |
|
|
|
In June 2007, the Company entered into a pay-floating, receive-fixed interest rate swap contract
effectively converting $250 million of its $1.0 billion, 4.75% fixed-rate notes into floating
rate instruments. The interest rate swap is designated as a hedge of the fair value change in
the notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap
rate and will mature in 2015. The fair value change in the notes is fully offset in interest
expense by the fair value change in the swap contract. |
|
|
|
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. |
|
|
|
In March 2007, $350 million of 2.5% notes, along with an associated pay-floating, receive-fixed
interest rate swap, matured and were retired. |
- 8 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
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. |
|
7. |
|
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 Washoe and Clark Counties, Nevada. As
of June 30, 2007, the Company had been served or was aware that it had been named as a defendant
in approximately 26,950 lawsuits, which include approximately 45,225 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 8,575 lawsuits representing approximately 23,450 plaintiff groups are or
are slated to be in the federal MDL and approximately 16,400 lawsuits representing approximately
16,400 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 4,620
plaintiff groups had been dismissed as of June 30, 2007. Of these, there have been over 1,170
plaintiff groups whose claims were dismissed with prejudice (i.e., they cannot be brought again)
either by plaintiffs themselves or by the courts. Over 3,450 additional plaintiff groups have
had their claims dismissed without prejudice (i.e., they can be brought again). |
|
|
|
Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that establishes a procedure to halt the running of the statute of
limitations (tolling) as to certain categories of claims allegedly arising from the use of Vioxx
by non-New Jersey citizens. The Tolling Agreement applies to individuals who have not filed
lawsuits and may or may not eventually file lawsuits and only to those claimants who seek to
toll claims alleging injuries resulting from a thrombotic cardiovascular event that results in a
myocardial infarction or ischemic stroke. The Tolling Agreement provides counsel additional
time to evaluate potential claims. The Tolling Agreement requires any tolled claims to be filed
in federal court. As of June 30, 2007, approximately 14,450 claimants had entered into Tolling
Agreements. The parties agreed that April 9, 2007 was the deadline for filing Tolling
Agreements and no additional Tolling Agreements are being accepted. |
|
|
|
The following sets forth the results of trials and certain significant rulings that occurred in
or after the second quarter of 2007 with respect to the Vioxx Product Liability Lawsuits. |
|
|
|
In August 2006, in Barnett v. Merck, a jury in New Orleans, Louisiana returned a plaintiff
verdict in the second federal Vioxx case to go to trial. The jury awarded the plaintiff $50
million in compensatory damages and $1 million in punitive damages. On June 5, 2007, Judge
Fallon denied Mercks motion for judgment as a matter of law and denied in part Mercks motion
for a new trial on all issues. The Court allowed the plaintiff to choose whether to accept a
reduced damages award of $1.6 million ($600,000 in compensatory damages and $1 million in
punitive damages) or to have a re-trial. On June 20, 2007, the plaintiff accepted the Courts
reduced damage award of $1.6 million, and on June 28, 2007, Judge Fallon entered judgment in
that amount. The Company intends to appeal this judgment. |
|
|
|
On May 29, 2007, in the case of Plunkett v. Merck, Judge Fallon granted plaintiffs motion for a
new trial, vacating the February 23, 2006 judgment in favor of Merck. |
|
|
|
On July 3, 2007, Judge Fallon denied Mercks motion for summary judgment on federal preemption
grounds in two individual cases, Arnold v. Merck and Gomez v. Merck. |
- 9 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
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. On July 9, 2007, Judge Chaney scheduled the retrial of the combined trial of Appell
and Arrigale for September 17, 2007. Judge Chaney was set to try Berwick v. Merck on April 12,
2007. On the eve of trial, plaintiff dismissed the case with prejudice, citing health issues. |
|
|
|
A consolidated trial, Hermans v. Merck and the retrial of 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, resulting in a jury verdict in favor of Merck on
November 3, 2005. However, on August 17, 2006, Judge Higbee set aside the November 2005 jury
verdict 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. On March 2, 2007, the jury found for Merck in the
general phase on the Hermans failure to warn claim, and the consumer fraud claim was
subsequently submitted to Judge Higbee for decision, which is still pending. On March 12, 2007,
the jury found for plaintiffs 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. These and other post-trial
motions are currently pending. |
|
|
|
In April 2006, in a trial involving two plaintiffs, Thomas Cona and John McDarby, in Superior
Court of New Jersey, Law Division, Atlantic County, the jury returned a split verdict. The jury
determined that Vioxx did not substantially contribute to the heart attack of Mr. Cona, but did
substantially contribute to the heart attack of Mr. McDarby. The jury also concluded that, in
each case, Merck violated New Jerseys consumer fraud statute, which allows plaintiffs to
receive their expenses for purchasing the drug, trebled, as well as reasonable attorneys fees.
The jury awarded $4.5 million in compensatory damages to Mr. McDarby and his wife, who also was
a plaintiff in that case, as well as punitive damages of $9 million. On June 8, 2007, Judge
Higbee denied Mercks motion for a new trial. On June 15, 2007, Judge Higbee awarded
approximately $4 million in the aggregate in attorneys fees and costs. The Company intends to
appeal this verdict after the completion of post-trial proceedings in the trial court. |
|
|
|
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. The plaintiff moved for a new trial on May 25,
2007. |
|
|
|
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. |
|
|
|
In July 2006, in Doherty v. Merck, in the Superior Court of Atlantic County, Law Division, New
Jersey, a jury returned a verdict in favor of the Company on all counts. The jury rejected a
claim by the plaintiff that her nearly three years of Vioxx use caused her heart attack. The
jury also found in favor of Merck on the plaintiffs consumer fraud claim. Plaintiffs motion
for a new trial was argued on May 1, 2007. Judge Higbee took the matter under advisement. |
|
|
|
In December 2006, a New Orleans, Louisiana jury returned a verdict in favor of the Company in
Dedrick v. Merck. On May 29, 2007, Judge Fallon denied plaintiffs motion for a new trial. |
|
|
|
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 approximately 1,000 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. |
|
|
|
On July 31, 2007, the New Jersey Appellate Division unanimously upheld Judge Higbees dismissal
of Vioxx Product Liability Lawsuits brought by residents of the United Kingdom. |
- 10 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
Juries have now found in favor of Merck 10 times and in favor of plaintiffs five times. As
noted above, Judge Fallon has set aside the verdict in the Plunkett case, which is one of the 10
defense verdicts, and ordered a new trial. There are two unresolved mistrials as a result of
hung juries after plaintiffs failed to prove their claims. In addition, another 20 cases
scheduled for trial were either dismissed or withdrawn from the trial calendar by plaintiffs
before a jury could be selected. |
|
|
|
Merck voluntarily withdrew Vioxx from the market on September 30, 2004. Most states have
statutes of limitations for product liability claims of no more than three years, which require
that claims must be filed within no more than three years after the plaintiffs learned or could
have learned of their potential cause of action. As a result, some may view September 30, 2007
as a significant deadline for filing Vioxx cases. It is important to note, however, that the
law regarding statutes of limitations can be complex and variable, depending on the facts and
applicable law. Some states have longer statutes of limitations. There are also arguments that
the statutes of limitations began running before September 30, 2004. Merck expects that there
will be legal arguments concerning the proper application of these statutes, and the decisions
will be up to the judges presiding in individual cases in state and federal proceedings. As
previously disclosed, in the federal MDL, Judge Fallon denied the Companys motion for summary
judgment on statute of limitations grounds in three individual cases on the basis that there
were factual issues precluding summary judgment. To the extent that September 30, 2007 is a
deadline, it would not apply to claimants with whom Merck has entered into agreements to toll
the statute of limitations, as referred to above. |
|
|
|
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 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 requested certification
of a class of purchasers of Company stock between May 21, 1999 and October 29, 2004. The
complaint alleged that the defendants made false and misleading statements regarding Vioxx in
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and sought
unspecified compensatory damages and the costs of suit, including attorneys fees. The
complaint also 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 included
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 have appealed Judge Cheslers decision to the United States Court of
Appeals for the Third Circuit. |
|
|
|
In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging
violations of federal securities laws as well as violations of state law against the Company and
certain officers. Pursuant to the Case
|
- 11 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
Management Order governing the Shareholder MDL, the
case, which is based on the same allegations as the Vioxx Securities Lawsuits, was consolidated
with the Vioxx Securities Lawsuits. Defendants motion to dismiss the pension funds complaint
was filed on August 3, 2007. |
|
|
|
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, is pending. |
|
|
|
As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the
Vioxx Derivative Lawsuits). On May 5, 2006, Judge Chesler granted defendants motion to
dismiss and denied plaintiffs request for leave to amend their complaint. Plaintiffs
appealed, arguing that Judge Chesler erred in denying plaintiffs leave to amend their complaint
with materials acquired during discovery. On July 18, 2007, the United States Court of Appeals
for the Third Circuit reversed the District Courts decision on the grounds that Judge Chesler
should have allowed plaintiffs to make use of the discovery material to try to establish demand
futility, and remanded the case for the District Courts consideration of whether, even with the
additional materials, plaintiffs request to amend their complaint would still be futile. |
|
|
|
In addition, as previously disclosed, various putative class actions filed in federal court
under the Employee Retirement Income Security Act (ERISA) against the Company and certain
current and former officers and directors (the Vioxx ERISA Lawsuits and, together with the
Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits, the Vioxx Shareholder Lawsuits)
have been transferred to the Shareholder MDL and consolidated for all purposes. The
consolidated complaint asserts claims on behalf of certain of the Companys current and former
employees who are participants in certain of the Companys retirement plans for breach of
fiduciary duty. The lawsuits make similar allegations to the allegations contained in the Vioxx
Securities Lawsuits. On July 11, 2006, Judge Chesler granted in part and denied in part
defendants motion to dismiss the ERISA Complaint. |
|
|
|
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. |
|
|
|
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 in the aggregate 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 |
- 12 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
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
Securities and Exchange Commission (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 and 2008. At this time, the Company cannot predict the timing of any
trials in the Vioxx Shareholder Lawsuits. The Company believes that it has meritorious defenses
to the Vioxx Lawsuits and will vigorously defend against them. In view of the inherent
difficulty of predicting the outcome of litigation, particularly where there are many claimants
and the claimants seek indeterminate damages, the Company is unable to predict the outcome of
these matters, and at this time cannot reasonably estimate the possible loss or range of loss
with respect to the Vioxx Lawsuits. The Company has not established any reserves for any
potential liability relating to the Vioxx Lawsuits or the Vioxx Investigations, including for
those cases in which 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. |
|
|
|
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 six months of 2007, the Company spent approximately $258 million in the
aggregate in legal defense costs worldwide, including $137 million in the second quarter,
related to (i) the Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii)
the Vioxx Foreign Lawsuits, and (iv) the Vioxx Investigations (collectively, the Vioxx
Litigation). In the second quarter of 2007, the Company recorded a charge of $210 million, to
increase the reserve solely for its future legal defense costs related to the Vioxx Litigation
to $810 million at June 30, 2007. |
|
|
|
Some of the significant factors considered in the establishment and ongoing review of the
reserve for the Vioxx legal defense costs were as follows: the actual costs incurred by the
Company; 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 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. While the Company does not
anticipate that it will need to increase the reserve every quarter, 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. |
- 13 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
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 June 30, 2007, 225 cases, which
include approximately 700 plaintiff groups, had been filed against Merck in either federal or
state court, including 5 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 190 of the cases are 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. 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 six months 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 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. |
|
|
|
Other Litigation |
|
|
|
As previously disclosed, on August 20, 2004, the United States District Court for the District
of New Jersey granted a motion by the Company, Medco Health Solutions, Inc. (Medco Health) and
certain officers and directors to dismiss a shareholder derivative action involving claims
related to the Companys revenue recognition practice for retail co-payments paid by individuals
to whom Medco Health provides pharmaceutical benefits as well as other allegations. The
complaint was dismissed with prejudice. Plaintiffs appealed the decision. On December 15,
2005, the U.S. Court of Appeals for the Third Circuit upheld most of the District Courts
decision dismissing the suit, and sent the issue of
whether the Companys Board of Directors properly refused the shareholder demand relating to the
Companys treatment of retail co-payments back to the District Court for reconsideration under a
different legal standard. Plaintiffs moved to remand their action to state court on August 18,
2006, and the District Court granted that motion on February 1, 2007. On July 30, 2007, the
Superior Court of New Jersey, Chancery Division, Hunterdon County, granted a motion by the
Company, Medco Health, and certain officers and directors for dismissal and summary judgment.
