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 September 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 September 30, 2007:
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Class
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Number of Shares Outstanding |
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Common Stock
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2,176,567,489 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements
MERCK & CO., INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF INCOME
(Unaudited, $ in millions except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 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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$ |
6,074.1 |
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$ |
5,410.4 |
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$ |
17,954.8 |
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$ |
16,591.9 |
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Costs, Expenses and Other |
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Materials and production |
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1,517.7 |
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1,544.1 |
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4,595.9 |
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4,332.0 |
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Marketing and administrative |
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1,951.4 |
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2,370.6 |
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5,837.2 |
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5,819.6 |
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Research and development |
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1,440.5 |
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945.4 |
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3,501.0 |
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3,059.9 |
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Restructuring costs |
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49.3 |
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49.6 |
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170.9 |
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86.5 |
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Equity income from affiliates |
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(768.5 |
) |
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(595.4 |
) |
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(2,180.2 |
) |
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(1,710.2 |
) |
Other (income) expense, net |
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(180.9 |
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(134.7 |
) |
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(521.2 |
) |
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(305.4 |
) |
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4,009.5 |
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4,179.6 |
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11,403.6 |
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11,282.4 |
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Income Before Taxes |
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2,064.6 |
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1,230.8 |
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6,551.2 |
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5,309.5 |
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Taxes on Income |
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539.1 |
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290.2 |
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1,644.9 |
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1,349.6 |
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Net Income |
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$ |
1,525.5 |
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$ |
940.6 |
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$ |
4,906.3 |
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$ |
3,959.9 |
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Basic Earnings per Common Share |
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$ |
0.70 |
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$ |
0.43 |
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$ |
2.26 |
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$ |
1.82 |
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Earnings per Common Share Assuming Dilution |
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$ |
0.70 |
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$ |
0.43 |
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$ |
2.24 |
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$ |
1.81 |
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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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$ |
1.14 |
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$ |
1.14 |
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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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September 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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$ |
5,208.3 |
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$ |
5,914.7 |
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Short-term investments |
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2,183.2 |
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2,798.3 |
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Accounts receivable |
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3,501.6 |
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3,314.8 |
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Inventories (excludes inventories of $333.1 in 2007 and $416.1
in 2006 classified in Other assets see Note 4) |
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1,849.5 |
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1,769.4 |
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Prepaid expenses and taxes |
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1,421.1 |
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1,433.0 |
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Total current assets |
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14,163.7 |
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15,230.2 |
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Investments |
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7,501.1 |
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7,788.2 |
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Property, Plant and Equipment, at cost, net of allowance for
depreciation of $12,163.3 in 2007 and $11,015.4 in 2006 |
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12,490.7 |
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13,194.1 |
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Goodwill |
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1,431.6 |
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1,431.6 |
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Other Intangibles, Net |
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771.3 |
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943.9 |
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Other Assets |
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9,342.3 |
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5,981.8 |
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$ |
45,700.7 |
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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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$ |
1,973.1 |
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$ |
1,285.1 |
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Trade accounts payable |
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392.1 |
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496.6 |
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Accrued and other current liabilities |
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6,452.9 |
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6,653.3 |
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Income taxes payable |
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858.0 |
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3,460.8 |
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Dividends payable |
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829.9 |
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826.9 |
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Total current liabilities |
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10,506.0 |
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12,722.7 |
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Long-Term Debt |
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3,873.6 |
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5,551.0 |
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Deferred Income Taxes and Noncurrent Liabilities |
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8,161.8 |
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6,330.3 |
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Minority Interests |
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2,437.4 |
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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 - 2,983,508,675 shares at September 30, 2007 |
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Issued - 2,976,223,337 shares at December 31, 2006 |
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29.8 |
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29.8 |
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Other paid-in capital |
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7,823.0 |
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7,166.5 |
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Retained earnings |
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41,601.8 |
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39,095.1 |
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Accumulated other comprehensive loss |
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(1,053.6 |
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(1,164.3 |
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48,401.0 |
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45,127.1 |
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Less treasury stock, at cost |
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806,941,186 shares at September 30, 2007 |
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808,437,892 shares at December 31, 2006 |
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27,679.1 |
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27,567.4 |
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Total stockholders equity |
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20,721.9 |
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17,559.7 |
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$ |
45,700.7 |
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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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Nine Months Ended |
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September 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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$ |
4,906.3 |
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$ |
3,959.9 |
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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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1,489.2 |
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1,725.4 |
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Deferred income taxes |
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(391.6 |
) |
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(226.1 |
) |
Equity income from affiliates |
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(2,180.2 |
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(1,710.2 |
) |
Dividends and distributions from equity affiliates |
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1,626.1 |
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1,372.5 |
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Share-based compensation |
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250.8 |
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246.0 |
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Acquired research |
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325.1 |
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296.3 |
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Other |
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19.8 |
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34.5 |
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Taxes paid for Internal Revenue Service settlement |
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(2,788.1 |
) |
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Net changes in assets and liabilities |
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1,394.0 |
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(709.2 |
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Net Cash Provided by Operating Activities |
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4,651.4 |
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4,989.1 |
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Cash Flows from Investing Activities |
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Capital expenditures |
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(726.3 |
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(684.7 |
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Purchases of securities, subsidiaries and other investments |
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(8,412.2 |
) |
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(15,983.2 |
) |
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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8,311.9 |
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13,480.0 |
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Other |
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0.3 |
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(1.5 |
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Net Cash Used by Investing Activities |
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(1,962.2 |
) |
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(3,189.4 |
) |
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Cash Flows from Financing Activities |
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Net change in short-term borrowings |
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161.1 |
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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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(1,158.9 |
) |
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(505.6 |
) |
Purchases of treasury stock |
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(574.6 |
) |
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(751.0 |
) |
Dividends paid to stockholders |
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(2,478.1 |
) |
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(2,494.0 |
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Proceeds from exercise of stock options |
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473.4 |
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340.8 |
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Other |
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106.1 |
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(172.5 |
) |
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Net Cash Used by Financing Activities |
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(3,471.0 |
) |
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(5,183.8 |
) |
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Effect of Exchange Rate Changes on Cash and Cash Equivalents |
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75.4 |
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20.9 |
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Net Decrease in Cash and Cash Equivalents |
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(706.4 |
) |
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(3,363.2 |
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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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$ |
5,208.3 |
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$ |
6,222.1 |
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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 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.
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 September 30, 2007, the Company has recorded total pre-tax
accumulated costs of $1.9 billion and eliminated approximately 6,000 positions which are
comprised of employee separations and the elimination of contractors and vacant positions.
However, the Company continues to hire new employees as the Companys business requires it. For
segment reporting purposes, restructuring charges are unallocated expenses. |
- 5 -
Notes to Consolidated Financial Statements (unaudited) (continued)
The following tables summarize the charges related to restructuring activities by type of cost:
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Three Months Ended September 30, |
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2007 |
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2006 |
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Separation |
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Accelerated |
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Separation |
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Accelerated |
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($ 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 |
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Materials and production |
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$ |
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$ |
127.4 |
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$ |
1.4 |
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$ |
128.8 |
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$ |
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$ |
187.4 |
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$ |
12.2 |
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$ |
199.6 |
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Research and development |
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Restructuring costs |
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36.7 |
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12.6 |
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49.3 |
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|
37.8 |
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11.8 |
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49.6 |
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$ |
36.7 |
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$ |
127.4 |
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$ |
14.0 |
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$ |
178.1 |
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$ |
37.8 |
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$ |
187.4 |
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$ |
24.0 |
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$ |
249.2 |
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Nine Months Ended September 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) |
|
Costs |
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Depreciation |
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Other |
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Total |
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Materials and production |
|
$ |
|
|
|
$ |
363.7 |
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|
$ |
1.9 |
|
|
$ |
365.6 |
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|
$ |
|
|
|
$ |
549.0 |
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|
$ |
23.1 |
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|
$ |
572.1 |
|
Research and development |
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|
(0.1 |
) |
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(0.1 |
) |
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55.4 |
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|
55.4 |
|
Restructuring costs |
|
|
121.7 |
|
|
|
|
|
|
|
49.2 |
|
|
|
170.9 |
|
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|
87.4 |
|
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|
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(0.9 |
) |
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|
86.5 |
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|
|
|
$ |
121.7 |
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|
$ |
363.7 |
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|
$ |
51.0 |
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|
$ |
536.4 |
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|
$ |
87.4 |
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|
$ |
604.4 |
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$ |
22.2 |
|
|
$ |
714.0 |
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|
Separation costs are associated with actual headcount reductions, as well as those headcount
reductions that were probable and could be reasonably estimated. In the third quarter of 2007,
approximately 275 positions were eliminated and in the third quarter of 2006 approximately 500
positions were eliminated. In the first nine months of 2007, approximately 1,130 positions were
eliminated compared with approximately 2,800 positions in the first nine months of 2006.
Accelerated depreciation costs primarily relate to the manufacturing and preclinical facilities
expected to be sold or closed by the end of 2008. Since the inception of the program through
the end of the third quarter of 2007, four of the manufacturing facilities had been closed, sold
or had ceased operations and the two preclinical sites were closed.
Other activity reflects $14.0 million and $24.0 million for the third quarter of 2007 and 2006,
respectively, and $51.0 million and $61.7 million for the first nine 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 for the nine months ended September 30, 2006
includes pre-tax gains of $39.5 million resulting from the second quarter sales of facilities.
The following table summarizes the charges and spending relating to restructuring activities for
the nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation |
|
Accelerated |
|
|
|
|
($ in millions) |
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Restructuring reserves as of January 1, 2007 |
|
$ |
177.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
177.7 |
|
Expense |
|
|
121.7 |
|
|
|
363.7 |
|
|
|
51.0 |
|
|
|
536.4 |
|
(Payments) receipts, net |
|
|
(127.1 |
) |
|
|
|
|
|
|
(45.5 |
) |
|
|
(172.6 |
) |
Non-cash activity |
|
|
|
|
|
|
(363.7 |
) |
|
|
(5.5 |
) |
|
|
(369.2 |
) |
|
Restructuring reserves as of September 30, 2007 |
|
$ |
172.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
172.3 |
|
|
3. |
|
Acquisitions and Research Collaborations |
|
|
|
In September 2007, Merck announced that it had successfully completed the acquisition of
NovaCardia, Inc. (NovaCardia), a privately held clinical-stage pharmaceutical company focused
on cardiovascular disease. This acquisition adds rolofylline (KW-3902) (MK-7418),
NovaCardias investigational Phase III
compound for acute heart failure, to Mercks pipeline. Merck acquired all of the outstanding
equity of NovaCardia for a total purchase price of $366.4 million (including $16.4 million of
cash and investments on hand at closing), which was paid through the |
- 6 -
Notes to Consolidated Financial Statements (unaudited) (continued)
issuance of 7.3 million shares of Merck common stock to the former NovaCardia shareholders based
on Mercks average closing stock price for the five days prior to closing of the acquisition.
In connection with the acquisition, the Company recorded a charge of $325.1 million for acquired
research associated with rolofylline, since, at the acquisition date, technological feasibility
had not been established and no alternative future use existed. The charge, which is not
deductible for tax purposes, was recorded in Research and development expense and was determined
based upon the present value of expected future cash flows resulting from this technology
adjusted for the probability of its technical and marketing success utilizing an income approach
reflecting an appropriate risk-adjusted discount rate. The ongoing activity with respect to the
future development of rolofylline is not expected to be material to the Companys research and
development expenses. The remaining purchase price was allocated to cash and investments of
$16.4 million, a deferred tax asset relating to a net operating loss carryforward of $23.9
million and other net assets of $1.0 million. Because NovaCardia 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. NovaCardias results of operations have been included in the Companys
consolidated financial results since the acquisition date.
In July 2007, Merck and ARIAD Pharmaceuticals, Inc. (ARIAD) announced that they had entered
into a global collaboration to jointly develop and commercialize AP23573 (deforolimus)
(MK-8669), ARIADs novel mTOR inhibitor, for use in cancer. Each party will fund 50 percent of
the cost of global development of MK-8669, except that Merck will fund 100 percent of the cost
of ex-U.S. development that is specific to the development or commercialization of MK-8669
outside the U.S. that is not currently part of the global development plan. The agreement
provided for an initial payment of $75 million to ARIAD, which the Company recorded as Research
and development expense, up to $452 million more in milestone payments to ARIAD based on the
successful development of MK-8669 in multiple cancer indications (including $13.5 million paid
in the third quarter for the initiation of the Phase III clinical trial in metastatic sarcomas
and $114.5 million to be paid 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 MK-8669 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 MK-8669; Merck will
pay ARIAD tiered double-digit royalties on end-market sales of MK-8669.