The entire complaint was dismissed with prejudice. |
- 14 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
8. |
|
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 |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pre-tax share-based compensation expense |
|
$ |
81.2 |
|
|
$ |
61.0 |
|
|
$ |
178.2 |
|
|
$ |
182.3 |
|
Income tax benefits |
|
|
(25.9 |
) |
|
|
(19.0 |
) |
|
|
(56.3 |
) |
|
|
(56.3 |
) |
|
Total share-based compensation expense, net of tax |
|
$ |
55.3 |
|
|
$ |
42.0 |
|
|
$ |
121.9 |
|
|
$ |
126.0 |
|
|
|
|
During the first half of 2007 and 2006, the Company granted 32.0 million options and 29.6
million options, respectively, related to its annual grant and other grants. The weighted
average fair value of options granted for the first half of 2007 and 2006 was $9.12 and $7.09
per option, respectively, and was determined using the following assumptions: |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
Expected dividend yield |
|
|
3.4 |
% |
|
|
4.5 |
% |
Risk-free interest rate |
|
|
4.4 |
% |
|
|
5.0 |
% |
Expected volatility |
|
|
24.4 |
% |
|
|
27.1 |
% |
Expected life (years) |
|
|
5.7 |
|
|
|
5.9 |
|
|
|
|
At June 30, 2007, there was $485.6 million of total pre-tax unrecognized compensation expense
related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted
average period of 2.3 years. For segment reporting, share-based compensation costs are
unallocated expenses. |
- 15 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
9. |
|
Pension and Other Postretirement Benefit Plans |
|
|
|
The Company has defined benefit pension plans covering eligible employees in the United States
and in certain of its international subsidiaries. The net cost of such plans consisted of the
following components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Service cost |
|
$ |
92.9 |
|
|
$ |
90.3 |
|
|
$ |
185.0 |
|
|
$ |
180.3 |
|
Interest cost |
|
|
92.6 |
|
|
|
85.3 |
|
|
|
184.6 |
|
|
|
170.1 |
|
Expected return on plan assets |
|
|
(122.2 |
) |
|
|
(109.3 |
) |
|
|
(243.6 |
) |
|
|
(217.3 |
) |
Net amortization |
|
|
34.3 |
|
|
|
42.5 |
|
|
|
68.5 |
|
|
|
84.9 |
|
Termination benefits |
|
|
8.9 |
|
|
|
2.7 |
|
|
|
16.0 |
|
|
|
16.2 |
|
Curtailments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
$ |
106.5 |
|
|
$ |
111.5 |
|
|
$ |
210.5 |
|
|
$ |
234.4 |
|
|
|
|
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 |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Service cost |
|
$ |
21.2 |
|
|
$ |
20.7 |
|
|
$ |
42.3 |
|
|
$ |
41.9 |
|
Interest cost |
|
|
26.0 |
|
|
|
24.8 |
|
|
|
51.9 |
|
|
|
50.2 |
|
Expected return on plan assets |
|
|
(30.3 |
) |
|
|
(28.2 |
) |
|
|
(60.6 |
) |
|
|
(56.4 |
) |
Net amortization |
|
|
(2.5 |
) |
|
|
0.8 |
|
|
|
(5.0 |
) |
|
|
1.8 |
|
Termination benefits |
|
|
2.6 |
|
|
|
0.8 |
|
|
|
3.5 |
|
|
|
2.2 |
|
Curtailments |
|
|
(3.9 |
) |
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
$ |
13.1 |
|
|
$ |
18.9 |
|
|
$ |
28.2 |
|
|
$ |
39.7 |
|
|
|
|
In connection with restructuring actions (see Note 2), the Company recorded termination charges
for the three and six months ended June 30, 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
gains on its other postretirement benefit plans for the three and six months ended June 30,
2007, and curtailment losses on its pension plans for the six months ended June 30, 2006. |
|
10. |
|
Other (Income) Expense, Net |
|
|
|
Other (income) expense, net, consisted of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Interest income |
|
$ |
(172.3 |
) |
|
$ |
(187.9 |
) |
|
$ |
(354.0 |
) |
|
$ |
(369.6 |
) |
Interest expense |
|
|
103.3 |
|
|
|
91.9 |
|
|
|
205.7 |
|
|
|
190.1 |
|
Exchange (gains) losses |
|
|
(12.0 |
) |
|
|
7.4 |
|
|
|
(31.6 |
) |
|
|
7.0 |
|
Minority interests |
|
|
30.8 |
|
|
|
30.0 |
|
|
|
61.4 |
|
|
|
59.9 |
|
Other, net |
|
|
(33.8 |
) |
|
|
(11.5 |
) |
|
|
(221.7 |
) |
|
|
(58.1 |
) |
|
|
|
$ |
(84.0 |
) |
|
$ |
(70.1 |
) |
|
$ |
(340.2 |
) |
|
$ |
(170.7 |
) |
|
|
|
The increase in Other, net for the six months ended June 30, 2007, primarily reflects the
favorable impact of gains on sales of assets and product divestitures. Interest paid for the
six months ended June 30, 2007 and 2006 was $223.6 million and $220.3 million, respectively. |
- 16 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
11. |
|
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 greater than 50% likely of being realized
upon ultimate settlement in the financial statements. For tax positions that are not more
likely than not of being sustained upon audit, the Company does not recognize any portion of the
benefit in the financial statements. 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
June 30, 2007, the Companys Consolidated Balance Sheet reflects a liability for unrecognized
tax benefits of $3.50 billion. If the Company were to recognize these benefits, the effective
tax rate would reflect a favorable net impact of $2.45 billion. Accrued interest and penalties
included in the Consolidated Balance Sheet were $1.61 billion as of June 30, 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 in 2007 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, respectively, over the remainder of 2007, and
an equivalent reduction in the balances of unrecognized tax benefits and accrued interest
reflected in the Consolidated Balance Sheet at June 30, 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). In October 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 $1.5 billion (U.S.
dollars) plus interest of approximately $585 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, during January 2007, the Company pledged collateral to a
financial institution which provided a Letter of Guarantee to the CRA representing a portion of
the tax and interest assessed. In May 2007, in connection with the same matters, the Company
pledged collateral to another financial institution which provided a financial guarantee to the
Quebec Ministry of Revenue. The collateral is included in Other Assets in the Consolidated
Balance |
- 17 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
Sheet and totaled $1.2 billion at June 30, 2007. 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. |
|
|
|
In July 2007, the CRA notified the Company that it is in the process of proposing a penalty of
$160 million (U.S. dollars) in connection with this matter. The penalty is for failing to
provide information on a timely basis. The Company vigorously disagrees with the penalty and
feels it is inapplicable and that appropriate information was
provided on a timely basis. The Company is
pursuing all appropriate remedies to avoid having the penalty
assessed and was notified in early August 2007 that the CRA is
holding the imposition of a penalty in abeyance pending a review of the
Companys submissions as to the inapplicability of a penalty. |
|
|
|
In addition, in July 2007, the CRA proposed additional adjustments for 1999 relating to
another intercompany pricing matter. The adjustments would increase Canadian tax due by
another $20 million (U.S. dollars) plus $17 million (U.S.
dollars) of interest. It is possible that the CRA will propose
similar adjustments for later years. The Company
disagrees with the positions taken by CRA and believes they are without merit. The Company
intends to pursue all appropriate remedies to resolve this matter. |
|
|
|
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. |
|
12. |
|
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 |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Average common shares outstanding |
|
|
2,167.0 |
|
|
|
2,181.3 |
|
|
|
2,166.9 |
|
|
|
2,182.5 |
|
Common shares issuable(1) |
|
|
22.2 |
|
|
|
6.4 |
|
|
|
16.5 |
|
|
|
6.7 |
|
|
Average common shares outstanding assuming dilution |
|
|
2,189.2 |
|
|
|
2,187.7 |
|
|
|
2,183.4 |
|
|
|
2,189.2 |
|
|
|
|
|
(1) |
|
Issuable primarily under share-based compensation plans. |
|
|
For the three and six months ended June 30, 2007, 151.5 million and 199.1 million,
respectively, and for both the three and six month periods ended June 30, 2006, 227.6 million 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. |
|
13. |
|
Comprehensive Income |
|
|
|
Comprehensive income was $1,656.4 million and $3,432.4 million for the three and six months
ended June 30, 2007, respectively, and was $1,470.9 million and $2,986.3 million for the three
and six months ended June 30, 2006, respectively. |
|
14. |
|
Segment Reporting |
|
|
|
The Companys operations are principally managed on a products basis and are comprised of two
reportable segments: the Pharmaceutical segment and the Vaccines segment. |
|
|
|
The Pharmaceutical segment includes human health pharmaceutical products marketed either
directly or through joint ventures. These products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human disorders. Merck sells these human
health pharmaceutical products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as health maintenance organizations
and other institutions. The Vaccines segment includes human health vaccine products marketed
either directly or through a joint venture. These products consist of preventive pediatric,
adolescent and adult vaccines, primarily administered at physician offices. Merck sells these
human health vaccines primarily to physicians, |
- 18 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
wholesalers, physician distributors and
government entities. The Vaccines segment includes the vast majority of the Companys vaccine
sales, but excludes certain sales of vaccines by non-U.S. subsidiaries managed by and included
in the Pharmaceutical segment. A large component of pediatric and adolescent vaccines is sold
to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is
funded by the U.S. government. |
|
|
|
Other segments include other non-reportable human and animal health segments. |
|
|
|
Revenues and profits for these segments are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Segment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical segment (1) |
|
$ |
5,116.4 |
|
|
$ |
5,338.3 |
|
|
$ |
10,018.1 |
|
|
$ |
10,409.5 |
|
Vaccines segment (1) |
|
|
929.0 |
|
|
|
319.0 |
|
|
|
1,732.9 |
|
|
|
549.5 |
|
Other segment revenues |
|
|
44.0 |
|
|
|
42.9 |
|
|
|
80.7 |
|
|
|
77.0 |
|
|
|
|
$ |
6,089.4 |
|
|
$ |
5,700.2 |
|
|
$ |
11,831.7 |
|
|
$ |
11,036.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits:(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical segment |
|
$ |
3,596.9 |
|
|
$ |
3,759.9 |
|
|
$ |
7,015.3 |
|
|
$ |
7,257.6 |
|
Vaccines segment |
|
|
609.9 |
|
|
|
149.7 |
|
|
|
1,101.5 |
|
|
|
265.3 |
|
Other segment profits |
|
|
128.4 |
|
|
|
106.9 |
|
|
|
282.5 |
|
|
|
240.2 |
|
|
|
|
$ |
4,335.2 |
|
|
$ |
4,016.5 |
|
|
$ |
8,399.3 |
|
|
$ |
7,763.1 |
|
|
|
|
|
(1) |
|
In accordance with segment reporting requirements, Vaccines segment
revenues exclude $113.4 million and $30.1 million for the second quarter of 2007 and 2006,
respectively, and $212.4 million and $71.1 million for the first six months of 2007 and
2006, respectively, of vaccines sales by certain non-U.S. subsidiaries managed by and
included in the Pharmaceutical segment. |
|
(2) |
|
Includes the majority of Equity income from affiliates. |
|
|
A reconciliation of total segment revenues to consolidated sales is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Segment revenues |
|
$ |
6,089.4 |
|
|
$ |
5,700.2 |
|
|
$ |
11,831.7 |
|
|
$ |
11,036.0 |
|
Other revenues |
|
|
22.0 |
|
|
|
71.5 |
|
|
|
49.0 |
|
|
|
145.5 |
|
|
|
|
$ |
6,111.4 |
|
|
$ |
5,771.7 |
|
|
$ |
11,880.7 |
|
|
$ |
11,181.5 |
|
|
|
|
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. |
- 19 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
Sales (1) of the Companys products were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair |
|
$ |
1,091.8 |
|
|
$ |
949.8 |
|
|
$ |
2,093.8 |
|
|
$ |
1,751.2 |
|
Cozaar/Hyzaar |
|
|
847.2 |
|
|
|
783.7 |
|
|
|
1,645.2 |
|
|
|
1,484.8 |
|
Fosamax |
|
|
785.6 |
|
|
|
820.9 |
|
|
|
1,527.8 |
|
|
|
1,574.4 |
|
Zocor |
|
|
178.0 |
|
|
|
989.6 |
|
|
|
436.4 |
|
|
|
2,053.1 |
|
Primaxin |
|
|
185.7 |
|
|
|
172.1 |
|
|
|
382.8 |
|
|
|
341.7 |
|
Cosopt/Trusopt |
|
|
192.0 |
|
|
|
175.4 |
|
|
|
378.1 |
|
|
|
327.0 |
|
Cancidas |
|
|
134.0 |
|
|
|
123.8 |
|
|
|
268.0 |
|
|
|
270.0 |
|
Vasotec/Vaseretic |
|
|
127.5 |
|
|
|
140.2 |
|
|
|
249.1 |
|
|
|
276.3 |
|
Proscar |
|
|
113.1 |
|
|
|
183.0 |
|
|
|
238.4 |
|
|
|
371.2 |
|
Januvia |
|
|
143.6 |
|
|
|
|
|
|
|
230.7 |
|
|
|
|
|
Maxalt |
|
|
109.0 |
|
|
|
97.2 |
|
|
|
216.4 |
|
|
|
190.1 |
|
Propecia |
|
|
98.3 |
|
|
|
84.8 |
|
|
|
193.6 |
|
|
|
160.1 |
|
Arcoxia |
|
|
88.7 |
|
|
|
66.1 |
|
|
|
169.1 |
|
|
|
125.5 |
|
Crixivan/Stocrin |
|
|
75.3 |
|
|
|
74.1 |
|
|
|
157.6 |
|
|
|
155.7 |
|
Janumet |
|
|
24.3 |
|
|
|
|
|
|
|
24.3 |
|
|
|
|
|
Other pharmaceutical (2) |
|
|
808.8 |
|
|
|
647.4 |
|
|
|
1,594.4 |
|
|
|
1,257.2 |
|
|
|
|
|
5,002.9 |
|
|
|
5,308.1 |
|
|
|
9,805.7 |
|
|
|
10,338.3 |
|
|
Vaccines: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gardasil |
|
|
357.5 |
|
|
|
9.6 |
|
|
|
723.0 |
|
|
|
9.6 |
|
RotaTeq |
|
|
119.1 |
|
|
|
30.7 |
|
|
|
204.1 |
|
|
|
33.0 |
|
Zostavax |
|
|
46.8 |
|
|
|
1.2 |
|
|
|
89.5 |
|
|
|
1.2 |
|
ProQuad/M-M-R II/Varivax |
|
|
343.5 |
|
|
|
181.8 |
|
|
|
589.6 |
|
|
|
341.1 |
|
Hepatitis vaccines |
|
|
79.6 |
|
|
|
59.1 |
|
|
|
151.1 |
|
|
|
112.6 |
|
Other vaccines |
|
|
95.9 |
|
|
|
66.7 |
|
|
|
188.0 |
|
|
|
123.1 |
|
|
|
|
|
1,042.4 |
|
|
|
349.1 |
|
|
|
1,945.3 |
|
|
|
620.6 |
|
|
Other (4) |
|
|
66.1 |
|
|
|
114.5 |
|
|
|
129.7 |
|
|
|
222.6 |
|
|
|
|
$ |
6,111.4 |
|
|
$ |
5,771.7 |
|
|
$ |
11,880.7 |
|
|
$ |
11,181.5 |
|
|
|
|
|
(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 $524.4
million and $417.9 million for the second quarter of 2007 and 2006, respectively, and was
$1,021.9 million and $798.0 million for the first six months of 2007 and 2006,
respectively. |
|
(3) |
|
These amounts do not reflect sales of vaccines sold in most major
European markets through the Companys joint venture, Sanofi Pasteur MSD, the results of
which are reflected in Equity income from affiliates. These amounts do reflect supply
sales to Sanofi Pasteur MSD. |
|
(4) |
|
Other primarily includes other pharmaceutical and animal health joint
venture supply sales and other miscellaneous revenues. |
- 20 -
Notes
to Consolidated Financial Statements (unaudited) (continued)
|
|
A reconciliation of segment profits to Income Before Taxes is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Segment profits |
|
$ |
4,335.2 |
|
|
$ |
4,016.5 |
|
|
$ |
8,399.3 |
|
|
$ |
7,763.1 |
|
Other profits |
|
|
29.8 |
|
|
|
47.9 |
|
|
|
30.0 |
|
|
|
106.1 |
|
Adjustments |
|
|
89.3 |
|
|
|
109.2 |
|
|
|
172.2 |
|
|
|
265.2 |
|
Unallocated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
172.3 |
|
|
|
187.9 |
|
|
|
354.0 |
|
|
|
369.6 |
|
Interest expense |
|
|
(103.3 |
) |
|
|
(91.9 |
) |
|
|
(205.7 |
) |
|
|
(190.1 |
) |
Equity income from affiliates |
|
|
85.0 |
|
|
|
68.4 |
|
|
|
132.7 |
|
|
|
137.9 |
|
Depreciation and amortization |
|
|
(464.1 |
) |
|
|
(495.6 |
) |
|
|
(930.5 |
) |
|
|
(1,078.4 |
) |
Research and development |
|
|
(1,030.5 |
) |
|
|
(1,172.5 |
) |
|
|
(2,060.6 |
) |
|
|
(2,114.5 |
) |
Other expenses, net |
|
|
(881.5 |
) |
|
|
(561.6 |
) |
|
|
(1,404.8 |
) |
|
|
(1,180.2 |
) |
|
|
|
$ |
2,232.2 |
|
|
$ |
2,108.3 |
|
|
$ |
4,486.6 |
|
|
$ |
4,078.7 |
|
|
|
|
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. |
- 21 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Management
In July 2007, Merck announced that Kenneth C. Frazier has been named executive vice president and
president, Global Human Health, effective August 1, 2007. Mr. Frazier was serving as Mercks
executive vice president and general counsel. Bruce N. Kuhlik, who is being promoted to senior
vice president, will succeed Mr. Frazier as general counsel.
In June 2007, Merck announced that Peter N. Kellogg has been named Mercks executive vice president
and chief financial officer, effective August 14, 2007. Judy C. Lewent, Mercks current executive
vice president and chief financial officer, who is retiring, will resign that position effective
the same date.
In May 2007, Merck announced that Peter Loescher, president, Global Human Health, was resigning.
The effective date of his resignation was May 31, 2007.
Operating Results
Sales
Worldwide sales were $6.1 billion for the second quarter of 2007, an increase of 6% compared with
the second quarter of 2006, which was attributable to a 4% volume increase and a 2% favorable
effect from foreign exchange. Worldwide sales were $11.9 billion for the first six months of 2007,
an increase of 6% compared with the first half of 2006, largely resulting from a 5% volume increase
and a 2% favorable effect from foreign exchange for the period. Sales performance over 2006 in
each period reflects strong growth of the Companys vaccines, including Gardasil, a vaccine to help
protect against cervical cancer and genital warts caused by certain types of human papillomavirus
(HPV) and RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and
children, as well as other pediatric vaccines, including Varivax, a vaccine to help prevent
chickenpox. Also contributing to the sales growth in both periods was strong performance of
Singulair, a once-a-day oral medicine indicated for the chronic treatment of asthma and the relief
of symptoms of allergic rhinitis, sales of Januvia for the treatment of type 2 diabetes, higher
revenues from the Companys relationship with AstraZeneca LP (AZLP) primarily driven by Nexium,
as well as increased sales of Cozaar/Hyzaar* for high blood pressure. Sales growth for the quarter
and year-to-date periods was partially offset by lower sales of Zocor, the Companys statin for
modifying cholesterol and Proscar, a urology product for the treatment of symptomatic benign
prostate enlargement. Mercks U.S. market exclusivity for Zocor expired on June 23, 2006, while
Mercks U.S. market exclusivity for Proscar expired on June 19, 2006.