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 ($57.6 million net of
deferred taxes) related to GlycoFis developed technology that can be used immediately in the
research and development process and has alternative future uses. This intangible asset is
being amortized to Research and development expense on a straight-line basis over a five year
useful life. The remaining net assets acquired in this transaction were not material. Because
GlycoFi was a development stage company that had not commenced its planned principal operations,
the transaction was accounted for as an acquisition of assets rather than as a business
combination and, therefore, goodwill was not recorded. GlycoFis results of operations have
been included in the Companys consolidated financial results since the acquisition date.
- 7 -
Notes to Consolidated Financial Statements (unaudited) (continued)
4. |
|
Inventories |
|
|
|
Inventories consisted of: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
($ in millions) |
|
2007 |
|
2006 |
|
Finished goods |
|
$ |
409.4 |
|
|
$ |
403.8 |
|
Raw materials and work in process |
|
|
1,672.1 |
|
|
|
1,688.9 |
|
Supplies |
|
|
101.1 |
|
|
|
92.8 |
|
|
Total (approximates current cost) |
|
|
2,182.6 |
|
|
|
2,185.5 |
|
Reduction to LIFO cost for domestic inventories |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,182.6 |
|
|
$ |
2,185.5 |
|
|
Recognized as: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
1,849.5 |
|
|
$ |
1,769.4 |
|
Other assets |
|
$ |
333.1 |
|
|
$ |
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. |
|
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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Merck/Schering-Plough |
|
$ |
480.9 |
|
|
$ |
350.1 |
|
|
$ |
1,293.1 |
|
|
$ |
858.1 |
|
AstraZeneca LP |
|
|
181.2 |
|
|
|
173.7 |
|
|
|
608.3 |
|
|
|
602.6 |
|
Other (1) |
|
|
106.4 |
|
|
|
71.6 |
|
|
|
278.8 |
|
|
|
249.5 |
|
|
|
|
$ |
768.5 |
|
|
$ |
595.4 |
|
|
$ |
2,180.2 |
|
|
$ |
1,710.2 |
|
|
(1) Primarily reflects results from Merial Limited, and joint ventures with Sanofi
Pasteur and Johnson & Johnson.
Merck/Schering-Plough
In 2000, the Company and Schering-Plough Corporation (Schering-Plough) (collectively the
Partners) entered into agreements to create separate equally-owned partnerships to develop and
market in the United States new prescription medicines in the cholesterol-management and
respiratory therapeutic areas. These agreements generally provide for equal sharing of
development costs and for co-promotion of approved products by each company. In 2001, the
cholesterol-management partnership agreements were expanded to include all the countries of the
world, excluding Japan. In 2002, ezetimibe, the first in a new class of cholesterol-lowering
agents, was launched in the United States as Zetia (marketed as Ezetrol outside the United
States). In July 2004, a combination product containing the active ingredients of both Zetia
and Zocor was approved in the United States as Vytorin (marketed as Inegy outside of the United
States).
The cholesterol agreements provide for the sharing of operating income generated by the
Merck/Schering-Plough cholesterol partnership (MSP Partnership) based upon percentages that
vary by product, sales level and country. In the U.S. market, the Partners share profits on
Zetia and Vytorin sales equally, with the exception of the first $300 million of annual Zetia
sales on which Schering-Plough receives a greater share of profits. Operating income includes
expenses that the Partners have contractually agreed to share, such as a portion of
manufacturing costs, specifically identified promotion costs (including direct-to-consumer
advertising and direct and identifiable out-of-pocket promotion) and other agreed upon costs for
specific services such as on-going clinical research, market support, market research, market
expansion, as well as a specialty sales force and physician education programs. Expenses
incurred in support of the MSP Partnership but not shared between the Partners, such as
marketing and administrative expenses (including certain sales force costs), as well as certain manufacturing
costs, are not included in Equity income from affiliates. However, these costs are reflected in
the overall results of the Company. Certain
- 8 -
Notes to Consolidated Financial Statements (unaudited) (continued)
research and development expenses are generally shared equally by the Partners, after adjusting
for earned milestones.
The respiratory therapeutic agreements provide for the joint development and marketing in the
United States by the Partners of a once-daily, fixed-combination tablet containing the active
ingredients montelukast sodium and loratadine. Montelukast sodium is sold by Merck as Singulair
and loratadine is sold by Schering-Plough as Claritin, both of which are indicated for the
relief of symptoms of allergic rhinitis. In August 2007, Schering-Plough/Merck Pharmaceuticals
(SPM) announced that the New Drug Application filing for montelukast sodium/loratadine had
been accepted by the U.S. Food and Drug Administration for standard review. SPM is seeking U.S.
marketing approval of the medicine for treatment of allergic rhinitis symptoms in patients who
want relief from nasal congestion.
Summarized financial information for the MSP Partnership is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Sales |
|
$ |
1,167.8 |
|
|
$ |
793.2 |
|
|
$ |
1,263.9 |
|
|
$ |
973.4 |
|
|
$ |
1,300.0 |
|
|
$ |
1,028.5 |
|
|
$ |
3,731.7 |
|
|
$ |
2,795.1 |
|
|
Zetia |
|
|
544.0 |
|
|
|
414.8 |
|
|
|
577.5 |
|
|
|
476.0 |
|
|
|
607.0 |
|
|
|
501.9 |
|
|
|
1,728.5 |
|
|
|
1,392.7 |
|
Vytorin |
|
|
623.8 |
|
|
|
378.4 |
|
|
|
686.4 |
|
|
|
497.4 |
|
|
|
693.0 |
|
|
|
526.6 |
|
|
|
2,003.2 |
|
|
|
1,402.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production costs |
|
|
50.0 |
|
|
|
38.9 |
|
|
|
51.2 |
|
|
|
45.8 |
|
|
|
60.9 |
|
|
|
47.3 |
|
|
|
162.1 |
|
|
|
132.0 |
|
Other expense, net |
|
|
322.6 |
|
|
|
296.5 |
|
|
|
323.4 |
|
|
|
294.0 |
|
|
|
302.9 |
|
|
|
283.5 |
|
|
|
948.9 |
|
|
|
874.0 |
|
|
Income before taxes |
|
$ |
795.2 |
|
|
$ |
457.8 |
|
|
$ |
889.3 |
|
|
$ |
633.6 |
|
|
$ |
936.2 |
|
|
$ |
697.7 |
|
|
$ |
2,620.7 |
|
|
$ |
1,789.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mercks share of income
before taxes (1) |
|
$ |
362.5 |
|
|
$ |
191.8 |
|
|
$ |
453.3 |
|
|
$ |
322.8 |
|
|
$ |
481.9 |
|
|
$ |
354.5 |
|
|
$ |
1,297.7 |
|
|
$ |
869.1 |
|
|
|
|
(1) |
Mercks share of the MSP Partnerships income before taxes differs from the
equity income recognized from the MSP Partnership primarily due to the timing of recognition of
certain transactions between the Company and the MSP Partnership.
|
AstraZeneca LP
As previously disclosed, the 1999 AstraZeneca merger triggers a partial redemption of Mercks
limited partnership interest in AstraZeneca LP (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 before
the end of the second quarter of 2008.
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.
Such amounts are anticipated to represent a substantial portion of
the $4.7 billion. 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.
- 9 -
Notes to Consolidated Financial Statements (unaudited) (continued)
6. |
|
Debt and Financial Instruments |
|
|
|
In September 2007, the Company redeemed its $300 million variable-rate borrowing, which was due
in 2009. |
|
|
|
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. |
|
|
|
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 October 9, 2007, the Company had been served or was aware that it had been named as a
defendant in approximately 26,600 lawsuits, filed on or before September 30, 2007, which include
approximately 47,000 plaintiff groups, alleging personal injuries resulting from the use of
Vioxx, and in approximately 264 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 8,800 lawsuits
representing approximately 25,800 plaintiff groups are or are slated to be in the federal MDL
and approximately 15,850 lawsuits representing approximately 15,850 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 5,550
plaintiff groups had been dismissed as of September 30, 2007. Of these, there have been over
1,625 plaintiff groups whose claims were dismissed with prejudice (i.e., they cannot be brought
again) either by plaintiffs themselves or by the courts. Over 3,925 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 |
- 10 -
Notes to Consolidated Financial Statements (unaudited) (continued)
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 September 30, 2007, approximately 14,100 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 third quarter of 2007 with respect to the Vioxx Product Liability Lawsuits.
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 October 5, 2007, the jury in Kozic v. Merck, a case tried in state court in Tampa, Florida
found unanimously in favor of Merck on all counts, rejecting a claim that the Company was liable
for plaintiffs heart attack.
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. On August 20, 2007, Judge Fallon denied Mercks motion for a new trial. The
Company has appealed the judgment.
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. Judge Chaney has rescheduled the re-trial of the combined trial of Appell and Arrigale
for January 8, 2008.
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 has
appealed both cases and the Appellate Division has scheduled oral argument on both cases for
December 19, 2007.
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. The plaintiff filed a supplemental motion for a new trial on September 5, 2007.
On December 15, 2006, the jury in Albright v. Merck, a case tried in state court in Birmingham,
Alabama, returned a verdict for Merck on all counts. Plaintiff appealed in July 2007 to the
Alabama Supreme Court.
Juries
have now decided in favor of Merck 12 times and in plaintiffs favor
five times. One Merck verdict was set aside by the court and has not
been retried. Another Merck verdict was set aside and retried,
leading to one of the five plaintiff verdicts. There
have been two unresolved mistrials.
On September 28, 2006, the New Jersey Superior Court, Appellate Division, heard argument on
plaintiffs appeal of Judge Higbees dismissal of the Sinclair 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. The appeal was argued on October 22, 2007.
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,
- 11 -
Notes to Consolidated Financial Statements (unaudited) (continued)
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.
Plaintiffs have appealed the decision.
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. Plaintiffs have
asked the New Jersey Supreme Court to review the decision. The Court has not yet decided
whether it will exercise its discretion to do so.
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, due to disputes of fact, Judge Fallon declined to grant the Companys statute of limitations motion for summary
judgment in three individual cases. 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.
On October 15, 2007, Judge Higbee granted Mercks motion for summary judgment in Oldfield v.
Merck finding that the case, filed in December 2006, was barred because the two-year New Jersey
statute of limitations had run out. In so doing, Judge Higbee rejected plaintiffs argument
that the statute of limitations only started to run in 2006 pursuant to New Jerseys Discovery
Rule, a rule which delays the running of the statute of limitations until the plaintiff is, or
should be, aware of facts giving rise to a potential claim. Judge Higbee found that the wide
publicity surrounding Vioxx at the time Merck voluntarily withdrew it in September 2004 should
have put the plaintiff on notice of a potential claim.
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
sought 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. On March 31, 2006, the New Jersey Superior Court, Appellate Division, affirmed
the class certification order. On September 6, 2007, the New Jersey Supreme Court reversed the
certification of a nationwide class action of third-party payors, finding that the suit does not
meet the requirements for a class action.
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. In
addition, on September 17, 2007, the Attorney General of New York and the City of New York
commenced a similar lawsuit against the Company. 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. The putative class action, which
requested damages on behalf of purchasers of Company stock between May 21, 1999 and October 29,
2004, 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 asserted claims under
- 12 -
Notes to Consolidated Financial Statements (unaudited) (continued)
Section 20A of the Securities and Exchange Act against
certain defendants relating to their sales of Merck stock and under
Sections 11, 12 and 15 of the Securities Act of 1933 against certain defendants based on
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 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. In September 2007, the Dutch pension fund filed an amended
complaint rather than responding to Defendants motion to dismiss. In September 2007, five new
complaints were filed in the District of New Jersey on behalf of various foreign institutional
investors also alleging violations of federal securities laws as well as violations of state law
against the Company and certain officers. Defendants expect to move to dismiss the amended
complaint filed by the Dutch pension fund as well as the new complaints.
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 under
Oregon securities law. A trial date has been set for October 2008.