|
|
|
* |
|
Cozaar and Hyzaar are registered trademarks of E.I. DuPont de Nemours & Company,
Wilmington, Delaware. |
- 22 -
Sales of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair |
|
$ |
1,091.8 |
|
|
$ |
949.8 |
|
|
$ |
2,093.8 |
|
|
$ |
1,751.2 |
|
Cozaar/Hyzaar |
|
|
847.2 |
|
|
|
783.7 |
|
|
|
1,645.2 |
|
|
|
1,484.8 |
|
Fosamax |
|
|
785.6 |
|
|
|
820.9 |
|
|
|
1,527.8 |
|
|
|
1,574.4 |
|
Zocor |
|
|
178.0 |
|
|
|
989.6 |
|
|
|
436.4 |
|
|
|
2,053.1 |
|
Primaxin |
|
|
185.7 |
|
|
|
172.1 |
|
|
|
382.8 |
|
|
|
341.7 |
|
Cosopt/Trusopt |
|
|
192.0 |
|
|
|
175.4 |
|
|
|
378.1 |
|
|
|
327.0 |
|
Cancidas |
|
|
134.0 |
|
|
|
123.8 |
|
|
|
268.0 |
|
|
|
270.0 |
|
Vasotec/Vaseretic |
|
|
127.5 |
|
|
|
140.2 |
|
|
|
249.1 |
|
|
|
276.3 |
|
Proscar |
|
|
113.1 |
|
|
|
183.0 |
|
|
|
238.4 |
|
|
|
371.2 |
|
Januvia |
|
|
143.6 |
|
|
|
|
|
|
|
230.7 |
|
|
|
|
|
Maxalt |
|
|
109.0 |
|
|
|
97.2 |
|
|
|
216.4 |
|
|
|
190.1 |
|
Propecia |
|
|
98.3 |
|
|
|
84.8 |
|
|
|
193.6 |
|
|
|
160.1 |
|
Arcoxia |
|
|
88.7 |
|
|
|
66.1 |
|
|
|
169.1 |
|
|
|
125.5 |
|
Crixivan/Stocrin |
|
|
75.3 |
|
|
|
74.1 |
|
|
|
157.6 |
|
|
|
155.7 |
|
Janumet |
|
|
24.3 |
|
|
|
|
|
|
|
24.3 |
|
|
|
|
|
Other pharmaceutical (1) |
|
|
808.8 |
|
|
|
647.4 |
|
|
|
1,594.4 |
|
|
|
1,257.2 |
|
|
|
|
|
5,002.9 |
|
|
|
5,308.1 |
|
|
|
9,805.7 |
|
|
|
10,338.3 |
|
|
Vaccines: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gardasil |
|
|
357.5 |
|
|
|
9.6 |
|
|
|
723.0 |
|
|
|
9.6 |
|
RotaTeq |
|
|
119.1 |
|
|
|
30.7 |
|
|
|
204.1 |
|
|
|
33.0 |
|
Zostavax |
|
|
46.8 |
|
|
|
1.2 |
|
|
|
89.5 |
|
|
|
1.2 |
|
ProQuad/M-M-R II/Varivax |
|
|
343.5 |
|
|
|
181.8 |
|
|
|
589.6 |
|
|
|
341.1 |
|
Hepatitis |
|
|
79.6 |
|
|
|
59.1 |
|
|
|
151.1 |
|
|
|
112.6 |
|
Other vaccines |
|
|
95.9 |
|
|
|
66.7 |
|
|
|
188.0 |
|
|
|
123.1 |
|
|
|
|
|
1,042.4 |
|
|
|
349.1 |
|
|
|
1,945.3 |
|
|
|
620.6 |
|
|
Other (3) |
|
|
66.1 |
|
|
|
114.5 |
|
|
|
129.7 |
|
|
|
222.6 |
|
|
|
|
$ |
6,111.4 |
|
|
$ |
5,771.7 |
|
|
$ |
11,880.7 |
|
|
$ |
11,181.5 |
|
|
(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 $524.4 million and $417.9 million for the second
quarter of 2007 and 2006, respectively, and was $1,021.9 million and $798.0 million for the
first six months of 2007 and 2006, respectively. |
|
(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. 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 $525.0 million and $1,072.8 million for the three months ended June 30, 2007 and 2006,
respectively, and by $1,043.7 million and $2,252.4 million for the six months ended June 30, 2007
and 2006, respectively. The reduction in discounts for both periods compared with the
corresponding prior year periods resulted primarily from the significant decline in Zocor sales due
to the loss of U.S. market exclusivity in June 2006. Inventory levels at key wholesalers for each
of the Companys major products are generally less than one month.
- 23 -
Segment Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical segment (1) |
|
$ |
5,116.4 |
|
|
$ |
5,338.3 |
|
|
$ |
10,018.1 |
|
|
$ |
10,409.5 |
|
Vaccines segment (1) |
|
|
929.0 |
|
|
|
319.0 |
|
|
|
1,732.9 |
|
|
|
549.5 |
|
Other segment (2) |
|
|
44.0 |
|
|
|
42.9 |
|
|
|
80.7 |
|
|
|
77.0 |
|
Other (3) |
|
|
22.0 |
|
|
|
71.5 |
|
|
|
49.0 |
|
|
|
145.5 |
|
|
Total revenues |
|
$ |
6,111.4 |
|
|
$ |
5,771.7 |
|
|
$ |
11,880.7 |
|
|
$ |
11,181.5 |
|
|
|
|
|
(1) |
|
In accordance with segment reporting requirements, Vaccines segment
revenues exclude $113.4 million and $30.1 million for the second quarter of 2007 and 2006,
respectively, and $212.4 million and $71.1 million for the first six months 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 declined 4% to $5.12 billion in the second quarter and
decreased 4% to $10.02 billion for the first half of 2007, primarily reflecting declines in Zocor
and Proscar post-U.S. patent expiration, partially offset by increases in Singulair, Januvia,
Cozaar/Hyzaar, and Nexium supply sales.
Worldwide sales were strong for Singulair, reaching $1.09 billion for the second quarter of 2007,
representing growth of 15% over the second quarter of 2006. Sales for the first six months of 2007
were $2.09 billion, a 20% increase over the comparable prior year period. Singulair continues to
be the number one prescribed product in the U.S. respiratory market.
In April 2007, the U.S. Food and Drug Administration (FDA) approved a new indication for
Singulair for the prevention of exercise-induced bronchoconstriction (EIB) in patients 15 years
of age and older. EIB is typically characterized by shortness of breath, coughing, wheezing and
chest tightness brought on by exercise. Singulair is the first and only oral tablet approved for
this use.
Global sales of Mercks antihypertensive medicines, Cozaar and Hyzaar were $847.2 million for the
second quarter of 2007, representing an increase of 8% from the second quarter of 2006. Sales for
the first six months of 2007 were $1.65 billion, an increase of 11% compared with the first six
months of 2006. Cozaar and Hyzaar are among the leading members of the angiotensin receptor
blocker class of medicines, 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 $785.6 million for the second quarter of 2007, representing a
decline of 4% compared with the second quarter of 2006. Sales for the first six months of 2007
were $1.53 billion, a decline of 3% compared with the first six months 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 declined 2% for the second quarter of 2007,
but experienced an overall increase of 2% for the first six months of 2007. 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 $178.0 million in the
second quarter of 2007, representing a decline of 82% over the second quarter of 2006. Sales for
the first half of 2007 were $436.4 million, a decline of 79% over the first half of 2006. Sales of
Zocor in both periods 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 $143.6 million in
the second quarter of 2007 and $230.7 million for the first six months of 2007. Januvia was
approved by the FDA in October 2006. Since the U.S. launch in October 2006, Januvia has been added
to the formularies of all major Pharmacy Benefit Managers in the United States. As of the second
quarter 2007, the medicine was approved in 51 countries and launched in 25 of those countries.
In June 2007, data presented at the American Diabetes Association (ADA) 67th Annual
Scientific Sessions showed that, when used investigationally as initial therapy, Januvia
(sitagliptin) in combination with metformin, provided significant glycemic improvement and was
generally well tolerated over 54 weeks in patients with type 2 diabetes. Additional new
- 24 -
data from
investigational studies presented also showed that Januvia significantly improved blood sugar
control in patients with type 2 diabetes when added to a sulfonylurea, glimepiride (dual
combination therapy), or when added to a sulfonylurea and metformin (triple combination therapy).
Additional data were presented at the meeting regarding the efficacy and safety of Januvia.
Additionally, new data from an investigational study was also released at the ADA Scientific
Sessions that showed initial combination therapy with Januvia and metformin demonstrated
significant improvement in markers of beta cell function in patients with type 2 diabetes.
Pancreatic islet beta cell function determines the ability of the body to produce insulin, a
hormone which plays a central role in the regulation of blood sugar levels. New data from a
separate pharmacologic study revealed that, when used in combination in healthy adults, the
different mechanisms of action of Januvia and metformin had a complementary effect on glucagon-like
peptide-1 (GLP-1) levels, another hormone that is an important regulator of blood sugar levels.
This aspect of the mechanism of action of metformin used in combination with Januvia was previously
unknown. GLP-1 acts, in part, by enhancing pancreatic beta cell insulin production and secretion.
On March 30, 2007, the FDA approved Janumet, Mercks oral antihyperglycemic agent that combines
sitagliptin (Mercks DPP-4 inhibitor, Januvia) 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 medicine is now approved for use in the
United States, Mexico and Peru; and the Company is moving forward with additional regulatory
filings. U.S. sales for Janumet were $24.3 million for the second quarter of 2007.
Other products experiencing growth in the second quarter and first half of 2007 include Cosopt to
treat glaucoma, Arcoxia for the treatment of arthritis and pain, Primaxin, an antibiotic, 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 had 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. Merck continues to evaluate
the options available with regard to a potential path forward in the U.S. 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.
As previously disclosed, in May 2007 the government of Brazil issued a compulsory license for
Stocrin, which makes it possible for Stocrin to be produced by a generic manufacturer despite the
Companys patent protection on Stocrin. In November 2006, the government of Thailand stated that
it had issued a compulsory license for Stocrin, despite the Companys patent protection on Stocrin,
which the government of Thailand contends makes it possible for Stocrin to be produced by a generic
manufacturer. The Company remains committed to exploring mutually acceptable agreements with the
governments of Brazil and Thailand.
Vaccines Segment Revenues
Sales of the Vaccines segment increased to $929.0 million in the second quarter of 2007 compared
with $319.0 million in the second quarter of 2006. Sales of the Vaccines segment for the first six
months of 2007 were $1.73 billion compared with $549.5 million for the same prior year period. The
increase in both periods is attributable to 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. Supply sales to SPMSD are reflected in Vaccines segment
revenues.
Total vaccine sales as recorded by Merck (including the $929.0 million reflected in the Vaccines
segment and the $113.4 million reflected in the Pharmaceutical segment) were $1.04 billion for the
second quarter of 2007 compared with $349.1
million in the second quarter of 2006. Total vaccine sales for the first six months of 2007 as
recorded by Merck (including the $1.73 billion reflected in the Vaccines segment and the $212.4
million reflected in the Pharmaceutical segment) were
- 25 -
$1.95 billion compared with $620.6 million
for the first six months of 2006. Growth in vaccines was led by Gardasil, as well as the strong
performance of RotaTeq and other pediatric vaccines, including Varivax and ProQuad.
Total sales as recorded by Merck for Gardasil were $357.5 million for the second quarter of 2007
and $723.0 million for the first six months 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 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. As of the second quarter 2007, Gardasil has been approved in 80 countries, many under
fast-track or expedited review; and launched in 59 of those countries. The vaccine remains under
review in approximately 40 other countries.
In May 2007, the FDA accepted for standard review a supplemental Biologics License Application
(sBLA) for Gardasil which includes data on protection against vaginal and vulvar cancer caused by HPV types 16 and 18
and data on immune memory. In July, the FDA accepted for standard
review an sBLA for the prevention
of cervical disease caused by non-vaccine types (cross protection). The review goal dates for both
the vaginal and vulvar cancer sBLA and the cross protection sBLA are in the first quarter of 2008.
RotaTeq, Mercks vaccine to help protect against rotavirus gastroenteritis in infants and children,
achieved total sales recorded by Merck of $119.1 million for the second quarter of 2007 and $204.1
million for the first half of the year. RotaTeq was approved by the FDA in February 2006. As of
the second quarter 2007, RotaTeq has been approved in 61 countries and it has launched in 22 of
those countries.
In July 2007, the Company announced that both Gardasil and RotaTeq have been adopted by all 55
U.S.-based immunization projects of the CDC Vaccines for Children program. The Vaccines for
Children program provides vaccines to children who are Medicaid-eligible, uninsured, underinsured
(when seen at a Federally Qualified Health Center or Rural Health Clinic), or Native American.
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.
ProQuad, the Companys combination vaccine against measles, mumps, rubella and chickenpox, one of
the VZV-containing vaccines, is no longer available for order. However, the Company expects to be
able to meet market demand through the use of the component vaccines, Varivax and M-M-R II, and is
transitioning orders as appropriate. Total sales as recorded by Merck for ProQuad were $88.7
million for the second quarter of 2007 and were $190.9 million for the first half of 2007. Mercks
sales of Varivax, the Companys vaccine for the prevention of chickenpox (varicella), were $197.1
million for the second quarter of 2007 mainly as a result of the Advisory Committee on Immunization
Practices updating its recommended immunization schedules earlier this year to include a routine
second dose of the varicella vaccine. Sales of Varivax were $300.9 million for the first six
months of 2007.
Sales of Zostavax, the Companys vaccine to help prevent shingles (herpes zoster), were $46.8
million for the second quarter of 2007 and were $89.5 million for the first six months of 2007.
The vaccine is now reimbursed by plans covering approximately 92% of lives with managed care
insurance in the U.S. Zostavax, which was approved by the FDA in May 2006, is the first and only
medical option for the prevention of shingles.
Costs, Expenses and Other
In 2005, the Company initiated a series of steps to reduce its cost structure. 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 second quarter of 2007, four 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 5,700 positions eliminated throughout the Company since inception of the
program (approximately 855 of which were eliminated during the first half 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 $500 million
- 26 -
to $700 million during 2007. The Company
recorded pre-tax restructuring costs of $172.2 million ($110.1 million after tax) and $160.6
million ($102.5 million after tax) for the three months ended June 30, 2007 and 2006, respectively.
The Company recorded pre-tax restructuring costs of $358.3 million ($233.7 million after tax) and
$464.7 million ($297.3 million after tax) for the six months ended June 30, 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 to the consolidated financial statements). Merck continues to expect that this phase of its
global restructuring program, combined with cost savings the Company expects to achieve in its
marketing and administrative expenses, will yield cumulative pre-tax savings of $4.5 billion to
$5.0 billion from 2006 through 2010.
Materials and production costs were $1.55 billion for the second quarter of 2007, an increase of 7%
compared with the second quarter of 2006. Included in the second quarter of 2007 and 2006 were
costs associated with restructuring activities, primarily accelerated depreciation and asset
impairment costs of $118.7 million and $167.5 million, respectively. For the first six months of
2007, materials and production costs were $3.08 billion, an increase of 10% compared with the same
period of last year. Included in materials and production costs for the first six months of 2007
and 2006 were costs associated with restructuring activities of $236.8 million and $372.5 million,
respectively.
The gross margin was 74.6% in the second quarter of 2007 compared with 75.0% in the second quarter
of 2006, which reflect 1.9 and 2.9 percentage point unfavorable impacts, respectively, relating to
costs associated with restructuring activities. The gross margin was 74.1% in the first six months
of 2007 compared with 75.1% in the first six months of 2006, which reflect 2.0 and 3.3 percentage
point unfavorable impacts, respectively, relating to costs associated with restructuring
activities. Changes in product mix had an unfavorable impact on gross margin compared with the
same prior year periods, including the decline in branded Zocor sales in 2007 compared with 2006 as
a result of the loss of U.S. market exclusivity in June 2006.
Marketing and administrative expenses were $2.08 billion for the second quarter of 2007, an
increase of 20% compared with the second quarter of 2006. For the first six months of 2007,
marketing and administrative expenses were $3.89 billion, an increase of 13% compared with the same
period of 2006. The second quarter and first six months of 2007 include $210 million of additional
reserves solely for future legal defense costs for Vioxx litigation (see Note 7 to the consolidated
financial statements). Excluding this cost, marketing and administrative expenses rose 8% for the
second quarter of 2007 and 7% first six months of 2007. The increase in both periods largely
reflects the necessary support for the new product launches currently under way.
Research and development expenses totaled $1.03 billion and $2.06 billion for the second quarter
and first six months of 2007, respectively, compared with $1.17 billion and $2.11 billion for the
same periods of 2006, respectively. The second quarter and year-to-date amounts for 2006 include
$296.3 million of acquired research expense related to the GlycoFi, Inc. (GlycoFi) acquisition
(see Note 3 to the consolidated financial statements). In addition, Research and development
expenses for the first six months of 2006 also reflect $55.4 million of costs related to the global
restructuring program. Excluding these costs, the increase in research and development costs in
both periods reflects an increase in basic research and development spending in support of the
continued advancement of the research pipeline.
In May 2007, Merck confirmed that it had received an approvable letter from the FDA for the
Companys NDA for Emend (fosaprepitant dimeglumine) For Injection, also known as MK-0517, an
investigational intravenous therapy for chemotherapy-induced nausea and vomiting (CINV). The FDA
informed Merck in the letter that before approval of the NDA can be issued, additional
manufacturing validation and stability data are required as well as certain additional data. Merck
is working to provide the information requested and plans to submit the data within the next few
months. Once a response to the approvable letter has been submitted, FDA review of the application
is targeted to be approximately six months from submission of the response, per current FDA policy.
The application for Emend For Injection and receipt of the approvable letter does not relate in
any way to the manufacturing and availability of the oral formulation of Emend, which utilizes a
completely different manufacturing process and remains available for patient use.
In June 2007, clinical results from a Phase II study were presented for the first time at the
American Headache Society annual meeting which showed that MK-0974, an investigational oral
calcitonin gene-related peptide receptor antagonist, significantly improved migraine pain relief
two hours after dosing compared to placebo, and the relief was sustained through 24 hours. MK-0974
was generally well tolerated in the study. In addition to the measure of migraine pain, MK-0974
provided relief of migraine-associated symptoms, including nausea and sensitivity to light and
sound, and improved functional disability two hours post dose, as well as reduced patients need
for rescue medication. MK-0974 is Mercks investigational medicine in Phase III clinical
development for the acute treatment of migraine in adults. Merck continues to anticipate filing
the NDA for MK-0974 in 2009.
In June 2007, Merck announced that the FDA accepted the NDA for Isentress
(raltegravir, previously known as MK-0518),
- 27 -
the Companys investigational oral
HIV integrase inhibitor. Data in the NDA support the proposed use of Isentress
in combination with other antiretroviral agents for the treatment of HIV-1
infection in treatment-experienced patients with evidence of HIV-1 replication
despite ongoing antiretroviral therapy (ART). The FDA granted Isentress
priority review status, a designation for investigational products that address
unmet medical needs. Under the priority review designation, the FDA is
expected to review and act on the NDA for Isentress within six months of
submission. The Company has been informed that an FDA Advisory Committee
meeting will be held on September 5, 2007, and Merck anticipates FDA action by
mid-October 2007. The Company is also moving forward with regulatory filings
in countries outside of the United States. If approved, Isentress would be the
first in a new class of antiretroviral agents called integrase inhibitors that
inhibit the insertion of HIV DNA into human DNA. Inhibiting integrase from
performing this essential function blocks the ability of the virus to replicate
and infect new cells. The NDA included data from Phase II and Phase III
clinical trials in which Isentress was used in combination with optimized
background therapy (OBT) in treatment-experienced HIV patients failing ARTs who
were infected with virus resistant to at least one drug in each of the three
available classes of oral ARTs. Merck also is conducting ongoing clinical
trials of Isentress in the treatment-naïve (previously untreated) HIV
population.
In July 2007, at the 4th International AIDS Society Conference on HIV
Pathogenesis, Treatment and Prevention, the Company announced results from an
ongoing 48 week Phase II study of Isentress in combination with tenofovir and
lamivudine which demonstrated that Isentress provided reductions in HIV RNA to
undetectable levels of less than 50 copies/mL (83 to 88 percent of patients)
comparable to efavirenz combined with the same agents (87 percent of patients).
These results were observed with all four doses of Isentress studied (100 mg,
200 mg, 400 mg or 600 mg twice daily) in treatment-naïve patients infected with
HIV. In addition, Isentress showed minimal impact on total and low-density
lipoprotein serum cholesterol, serum triglycerides and the ratio of total
cholesterol to high-density lipoprotein cholesterol. These results indicate
that Isentress provided sustained viral load reduction and minimal lipid
effects when compared with the initial 24-week results presented at the 2006
International AIDS Conference in Toronto.
Merck continues to remain focused on augmenting its internal efforts by capitalizing on growth
opportunities ranging from targeted acquisitions to research collaborations, licensing pre-clinical
and clinical compounds and technology transactions to drive both near- and long-term growth.
On
July 25, 2007, Merck and NovaCardia, Inc. (NovaCardia), a privately held clinical-stage
pharmaceutical company focused on cardiovascular diseases, announced they had entered into a
definitive agreement under which Merck will acquire NovaCardia. Under the agreement, Merck will
acquire all of the outstanding equity of NovaCardia for $350 million plus the amount of cash on
hand at the time of closing, all of which will be paid in Merck stock based on the average closing
stock price on the five days prior to closing of the acquisition. NovaCardias lead product
candidate KW-3902, an adenosine A1 receptor antagonist, is being studied in Phase III
clinical trials in patients with acute congestive heart failure. KW-3902 is believed to block
adenosine-mediated constriction of blood flow to the kidneys and inhibit reabsorption of salt and
water by the kidney, thereby increasing urine volume and maintaining renal function in patients
with acute congestive heart failure. The acquisition is subject to clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. The two companies
expect to close the acquisition within 45 days of the announcement.
Also in July 2007, Merck and ARIAD Pharmaceuticals, Inc. (ARIAD) announced that they had entered
into a global collaboration to jointly develop and commercialize AP23573, ARIADs novel mTOR
inhibitor, for use in cancer. Each party will fund 50 percent of the cost of global development of
AP23573, except that Merck will fund 100 percent of the cost of ex-U.S. development that is
specific to the development or commercialization of AP23573 outside the U.S. that is not currently
part of the global development plan. It is expected that AP23573 will enter into Phase III
clinical development for the treatment of metastatic sarcomas beginning in the third quarter of
2007. The agreement provides for an initial payment of $75 million to ARIAD, which the Company
will record as Research and development expense, up to $452 million more in milestone payments to
ARIAD based on the successful development of AP23573 in multiple cancer indications (including
$13.5 million for the initiation of the Phase III clinical trial in metastatic sarcomas and $114.5
million for the initiation of other Phase II and Phase III clinical trials), up to $200 million
more based on achievement of significant sales thresholds, at least $200 million in estimated
contributions by Merck to global development, up to $200 million in interest-bearing repayable
development-cost advances from Merck to cover a portion of ARIADs share of global-development
costs (after ARIAD has paid $150 million in global development costs), and potential commercial
returns from profit sharing in the U.S. or royalties paid by Merck outside the U.S. In the U.S.,
ARIAD will distribute and sell AP23573 for all cancer indications, and ARIAD and Merck will
co-promote and will each receive 50 percent of the income
from such sales. Outside the U.S., Merck will distribute, sell and promote AP23573; Merck will pay
ARIAD tiered double-digit royalties on such end-market sales of AP23573.