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. The
District Court has set a briefing schedule and plaintiffs brief in support of their request for
leave to amend their complaint is due in November 2007.
In addition, as previously disclosed, various putative class actions filed in federal court
under the Employee Retirement Income Security Act (ERISA) against the Company and certain
current and former officers and directors (the Vioxx ERISA Lawsuits and, together with the
Vioxx Securities Lawsuits and the Vioxx Derivative Lawsuits, the Vioxx Shareholder Lawsuits)
have been transferred to the Shareholder MDL and consolidated for all purposes. The
consolidated complaint asserts claims on behalf of certain of the Companys current and former
employees who are participants in certain of the Companys retirement plans for breach of
fiduciary duty. The lawsuits make similar allegations to the allegations contained in the Vioxx
Securities Lawsuits. On July 11, 2006, Judge Chesler granted in part and denied in part
defendants motion to dismiss the ERISA Complaint.
As
previously disclosed, on October 29, 2004, two individual
shareholders made a demand on the Board to take legal action against
Mr. Raymond Gilmartin, former Chairman, President and Chief
Executive Officer and other individuals for allegedly causing damage
to the Company with respect to the allegedly improper marketing of
Vioxx. In December 2004, the Special Committee of the Board of
Directors retained the Honorable John S. Martin, Jr. of
Debevoise & Plimpton LLP to conduct an independent
investigation of, among other things, the allegations set forth in
the demand. Judge Martins report was made public in September
2006. Based on the Special Committees recommendation made after
careful consideration of the Martin report and the impact that
derivative litigation would have on the Company, the Board rejected
the demand. On October 11, 2007, the shareholders filed a
lawsuit in state court in Atlantic County against numerous current
and former executives and directors of the Company alleging that the
Boards rejection of their demand was unreasonable and improper.
In addition, the lawsuit alleges that the defendants breached various
duties to the Company in allowing Vioxx to be marketed.
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
- 13 -
Notes to Consolidated Financial Statements (unaudited) (continued)
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. The
amounts actually recovered under the policies discussed in this
paragraph may be less than the amounts specified.
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. Pursuant to
negotiated agreements, three of the Companys insurers, which represent approximately 25% of the
upper level excess product liability insurance, have committed to pay approximately $120 million in the aggregate
with respect to such insurance. Most of the funds have been received. The amounts recovered
from the insurers substantially offset previously established receivables and therefore have not
impacted Net Income in periods received. Remaining receivables for product liability
insurance recovery, 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 2008. Other than the Oregon case, which is set for trial in October 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 nine months of 2007, the Company spent approximately $418 million in the aggregate in
legal defense costs worldwide, including $160 million in the third 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). During the
first nine months of 2007, the Company
- 14 -
Notes to Consolidated Financial Statements (unaudited) (continued)
recorded charges of $280 million, including $70 million in the third quarter, to increase the
reserve solely for its future legal defense costs related to the Vioxx Litigation to $720
million at September 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 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 September 30, 2007, approximately
340 cases, which include approximately 850 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, about 300 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 nine 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
- 15 -
Notes to Consolidated Financial Statements (unaudited) (continued)
Companys business practices in inquiries other than the investigations discussed in this section. It is
not feasible to predict the outcome of any such inquiries.
As previously disclosed, the Company had received a letter from the DOJ advising it of the
existence of a qui tam complaint alleging that the Company violated certain rules related to its
calculations of best price and other federal pricing benchmark calculations, certain of which
may affect the Companys Medicaid rebate obligation. The DOJ has informed the Company that it
does not intend to intervene in this action and has closed its investigation. The DOJ recently
informed the Company that the qui tam action also has been voluntarily dismissed.
Other Litigation
There are various other legal proceedings, principally product liability and intellectual
property suits involving the Company, which are pending. While it is not feasible to predict
the outcome of such proceedings or the proceedings discussed in this Item, in the opinion of the
Company, all such proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability that would have a material adverse effect on the
financial position, liquidity or results of operations of the Company, other than proceedings
for which a separate assessment is provided in this Item.
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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pre-tax share-based compensation expense |
|
$ |
72.7 |
|
|
$ |
63.7 |
|
|
$ |
250.9 |
|
|
$ |
246.0 |
|
Income tax benefits |
|
|
(22.8 |
) |
|
|
(20.0 |
) |
|
|
(79.1 |
) |
|
|
(76.3 |
) |
|
Total share-based compensation expense, net of tax |
|
$ |
49.9 |
|
|
$ |
43.7 |
|
|
$ |
171.8 |
|
|
$ |
169.7 |
|
|
During the first nine months of 2007 and 2006, the Company granted 33.7 million options and 30.7
million options, respectively, related to its annual grant and other grants. The weighted
average fair value of options granted for the first nine months of 2007 and 2006 was $9.30 and
$7.01 per option, respectively, and was determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
3.4 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.4 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
Expected volatility |
|
|
24.5 |
% |
|
|
26.4 |
% |
|
|
|
|
|
|
|
|
Expected life (years) |
|
|
5.7 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
At September 30, 2007, there was $440.9 million of total pre-tax unrecognized compensation
expense related to nonvested stock options, RSU and PSU awards which will be recognized over a
weighted average period of 2.2 years. For segment reporting, share-based compensation costs are
unallocated expenses.
- 16 -
Notes to Consolidated Financial Statements (unaudited) (continued)
9. Pension and Other Postretirement Benefit Plans
The Company has defined benefit pension plans covering eligible employees in the United States
and in certain of its international subsidiaries. The net cost of such plans consisted of the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Service cost |
|
$ |
90.3 |
|
|
$ |
89.2 |
|
|
$ |
275.3 |
|
|
$ |
269.5 |
|
Interest cost |
|
|
99.9 |
|
|
|
85.5 |
|
|
|
284.5 |
|
|
|
255.6 |
|
Expected return on plan assets |
|
|
(123.1 |
) |
|
|
(110.3 |
) |
|
|
(366.7 |
) |
|
|
(327.6 |
) |
Net amortization |
|
|
44.0 |
|
|
|
42.0 |
|
|
|
112.5 |
|
|
|
126.9 |
|
Termination benefits |
|
|
2.5 |
|
|
|
2.1 |
|
|
|
18.5 |
|
|
|
18.3 |
|
Curtailments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Settlements |
|
|
|
|
|
|
15.0 |
|
|
|
|
|
|
|
15.0 |
|
|
|
|
$ |
113.6 |
|
|
$ |
123.5 |
|
|
$ |
324.1 |
|
|
$ |
357.9 |
|
|
The Company provides medical, dental and life insurance benefits, principally to its eligible
U.S. retirees and similar benefits to their dependents, through its other postretirement benefit
plans. The net cost of such plans consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Service cost |
|
$ |
25.8 |
|
|
$ |
24.6 |
|
|
$ |
68.1 |
|
|
$ |
66.5 |
|
Interest cost |
|
|
28.8 |
|
|
|
26.9 |
|
|
|
80.7 |
|
|
|
77.1 |
|
Expected return on plan assets |
|
|
(37.4 |
) |
|
|
(30.6 |
) |
|
|
(98.0 |
) |
|
|
(87.0 |
) |
Net amortization |
|
|
(7.5 |
) |
|
|
0.6 |
|
|
|
(12.5 |
) |
|
|
2.4 |
|
Termination benefits |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
3.7 |
|
|
|
2.6 |
|
Curtailments |
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
$ |
9.9 |
|
|
$ |
21.9 |
|
|
$ |
38.1 |
|
|
$ |
61.6 |
|
|
In connection with restructuring actions (see Note 2), the Company recorded termination charges
for the three and nine months ended September 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 nine months ended September 30, 2007,
and curtailment losses on its pension plans for the nine months ended September 30, 2006.
Additionally, the Company recorded settlement losses on certain of its domestic pension plans
for the three and nine months ended September 30, 2006, primarily resulting from employees
electing to receive their pension benefits as lump sum payments.
The Company expects contributions to the pension plans and other postretirement benefit plans
will total approximately $160 million and $65 million, respectively, during 2007.
- 17 -
Notes to Consolidated Financial Statements (unaudited) (continued)
10. Other (Income) Expense, Net
Other (income) expense, net, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Interest income |
|
$ |
(186.9 |
) |
|
$ |
(195.0 |
) |
|
$ |
(540.9 |
) |
|
$ |
(564.6 |
) |
Interest expense |
|
|
91.5 |
|
|
|
87.7 |
|
|
|
297.2 |
|
|
|
277.8 |
|
Exchange gains |
|
|
(8.3 |
) |
|
|
(11.5 |
) |
|
|
(39.8 |
) |
|
|
(4.5 |
) |
Minority interests |
|
|
30.6 |
|
|
|
30.7 |
|
|
|
92.0 |
|
|
|
90.7 |
|
Other, net |
|
|
(107.8 |
) |
|
|
(46.6 |
) |
|
|
(329.7 |
) |
|
|
(104.8 |
) |
|
|
|
$ |
(180.9 |
) |
|
$ |
(134.7 |
) |
|
$ |
(521.2 |
) |
|
$ |
(305.4 |
) |
|
The increase in Other, net for the nine months ended September 30, 2007, primarily reflects the
favorable impact of gains on sales of assets and product divestitures, as well as a net gain on
the settlements of certain patent disputes. Interest paid for the nine months ended September
30, 2007 and 2006 was $318.4 million and $317.8 million, respectively.
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
September 30, 2007, the Companys Consolidated Balance Sheet reflects a liability for
unrecognized tax benefits of $3.61 billion. If the Company were to recognize these benefits,
the effective tax rate would reflect a favorable net impact of $2.52 billion. Accrued interest
and penalties included in the Consolidated Balance Sheet were $1.76 billion as of September 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 is offset by (i) a tax refund of $165 million received in the third
quarter 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 in 2007. 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.
- 18 -
Notes to Consolidated Financial Statements (unaudited) (continued)
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 September 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 years 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 $674 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 2007, the Company pledged collateral to two
financial institutions, one of which provided
a guarantee to the CRA and the other to the Quebec Ministry of Revenue representing a portion of
the tax and interest assessed. The collateral is included in Other Assets in the Consolidated
Balance Sheet and totaled approximately $1.2 billion at September 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
approximately $21 million (U.S. dollars) plus $19 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.
- 19 -
Notes to Consolidated Financial Statements (unaudited) (continued)
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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Average common shares outstanding |
|
|
2,170.5 |
|
|
|
2,175.2 |
|
|
|
2,168.2 |
|
|
|
2,180.1 |
|
Common shares issuable(1) |
|
|
22.3 |
|
|
|
10.5 |
|
|
|
19.2 |
|
|
|
8.4 |
|
|
Average common shares outstanding assuming dilution |
|
|
2,192.8 |
|
|
|
2,185.7 |
|
|
|
2,187.4 |
|
|
|
2,188.5 |
|
|
|
|
|
(1) Issuable primarily under share-based compensation
plans. |
For
the three and nine months ended September 30, 2007,
124.5 million and 177.1 million, respectively, and for the
three and nine months ended September 30, 2006,
194.7 million and 222.8 million, respectively, of common
shares issuable under the Companys share-based compensation
plans were excluded from the computation of earnings per common share
assuming dilution because the effect would have been antidilutive.
13. Comprehensive Income
Comprehensive income was $1,584.5 million and $5,017.0 million for the three and nine months
ended September 30, 2007, respectively, and was $971.4 million and $3,957.7 million for the
three and nine months ended September 30, 2006, respectively.
14. Segment Reporting
The Companys operations are principally managed on a products basis and are comprised of two
reportable segments: the Pharmaceutical segment and the Vaccines segment.
The Pharmaceutical segment includes human health pharmaceutical products marketed either
directly or through joint ventures. These products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human disorders. Merck sells these human
health pharmaceutical products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as health maintenance organizations
and other institutions. The Vaccines segment includes human health vaccine products marketed
either directly or through a joint venture. These products consist of preventive pediatric,
adolescent and adult vaccines, primarily administered at physician offices. Merck sells these
human health vaccines primarily to physicians, wholesalers, physician distributors and
government entities. The Vaccines segment includes the vast majority of the Companys vaccine
sales, but excludes certain sales of vaccines by non-U.S. subsidiaries managed by and included
in the Pharmaceutical segment. A large component of pediatric and adolescent vaccines is sold
to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is
funded by the U.S. government.