- 28 -
The chart below reflects the Companys current research pipeline as of August 1, 2007. Candidates
shown in Phase III include specific products. Candidates shown in Phase I and II include the most
advanced compound with a specific mechanism in a given therapeutic area. Small molecules and
biologics are given MK-number designations and vaccine candidates are given V-number designations.
Back-up compounds, regardless of their phase of development, additional indications in the same
therapeutic area and additional line extensions or formulations for in-line products are not shown.
Phase I
Alzheimers Disease
V950
Atherosclerosis
MK-6213
Cancer
MK-0429
MK-0646*
MK-0752
MK-2461
MK-4721*
V930
Cardiovascular
MK-0448
MK-2323*
MK-8141*
Diabetes
MK-0941
MK-1642
Phase I
Infectious Disease
MK-0608
MK-4965
MK-7009
MK-8122*
V710**
V512
Insomnia
MK-8998
Ophthalmic
MK-0140
Osteoporosis
MK-0773
Parkinsons Disease
MK-0657
Psychiatric Disease
MK-0249
MK-2637
MK-5757 |
Phase II
Alzheimers Disease
MK-0249
Atherosclerosis
MK-0859
MK-0633
Cancer
MK-0457*
MK-0822
Diabetes
MK-0533
MK-0893
HIV
V520(1)
HPV
V502***
Infectious Disease
V419*
Ophthalmic
SIRNA-027(2)
Osteoporosis
MK-0822
Overactive Bladder
MK-0634
Pain
MK-2295*(3)
Respiratory Disease
MK-0633
Stroke
MK-0724*
|
Atherosclerosis
MK-0524A
(ER niacin/
laropiprant)
MK-0524B
Obesity
MK-0364
(taranabant)
Migraine
MK-0974
Cancer
MK-8669*(4)
(AP23573) |
Approvable
CINV
Emend For Injection
2007 U.S. Approvals
Diabetes
Janumet |
|
|
|
* |
|
Licensed, alliance, or acquisition |
|
** |
|
Antigen licensed from Intercell AG |
|
*** |
|
Multiple licenses, including CSL, Ltd. |
|
(1) |
|
V# correction; no change in program |
|
(2) |
|
Clinical development program conducted by Allergan, Inc. |
|
(3) |
|
Proof-of-Concept Molecule |
|
(4) |
|
It is expected that AP23573 will enter into Phase III clinical development for
the treatment of metastatic sarcomas beginning in third quarter 2007. |
The FDA issued a non-approvable
letter in response to the NDA for Arcoxia (etoricoxib) for the
symptomatic treatment of osteoarthritis. Merck continues to evaluate the options available with
regard to a potential path forward in the U.S.
Restructuring costs, primarily representing separation and other related costs associated with the
Companys global restructuring program, were $55.8 million and $121.6 million for the three and six
months ended June 30, 2007, respectively. Amounts included in Restructuring costs in the second
quarter of 2006 were a net credit of $6.9 million representing separation and other related costs
associated with the global restructuring program, offset by gains on sales of facilities in
connection with the program. Amounts included in Restructuring costs for the first half of 2006
were $36.8 million (see Note 2 to the consolidated financial statements).
Equity income from affiliates, which reflects the performance of the Companys joint ventures and
other equity method affiliates, was $759.1 million and $611.3 million for the second quarter of
2007 and 2006, respectively, and was $1.41 billion and $1.11 billion for the first six months of
2007 and 2006, respectively. The increase in both periods of 2007 primarily reflects the
successful performance of Vytorin and Zetia through the Merck/Schering-Plough partnership. See
Note 5 to the consolidated financial statements and Selected Joint Venture and Affiliate
Information below.
The increase in Other (income) expense, net for the first six months of 2007 compared with the same
period of 2006 primarily reflects the favorable impact of gains on sales of assets and product
divestitures.
- 29 -
Segment Profits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical segment |
|
$ |
3,596.9 |
|
|
$ |
3,759.9 |
|
|
$ |
7,015.3 |
|
|
$ |
7,257.6 |
|
Vaccines segment |
|
|
609.9 |
|
|
|
149.7 |
|
|
|
1,101.5 |
|
|
|
265.3 |
|
Other segment |
|
|
128.4 |
|
|
|
106.9 |
|
|
|
282.5 |
|
|
|
240.2 |
|
Other |
|
|
(2,103.0 |
) |
|
|
(1,908.2 |
) |
|
|
(3,912.7 |
) |
|
|
(3,684.4 |
) |
|
Income before income taxes |
|
$ |
2,232.2 |
|
|
$ |
2,108.3 |
|
|
$ |
4,486.6 |
|
|
$ |
4,078.7 |
|
|
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 4% in the second quarter of 2007 and declined 3% for the
first six months of 2007 compared with the same periods of 2006 largely reflecting 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 $609.9 million in the second quarter of 2007 compared with $149.7
million in the second quarter of 2006 and were $1.1 billion in the first half of 2007 compared with
$265.3 million for same period of 2006. The increase in both periods was 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 24.9% for the second quarter of 2007 compared with 28.9% for the second
quarter of 2006 and was 24.6% in the first six months of 2007 compared with 26.0% for the first six
months of 2006. The effective tax rates in both years reflect the impact of costs associated with
the global restructuring program. Additionally, the effective tax rates in 2006 reflect the
unfavorable impact of the acquired research charge associated with the acquisition of GlycoFi.
Net income was $1.68 billion for the second quarter of 2007 compared with $1.50 billion for the
second quarter of 2006 and was $3.38 billion for the first six months of 2007 compared with $3.02
billion for the first six months of 2006. Earnings per common share assuming dilution (EPS) for
the second quarter of 2007 were $0.77 compared with $0.69 in the second quarter of 2006 and were
$1.55 in the first six months of 2007 compared with $1.38 for the same period in 2006. These
results reflect strong performance across a range of the Companys products and solid performance
from the Merck/Schering-Plough partnership. In addition, the increase in net income and EPS in 2007
compared with 2006 reflects the acquired research charge related to the GlycoFi acquisition in
2006. For the six month period, gains from certain asset and product divestitures in 2007 as
discussed above and lower restructuring charges also contributed to the increase in EPS. Partially
offsetting these increases to 2007 EPS was the charge for future Vioxx legal defense costs.
Selected Joint Venture and Affiliate Information
The Merck/Schering-Plough partnership reported combined global sales of Zetia and Vytorin of $1.26
billion for the second quarter of 2007, representing growth of 30% over the second quarter of 2006.
Sales for the first six months of 2007 were $2.43 billion, an increase of 38% over the same period
of 2006. Global sales of Zetia, the cholesterol-absorption inhibitor also marketed as Ezetrol
outside the United States, reached $577.5 million in the second quarter of 2007, an increase of 21%
compared with the second quarter of 2006 and rose to $1.12 billion for the first half of 2007, an
increase of 26% compared with the first half of 2006. Global sales of Vytorin, marketed outside
the United States as Inegy, reached $686.4 million in the second quarter of 2007, an increase of
38% compared with the second quarter of
- 30 -
2006. Sales of Vytorin for the first six months of 2007 were $1.31 billion, an increase of 50%
over the comparable period of 2006.
Total vaccine sales reported by SPMSD were $264.8 million and $177.1 million for the second quarter
of 2007 and 2006, respectively, and were $459.6 million and $349.8 million for the first six months
of 2007 and 2006, respectively. SPMSD sales included sales of Gardasil of $77.8 million for the
second quarter and $108.0 million for the first six months of 2007.
The Company records the results from its interest in the Merck/Schering-Plough partnership and
SPMSD in Equity income from affiliates.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Cash and investments |
|
$ |
13,147.0 |
|
|
$ |
16,501.2 |
|
Working capital |
|
$ |
2,154.7 |
|
|
$ |
2,507.5 |
|
Total debt to total liabilities and equity |
|
|
14.3 |
% |
|
|
15.3 |
% |
|
The decline in cash and investments at June 30, 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). Working capital as of June 30, 2007 includes the impact of the
reclassification of certain amounts to current liabilities (see Notes 5 and 6 to the consolidated
financial statements).
During the first six months of 2007, cash provided by operations was $1.6 billion compared with
cash provided by operations of $3.5 billion for the same period of 2006. Cash provided by
operations reflects the nature and timing of tax payments, which totaled $2.8 billion for the first
six months of 2007 including the payment referenced above for certain tax matters, compared with
$1.4 billion for the same period of 2006, which included payments related to the American Jobs
Creation Act repatriation. 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 $1.9 billion in the first six months 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 June 30, 2007, the
Companys Consolidated Balance Sheet reflects a liability for unrecognized tax benefits of $3.50
billion. If the Company were to recognize these benefits, the effective tax rate would reflect a
favorable net impact of $2.45 billion. Accrued interest and penalties included in the Consolidated
Balance Sheet were $1.61 billion as of June 30, 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 settlement with the IRS did not have a material impact on
the Companys results of operations in 2007 as these amounts had been previously provided for.
- 31 -
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, respectively, over the remainder of 2007, and an
equivalent reduction in the balances of unrecognized tax benefits and accrued interest reflected in
the Consolidated Balance Sheet at June 30, 2007. Due to the high degree of uncertainty regarding
the timing of future cash outflows of liabilities for unrecognized tax benefits beyond one year, a
reasonable estimate of the period of cash settlement for these future years can not be made.
As previously disclosed, Mercks Canadian tax returns for the year 1998 through 2004 are being
examined by the Canada Revenue Agency (CRA). In October 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 $1.5 billion (U.S.
dollars) plus interest of approximately $585 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, during January 2007, the Company pledged collateral to a financial institution
which provided a Letter of Guarantee to the CRA representing a portion of the tax and interest
assessed. In May 2007, in connection with the same matters, the Company pledged collateral to
another financial institution which provided a financial guarantee to the Quebec Ministry of
Revenue. The collateral is included in Other Assets in the Consolidated Balance Sheet and totaled
$1.2 billion at June 30, 2007. 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.
In July 2007, the CRA notified the Company that it is in the process of proposing a penalty of $160
million (U.S. dollars) in connection with this matter. The penalty is for failing to provide
information on a timely basis. The Company vigorously disagrees with the penalty and feels it is
inapplicable and that appropriate information was provided on a
timely basis. The Company is pursuing all
appropriate remedies to avoid having the penalty assessed and was
notified in early August 2007 that the CRA is holding the imposition
of a penalty in abeyance pending a review of the Companys
submissions as to the inapplicability of a penalty.
In addition, in July 2007, the CRA proposed additional adjustments for 1999 relating to another
intercompany pricing matter. The adjustments would increase Canadian
tax due by another $20
million (U.S. dollars) plus $17 million (U.S. dollars) of
interest. It is possible that the CRA will propose similar
adjustments for later years. The Company disagrees with the
positions taken by CRA and believes they are without merit. The Company intends to pursue all
appropriate remedies to resolve this matter.
Capital expenditures totaled $473.1 million and $460.7 million for the first six months of 2007 and
2006, respectively. Capital expenditures for full year 2007 are estimated to be $1.2 billion.