Other segments include other non-reportable human and animal health segments.
- 20 -
Notes to Consolidated Financial Statements (Unaudited) (continued)
Revenues and profits for these segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Segment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical segment (1) |
|
$ |
4,877.9 |
|
|
$ |
4,764.3 |
|
|
$ |
14,895.9 |
|
|
$ |
15,173.8 |
|
Vaccines segment (1) |
|
|
1,123.3 |
|
|
|
516.3 |
|
|
|
2,856.2 |
|
|
|
1,065.8 |
|
Other segment revenues |
|
|
44.9 |
|
|
|
46.6 |
|
|
|
125.6 |
|
|
|
123.6 |
|
|
|
|
$ |
6,046.1 |
|
|
$ |
5,327.2 |
|
|
$ |
17,877.7 |
|
|
$ |
16,363.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits:(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical segment |
|
$ |
3,453.0 |
|
|
$ |
3,222.3 |
|
|
$ |
10,468.3 |
|
|
$ |
10,479.9 |
|
Vaccines segment |
|
|
823.3 |
|
|
|
293.3 |
|
|
|
1,924.8 |
|
|
|
558.5 |
|
Other segment profits |
|
|
112.9 |
|
|
|
88.3 |
|
|
|
395.5 |
|
|
|
328.6 |
|
|
|
|
$ |
4,389.2 |
|
|
$ |
3,603.9 |
|
|
$ |
12,788.6 |
|
|
$ |
11,367.0 |
|
|
|
|
|
(1) |
|
In accordance with segment reporting requirements, Vaccines segment revenues
exclude $121.0 million and $39.1 million for the third quarter of 2007 and 2006,
respectively, and $333.4 million and $110.3 million for the first nine months of 2007 and
2006, respectively, of vaccines sales by certain non-U.S. subsidiaries managed by and
included in the Pharmaceutical segment. |
|
(2) |
|
Includes the majority of Equity income from affiliates. |
A reconciliation of total segment revenues to consolidated sales is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Segment revenues |
|
$ |
6,046.1 |
|
|
$ |
5,327.2 |
|
|
$ |
17,877.7 |
|
|
$ |
16,363.2 |
|
Other revenues |
|
|
28.0 |
|
|
|
83.2 |
|
|
|
77.1 |
|
|
|
228.7 |
|
|
|
|
$ |
6,074.1 |
|
|
$ |
5,410.4 |
|
|
$ |
17,954.8 |
|
|
$ |
16,591.9 |
|
|
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.
- 21 -
Notes to Consolidated Financial Statements (Unaudited) (continued)
Sales (1) of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair |
|
$ |
1,018.1 |
|
|
$ |
868.0 |
|
|
$ |
3,111.9 |
|
|
$ |
2,619.1 |
|
Cozaar/Hyzaar |
|
|
813.6 |
|
|
|
813.3 |
|
|
|
2,458.8 |
|
|
|
2,298.1 |
|
Fosamax |
|
|
725.2 |
|
|
|
770.5 |
|
|
|
2,253.0 |
|
|
|
2,345.0 |
|
Zocor |
|
|
217.8 |
|
|
|
371.0 |
|
|
|
654.2 |
|
|
|
2,424.1 |
|
Cosopt/Trusopt |
|
|
196.8 |
|
|
|
190.9 |
|
|
|
575.0 |
|
|
|
517.8 |
|
Primaxin |
|
|
185.6 |
|
|
|
181.8 |
|
|
|
568.4 |
|
|
|
523.6 |
|
Januvia |
|
|
184.6 |
|
|
|
0.6 |
|
|
|
415.3 |
|
|
|
0.6 |
|
Cancidas |
|
|
135.2 |
|
|
|
127.1 |
|
|
|
403.2 |
|
|
|
397.1 |
|
Vasotec/Vaseretic |
|
|
119.5 |
|
|
|
134.5 |
|
|
|
368.5 |
|
|
|
410.8 |
|
Maxalt |
|
|
125.0 |
|
|
|
105.1 |
|
|
|
341.5 |
|
|
|
295.2 |
|
Proscar |
|
|
89.6 |
|
|
|
127.3 |
|
|
|
328.0 |
|
|
|
498.5 |
|
Propecia |
|
|
99.2 |
|
|
|
88.9 |
|
|
|
292.8 |
|
|
|
249.0 |
|
Arcoxia |
|
|
76.1 |
|
|
|
66.3 |
|
|
|
245.2 |
|
|
|
191.8 |
|
Crixivan/Stocrin |
|
|
72.3 |
|
|
|
83.1 |
|
|
|
229.9 |
|
|
|
238.8 |
|
Janumet |
|
|
18.6 |
|
|
|
|
|
|
|
42.9 |
|
|
|
|
|
Other pharmaceutical (2) |
|
|
679.6 |
|
|
|
796.8 |
|
|
|
2,274.0 |
|
|
|
2,054.0 |
|
|
|
|
|
4,756.8 |
|
|
|
4,725.2 |
|
|
|
14,562.6 |
|
|
|
15,063.5 |
|
|
Vaccines: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gardasil |
|
|
418.4 |
|
|
|
70.0 |
|
|
|
1,141.3 |
|
|
|
79.6 |
|
RotaTeq |
|
|
171.3 |
|
|
|
61.8 |
|
|
|
375.4 |
|
|
|
94.8 |
|
Zostavax |
|
|
61.2 |
|
|
|
10.2 |
|
|
|
150.7 |
|
|
|
11.4 |
|
ProQuad/M-M-R II/Varivax |
|
|
428.5 |
|
|
|
247.5 |
|
|
|
1,018.1 |
|
|
|
588.6 |
|
Hepatitis vaccines |
|
|
68.4 |
|
|
|
68.5 |
|
|
|
219.5 |
|
|
|
181.1 |
|
Other vaccines |
|
|
96.5 |
|
|
|
97.4 |
|
|
|
284.6 |
|
|
|
220.6 |
|
|
|
|
|
1,244.3 |
|
|
|
555.4 |
|
|
|
3,189.6 |
|
|
|
1,176.1 |
|
|
Other (4) |
|
|
73.0 |
|
|
|
129.8 |
|
|
|
202.6 |
|
|
|
352.3 |
|
|
|
|
$ |
6,074.1 |
|
|
$ |
5,410.4 |
|
|
$ |
17,954.8 |
|
|
$ |
16,591.9 |
|
|
|
|
|
(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 $416.3 million and $442.5
million for the third quarter of 2007 and 2006, respectively, and was $1,438.2 million and
$1,240.5 million for the first nine months of 2007 and 2006, respectively. |
|
(3) |
|
These amounts do not reflect sales of vaccines sold in most major European
markets through the Companys joint venture, Sanofi Pasteur MSD, the results of which are