Dividends paid to stockholders were $1.7 billion for both the first six months of 2007 and 2006.
In May and July 2007, the Board of Directors declared a quarterly dividend of $0.38 per share on
the Companys common stock for the third and fourth quarters of 2007, respectively.
The Company purchased $491.9 million of its common stock (10.4 million shares) for its Treasury
during the first six months of 2007. The Company has approximately $6.0 billion remaining under
the July 2002 treasury stock purchase authorization.
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.
In June 2007, the Company entered into a pay-floating, receive-fixed interest rate swap contract
effectively converting $250 million of its $1.0 billion, 4.75% fixed-rate notes into floating rate
instruments. The interest rate swap is designated as a hedge of the fair value change in the notes
attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate and will
mature in 2015. The fair value change in the notes is fully offset in interest expense by the fair
value change in the swap contract.
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
- 32 -
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 11), there have been no significant changes in the Companys critical accounting policies
since December 31, 2006.
Recently Issued Accounting Standards
In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue
No. 07-3, Accounting for Advance Payments for Goods or Services Received for Use in Future Research
and Development Activities (Issue 07-3), which is effective January 1, 2008 and is applied
prospectively for new contracts entered into on or after the effective date. Issue 07-3 addresses
nonrefundable advance payments for goods or services that will be used or rendered for future
research and development activities. Issue 07-3 will require these payments be deferred and
capitalized and recognized as an expense as the related goods are delivered or the related services
are performed. The Company is assessing the effects of adoption of Issue 07-3 on its financial
position and results of operations.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115 (FAS 159), which is
effective January 1, 2008. FAS 159 permits companies to choose to measure certain financial assets
and financial liabilities at fair value. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each subsequent reporting date. The
effect of adoption of FAS 159 on the Companys financial position and results of operations is not
expected to be material.
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.
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 the consolidated financial statements contained in (i) this report, (ii) the Companys Report on
Form 10-Q for the quarter ended March 31, 2007 and (iii) 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 Washoe and Clark Counties, Nevada. As of
June 30, 2007, the Company had been served or was aware that it had been named as a defendant in
approximately 26,950 lawsuits, which include approximately 45,225 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 8,575 lawsuits representing approximately 23,450 plaintiff groups are or are slated
to be in the federal MDL and approximately 16,400 lawsuits representing approximately 16,400
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 4,620
plaintiff groups had been dismissed as of June 30, 2007. Of these, there have been over 1,170
plaintiff groups whose claims were dismissed with prejudice (i.e., they cannot be brought again)
either by plaintiffs themselves or by the courts. Over 3,450 additional plaintiff groups have had
their claims dismissed without prejudice (i.e., they can be brought again).
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.
- 33 -
Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that establishes a procedure to halt the running of the statute of limitations
(tolling) as to certain categories of claims allegedly arising from the use of Vioxx by non-New
Jersey citizens. The Tolling Agreement applies to individuals who have not filed lawsuits and may
or may not eventually file lawsuits and only to those claimants who seek to toll claims alleging
injuries resulting from a thrombotic cardiovascular event that results in a myocardial infarction
or ischemic stroke. The Tolling Agreement provides counsel additional time to evaluate potential
claims. The Tolling Agreement requires any tolled claims to be filed in federal court. As of June
30, 2007, approximately 14,450 claimants had entered into Tolling Agreements. The parties agreed
that April 9, 2007 was the deadline for filing Tolling Agreements and no additional Tolling
Agreements are being accepted.
The following sets forth the results of trials and certain significant rulings that occurred in or
after the second quarter of 2007 with respect to the Vioxx Product Liability Lawsuits.
In August 2006, in Barnett v. Merck, a jury in New Orleans, Louisiana returned a plaintiff verdict
in the second federal Vioxx case to go to trial. The jury awarded the plaintiff $50 million in
compensatory damages and $1 million in punitive damages. On June 5, 2007, Judge Fallon denied
Mercks motion for judgment as a matter of law and denied in part Mercks motion for a new trial on
all issues. The Court allowed the plaintiff to choose whether to accept a reduced damages award of
$1.6 million ($600,000 in compensatory damages and $1 million in punitive damages) or to have a
re-trial. On June 20, 2007, the plaintiff accepted the Courts reduced damage award of $1.6
million, and on June 28, 2007, Judge Fallon entered judgment in that amount. The Company intends
to appeal this judgment.
On May 29, 2007, in the case of Plunkett v. Merck, Judge Fallon granted plaintiffs motion for a
new trial, vacating the February 23, 2006 judgment in favor of Merck.
On July 3, 2007, Judge Fallon denied Mercks motion for summary judgment on federal preemption
grounds in two individual cases, Arnold v. Merck and Gomez v. Merck.
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. On July 9,
2007, Judge Chaney scheduled the retrial of the combined trial of Appell and Arrigale for September
17, 2007. Judge Chaney was set to try Berwick v. Merck on April 12, 2007. On the eve of trial,
plaintiff dismissed the case with prejudice, citing health issues.
A consolidated trial, Hermans v. Merck and the retrial of 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, resulting in a jury verdict in favor of Merck on November 3, 2005.
However, on August 17, 2006, Judge Higbee set aside the November 2005 jury verdict 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. On March 2, 2007, the jury found for Merck in the general phase on
the Hermans failure to warn claim, and the consumer fraud claim was subsequently submitted to Judge
Higbee for decision, which is still pending. On March 12, 2007, the jury found for plaintiffs 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. These and other post-trial motions are currently pending.
In April 2006, in a trial involving two plaintiffs, Thomas Cona and John McDarby, in Superior Court
of New Jersey, Law Division, Atlantic County, the jury returned a split verdict. The jury
determined that Vioxx did not substantially contribute to the heart attack of Mr. Cona, but did
substantially contribute to the heart attack of Mr. McDarby. The jury also concluded that, in each
case, Merck violated New Jerseys consumer fraud statute, which allows plaintiffs to receive their
expenses for purchasing the drug, trebled, as well as reasonable attorneys fees. The jury awarded
$4.5 million in compensatory damages to Mr. McDarby and his wife, who also was a plaintiff in that
case, as well as punitive damages of $9 million. On June 8, 2007, Judge Higbee denied Mercks
motion for a new trial. On June 15, 2007, Judge Higbee awarded approximately $4 million in the
aggregate in attorneys fees and costs. The Company intends to appeal this verdict after the
completion of post-trial proceedings in the trial court.
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. The plaintiff moved for a new trial on May 25, 2007.
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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.
In July 2006, in Doherty v. Merck, in the Superior Court of Atlantic County, Law Division, New
Jersey, a jury returned a verdict in favor of the Company on all counts. The jury rejected a claim
by the plaintiff that her nearly three years of Vioxx use caused her heart attack. The jury also
found in favor of Merck on the plaintiffs consumer fraud claim. Plaintiffs motion for a new
trial was argued on May 1, 2007. Judge Higbee took the matter under advisement.
In December 2006, a New Orleans, Louisiana jury returned a verdict in favor of the Company in
Dedrick v. Merck. On May 29, 2007, Judge Fallon denied plaintiffs motion for a new trial.
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
approximately 1,000 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.
On July 31, 2007, the New Jersey Appellate Division unanimously upheld Judge Higbees dismissal of
Vioxx Product Liability Lawsuits brought by residents of the United Kingdom.
Juries have now found in favor of Merck 10 times and in favor of plaintiffs five times. As noted
above, Judge Fallon has set aside the verdict in the Plunkett case, which is one of the 10 defense
verdicts, and ordered a new trial. There are two unresolved mistrials as a result of hung juries
after plaintiffs failed to prove their claims. In addition, another 20 cases scheduled for trial
were either dismissed or withdrawn from the trial calendar by plaintiffs before a jury could be
selected.
Merck voluntarily withdrew Vioxx from the market on September 30, 2004. Most states have statutes
of limitations for product liability claims of no more than three years, which require that claims
must be filed within no more than three years after the plaintiffs learned or could have learned of
their potential cause of action. As a result, some may view September 30, 2007 as a significant
deadline for filing Vioxx cases. It is important to note, however, that the law regarding statutes
of limitations can be complex and variable, depending on the facts and applicable law. Some states
have longer statutes of limitations. There are also arguments that the statutes of limitations
began running before September 30, 2004. Merck expects that there will be legal arguments
concerning the proper application of these statutes, and the decisions will be up to the judges
presiding in individual cases in state and federal proceedings. As previously disclosed, in the
federal MDL, Judge Fallon denied the Companys motion for summary judgment on statute of
limitations grounds in three individual cases on the basis that there were factual issues
precluding summary judgment. To the extent that September 30, 2007 is a deadline, it would not
apply to claimants with whom Merck has entered into agreements to toll the statute of limitations,
as referred to above.
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
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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 requested certification of a class of purchasers
of Company stock between May 21, 1999 and October 29, 2004. The complaint alleged that the
defendants made false and misleading statements regarding Vioxx in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and sought unspecified compensatory damages and the
costs of suit, including attorneys fees. The complaint also 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 included 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 have appealed Judge Cheslers
decision to the United States Court of Appeals for the Third Circuit.
In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging
violations of federal securities laws as well as violations of state law against the Company and
certain officers. Pursuant to the Case Management Order governing the Shareholder MDL, the case,
which is based on the same allegations as the Vioxx Securities Lawsuits, was consolidated with the
Vioxx Securities Lawsuits. Defendants motion to dismiss
the pension funds complaint was filed on
August 3, 2007.
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, is pending.
As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the Vioxx
Derivative Lawsuits). On May 5, 2006, Judge Chesler granted defendants motion to dismiss and
denied plaintiffs request for leave to amend their complaint. Plaintiffs appealed, arguing that
Judge Chesler erred in denying plaintiffs leave to amend their complaint with materials acquired
during discovery. On July 18, 2007, the United States Court of Appeals for the Third Circuit
reversed the District Courts decision on the grounds that Judge Chesler should have allowed
plaintiffs to make use of the discovery material to try to establish demand futility, and remanded
the case for the District Courts consideration of whether, even with the additional materials,
plaintiffs request to amend their complaint would still be futile.
In addition, as previously disclosed, various putative class actions filed in federal court under
the Employee Retirement Income Security Act (ERISA) against the Company and certain current and
former officers and directors (the Vioxx ERISA Lawsuits and, together with the Vioxx Securities
Lawsuits and the Vioxx Derivative Lawsuits, the Vioxx Shareholder Lawsuits) have been transferred
to the Shareholder MDL and consolidated for all purposes. The consolidated complaint asserts
claims on behalf of certain of the Companys current and former employees who are participants in
certain of the Companys retirement plans for breach of fiduciary duty. The lawsuits make similar
allegations to the allegations contained in the Vioxx Securities Lawsuits. On July 11, 2006, Judge
Chesler granted in part and denied in part defendants motion to dismiss the ERISA Complaint.
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.
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.
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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 in the aggregate 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 Securities
and Exchange Commission (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 and 2008. At this time, the Company cannot predict the timing of any trials in the
Vioxx Shareholder Lawsuits. The Company believes that it has meritorious defenses to the Vioxx
Lawsuits and will vigorously defend against them. In view of the inherent difficulty of predicting
the outcome of litigation, particularly where there are many claimants and the claimants seek
indeterminate damages, the Company is unable to predict the outcome of these matters, and at this
time cannot reasonably estimate the possible loss or range of loss with respect to the Vioxx
Lawsuits. The Company has not established any reserves for any potential liability relating to the
Vioxx Lawsuits or the Vioxx Investigations, including for those cases in which 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.
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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 six months of 2007, the Company spent approximately $258 million in the aggregate
in legal defense costs worldwide, including $137 million in the second quarter, related to (i) the
Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii) the Vioxx Foreign
Lawsuits, and (iv) the Vioxx Investigations (collectively, the Vioxx Litigation). In the second
quarter of 2007, the Company recorded a charge of $210 million, to increase the reserve solely for
its future legal defense costs related to the Vioxx Litigation to $810 million at June 30, 2007.
Some of the significant factors considered in the establishment and ongoing review of the reserve
for the Vioxx legal defense costs were as follows: the actual costs incurred by the Company; 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 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. While the Company does not anticipate
that it will need to increase the reserve every quarter, 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 June 30, 2007, 225 cases, which include
approximately 700 plaintiff groups, had been filed against Merck in either federal or state court,
including 5 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 190 of the cases are 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. 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 six
months 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.
- 38 -
The Company is cooperating with all of these investigations. The Company cannot predict the
outcome of these investigations; however, it is possible that unfavorable outcomes could have a
material adverse effect on the Companys financial position, liquidity and results of operations.
In addition, from time to time, other federal, state or foreign regulators or authorities may seek
information about practices in the pharmaceutical industry or the Companys business practices in
inquiries other than the investigations discussed in this section. It is not feasible to predict
the outcome of any such inquiries.
Vaccine Litigation
The Company is aware that there are approximately 4,800 cases pending in the Vaccine Court
involving allegations that thimerosal-containing vaccines and/or the M-M-R II vaccine cause autism
spectrum disorders. Not all of the thimerosal-containing vaccines involved in the Vaccine Court
proceeding are Company vaccines. The Company is the sole source of the M-M-R II vaccine
domestically. In June 2007, the Special Masters presiding over the Vaccine Court proceedings held
a two and a half week hearing in which both petitioners and the government presented evidence on
the issue of whether the combination of M-M-R II and thimerosal in vaccines can cause autism
spectrum disorders and whether it did cause autism spectrum disorder in the petitioner in that
case. A ruling in that case is expected in 2008. According to the Vaccine Court, it expects to
hold evidentiary hearings in eight additional so-called test cases over approximately the next
year, covering a total of three medical theories on how the vaccines at issue can cause autism.
The Vaccine Court has indicated that it intends to use the evidence presented at these test case
hearings to guide the adjudication of the remaining autism spectrum disorder cases. Since the
Company is not a party, it does not participate in the proceedings.
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, Propecia, Zetia, Singulair, Primaxin, 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 dorzolamide (Trusopt) and dorzolamide/timolol (Cosopt),
imipenem/cilastatin (Primaxin) 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 Company LLC. On March 22, 2007, Schering-Plough
and MSP Singapore Company 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.
In February 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.
In January 2007, the Company received a letter from Ranbaxy Laboratories Ltd. (Ranbaxy) stating
that it had filed an ANDA seeking approval of a generic version of Mercks Primaxin. In April
2007, the Company filed a patent infringement suit against Ranbaxy.
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
- 39 -
decision in the United Kingdom was upheld on appeal. The Company has appealed the decisions in
Germany and Holland.
On January 18, 2006, the Company sued Hi-Tech Pharmacal Co., Inc. (Hi-Tech) of Amityville, New
York for patent infringement in response to Hi-Techs application to the FDA seeking approval of a
generic version of Mercks ophthalmic drugs Trusopt and Cosopt, which are used for treating
elevated intraocular pressure in people with ocular hypertension or glaucoma. In the lawsuit,
Merck sued to enforce a patent covering an active ingredient dorzolamide, which is present in both
Trusopt and Cosopt. 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.
In the case of omeprazole, on May 31, 2007, the trial court issued a decision with respect to four
generic companies selling generic omeprazole. The court found that the Impax Laboratories Inc. and
Apotex Corp. products infringed AstraZenecas formulation patents, while products made by Mylan
Laboratories and Lek Pharmaceutical and Chemical Co., d.d. did not infringe. The companies found
to have infringed were ordered off the market until October 20, 2007, which is the expiration of
the pediatric exclusivity period.
Other Litigation
As previously disclosed, on August 20, 2004, the United States District Court for the District of
New Jersey granted a motion by the Company, Medco Health Solutions, Inc. (Medco Health) and
certain officers and directors to dismiss a shareholder derivative action involving claims related
to the Companys revenue recognition practice for retail co-payments paid by individuals to whom
Medco Health provides pharmaceutical benefits as well as other allegations. The complaint was
dismissed with prejudice. Plaintiffs appealed the decision. On December 15, 2005, the U.S. Court
of Appeals for the Third Circuit upheld most of the District Courts decision dismissing the suit,
and sent the issue of whether the Companys Board of Directors properly refused the shareholder
demand relating to the Companys treatment of retail co-payments back to the District Court for
reconsideration under a different legal standard. Plaintiffs moved to remand their action to state
court on August 18, 2006, and the District Court granted that motion on February 1, 2007. On July
30, 2007, the Superior Court of New Jersey, Chancery Division, Hunterdon County, granted a motion
by the Company, Medco Health, and certain officers and directors for dismissal and summary
judgment. The entire complaint was dismissed with prejudice.
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.
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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. 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.
As noted above in Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations on August 14, 2007, Peter N. Kellogg will replace Judy C. Lewent as
Executive Vice President and Chief Financial Officer.
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.
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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 June 30, 2007 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
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($ in millions) |
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Total Number |
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Average Price |
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Approximate Dollar Value of Shares |
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of Shares |
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Paid Per |
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That May Yet Be Purchased |
Period |
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Purchased(1) |
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Share |
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Under the Plans or Programs(1) |
April 1 - April 30, 2007 |
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1,633,000 |
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$ |
48.69 |
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$ |
6,203.5 |
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May 1 - May 31, 2007 |
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1,671,950 |
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$ |
52.59 |
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$ |
6,115.6 |
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June 1 - June 30, 2007 |
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1,591,488 |
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$ |
50.35 |
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$ |
6,035.5 |
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Total |
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4,896,438 |
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$ |
50.56 |
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$ |
6,035.5 |
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(1) |
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All shares purchased during the period were made as part of a plan
announced in July 2002 to purchase $10 billion in Merck shares. |
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were voted upon at the Annual Meeting of Stockholders held on April 24, 2007,
and received the votes set forth below:
1. |
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All of the following persons nominated were elected to serve as directors and received the
number of votes set opposite their respective names: |
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Names |
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For |
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Withheld |
Richard T. Clark |
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1,789,623,123 |
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52,231,140 |
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Johnnetta B. Cole |
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1,698,078,553 |
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143,775,710 |
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William B. Harrison, Jr. |
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1,797,656,560 |
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44,197,703 |
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William N. Kelley |
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1,783,151,392 |
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58,702,871 |
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Rochelle B. Lazarus |
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1,707,379,969 |
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134,474,294 |
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Thomas E. Shenk |
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1,804,450,221 |
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37,404,042 |
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Anne M. Tatlock |
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1,801,591,994 |
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40,262,269 |
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Samuel O. Thier |
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1,790,032,685 |
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51,821,578 |
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Wendell P. Weeks |
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1,709,335,630 |
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132,518,633 |
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Peter C. Wendell |
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1,802,865,833 |
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38,988,430 |
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2. |
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A proposal to ratify the appointment of independent registered public accounting firm for
2007 received 1,809,323,305 votes FOR and 13,551,558 votes AGAINST, with 18,979,401
abstentions. |
- 42 -
3. |
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A proposal to amend the Restated Certificate of Incorporation to eliminate supermajority
voting requirements contained in the Restated Certificate of Incorporation received
1,805,276,612 votes FOR and 14,723,112 votes AGAINST, with 21,853,869 abstentions. |
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4. |
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A proposal to amend the Restated Certificate of Incorporation to eliminate supermajority
voting requirements imposed under New Jersey law on corporations organized before 1969
received 1,805,367,159 votes FOR and 14,398,675 votes AGAINST, with 22,088,275 abstentions. |
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5. |
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A proposal to amend the Restated Certificate of Incorporation to limit the size of the Board
to no more than 18 directors received 1,479,024,119 votes FOR and 33,321,800 votes AGAINST,
with 19,052,074 abstentions. This proposal did not pass because it required the affirmative
vote of at least 80% of the outstanding shares for approval. |
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6. |
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A proposal to amend the Restated Certificate of Incorporation to replace its cumulative
voting feature with a majority vote standard for the election of directors received
1,338,688,845 votes FOR and 172,362,447 votes AGAINST, with 20,346,512 abstentions. |
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7. |
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A stockholder proposal concerning publication of political contributions received 48,423,239
votes FOR and 1,203,651,055 votes AGAINST, with 279,323,306 abstentions and 310,456,663 broker
non-votes. |
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8. |
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A stockholder proposal concerning an advisory vote on executive compensation received
680,433,778 votes FOR and 702,305,124 votes AGAINST, with 148,622,580 abstentions and
310,492,780 broker non-votes. |
Item 6. Exhibits
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Number |
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Description |
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3.1
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Restated Certificate of Incorporation of Merck & Co., Inc. (May 17, 2007)
Incorporated by reference to Current Report on Form 8-K dated May 17, 2007 |
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3.2
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By-Laws of Merck & Co., Inc. (as amended effective May 31, 2007)
Incorporated by reference to Current Report on Form 8-K dated May 31, 2007 |
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10.1
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Offer Letter between Merck & Co., Inc. and Peter N. Kellogg, dated June 18, 2007
Incorporated by reference to Current Report on Form 8-K dated June 28, 2007 |
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12
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Computation of Ratios of Earnings to Fixed Charges |
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31.1
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Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
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31.2
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Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
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32.1
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Section 1350 Certification of Chief Executive Officer |
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32.2
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Section 1350 Certification of Chief Financial Officer |
- 43 -
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.
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MERCK & CO., INC.
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Date: August 8, 2007 |
/s/ Bruce N. Kuhlik
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BRUCE N. KUHLIK |
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Senior Vice President and General Counsel
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Date: August 8, 2007 |
/s/ John Canan
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JOHN CANAN |
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Vice President, Controller |
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- 44 -
EXHIBIT INDEX
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Number |
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Description |
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3.1
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Restated Certificate of Incorporation of Merck & Co., Inc. (May 17, 2007)
Incorporated by reference to Current Report on Form 8-K dated May 17, 2007 |
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3.2
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By-Laws of Merck & Co., Inc. (as amended effective May 31, 2007)
Incorporated by reference to Current Report on Form 8-K dated May 31, 2007 |
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10.1
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Offer Letter between Merck & Co., Inc. and Peter N. Kellogg, dated June 18, 2007
Incorporated by reference to Current Report on Form 8-K dated June 28, 2007 |
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12
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Computation of Ratios of Earnings to Fixed Charges |
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31.1
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Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
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31.2
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Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
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32.1
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Section 1350 Certification of Chief Executive Officer |
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32.2
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Section 1350 Certification of Chief Financial Officer |
- 45 -