reflected in Equity income from affiliates. These amounts do reflect supply sales to
Sanofi Pasteur MSD. |
|
(4) |
|
Other primarily includes other pharmaceutical and animal health joint venture
supply sales and other miscellaneous revenues. |
- 22 -
Notes to Consolidated Financial Statements (Unaudited) (continued)
A reconciliation of segment profits to Income Before Taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Segment profits |
|
$ |
4,389.2 |
|
|
$ |
3,603.9 |
|
|
$ |
12,788.6 |
|
|
$ |
11,367.0 |
|
Other profits |
|
|
10.3 |
|
|
|
56.9 |
|
|
|
40.3 |
|
|
|
163.0 |
|
Adjustments |
|
|
86.6 |
|
|
|
110.4 |
|
|
|
258.7 |
|
|
|
375.6 |
|
Unallocated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
186.9 |
|
|
|
195.0 |
|
|
|
540.9 |
|
|
|
564.6 |
|
Interest expense |
|
|
(91.5 |
) |
|
|
(87.7 |
) |
|
|
(297.2 |
) |
|
|
(277.8 |
) |
Equity income from affiliates |
|
|
47.9 |
|
|
|
37.7 |
|
|
|
180.6 |
|
|
|
175.6 |
|
Depreciation and amortization |
|
|
(458.0 |
) |
|
|
(521.5 |
) |
|
|
(1,388.5 |
) |
|
|
(1,599.9 |
) |
Research and development |
|
|
(1,440.5 |
) |
|
|
(945.4 |
) |
|
|
(3,501.0 |
) |
|
|
(3,059.9 |
) |
Other expenses, net |
|
|
(666.3 |
) |
|
|
(1,218.5 |
) |
|
|
(2,071.2 |
) |
|
|
(2,398.7 |
) |
|
|
|
$ |
2,064.6 |
|
|
$ |
1,230.8 |
|
|
$ |
6,551.2 |
|
|
$ |
5,309.5 |
|
|
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.
- 23 -
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Operating Results
Sales
Worldwide sales were $6.1 billion for the third quarter of 2007, an increase of 12% compared with
the third quarter of 2006, which was attributable to a 9% volume increase, a 2% favorable effect
from foreign exchange and a 1% favorable effect from price changes. Worldwide sales were $18.0
billion for the first nine months of 2007, an increase of 8% compared with the first nine months of
2006, largely resulting from a 6% volume increase and a 2% favorable effect from foreign exchange
for the period. Sales performance over 2006 in each period reflects strong growth of the Companys
vaccines, including Gardasil, a vaccine to help protect against cervical cancer and genital warts
caused by certain types of human papillomavirus (HPV), Varivax, a vaccine to help prevent
chickenpox, RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and
children, and Zostavax, a vaccine to help prevent shingles (herpes zoster). Also contributing to
sales growth in both periods was strong performance of Singulair, a once-a-day oral medicine
indicated for the chronic treatment of asthma and the relief of
symptoms of allergic rhinitis, and
sales of Januvia for the treatment of type 2 diabetes. Sales growth in the year-to-date period
also benefited from higher revenues from the Companys relationship with AstraZeneca LP (AZLP)
primarily driven by Nexium, as well as increased sales of Cozaar/Hyzaar* for high blood pressure.
Sales growth for the quarter and year-to-date periods was partially offset by lower sales of Zocor,
the Companys statin for modifying cholesterol, and Proscar, a urology product for the treatment of
symptomatic benign prostate enlargement. Mercks U.S. market exclusivity for Zocor and Proscar
both expired in June 2006.
* Cozaar and Hyzaar are registered trademarks of E.I. duPont de Nemours & Company, Wilmington,
Delaware.
- 24 -
Sales of the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair |
|
$ |
1,018.1 |
|
|
$ |
868.0 |
|
|
$ |
3,111.9 |
|
|
$ |
2,619.1 |
|
Cozaar/Hyzaar |
|
|
813.6 |
|
|
|
813.3 |
|
|
|
2,458.8 |
|
|
|
2,298.1 |
|
Fosamax |
|
|
725.2 |
|
|
|
770.5 |
|
|
|
2,253.0 |
|
|
|
2,345.0 |
|
Zocor |
|
|
217.8 |
|
|
|
371.0 |
|
|
|
654.2 |
|
|
|
2,424.1 |
|
Cosopt/Trusopt |
|
|
196.8 |
|
|
|
190.9 |
|
|
|
575.0 |
|
|
|
517.8 |
|
Primaxin |
|
|
185.6 |
|
|
|
181.8 |
|
|
|
568.4 |
|
|
|
523.6 |
|
Januvia |
|
|
184.6 |
|
|
|
0.6 |
|
|
|
415.3 |
|
|
|
0.6 |
|
Cancidas |
|
|
135.2 |
|
|
|
127.1 |
|
|
|
403.2 |
|
|
|
397.1 |
|
Vasotec/Vaseretic |
|
|
119.5 |
|
|
|
134.5 |
|
|
|
368.5 |
|
|
|
410.8 |
|
Maxalt |
|
|
125.0 |
|
|
|
105.1 |
|
|
|
341.5 |
|
|
|
295.2 |
|
Proscar |
|
|
89.6 |
|
|
|
127.3 |
|
|
|
328.0 |
|
|
|
498.5 |
|
Propecia |
|
|
99.2 |
|
|
|
88.9 |
|
|
|
292.8 |
|
|
|
249.0 |
|
Arcoxia |
|
|
76.1 |
|
|
|
66.3 |
|
|
|
245.2 |
|
|
|
191.8 |
|
Crixivan/Stocrin |
|
|
72.3 |
|
|
|
83.1 |
|
|
|
229.9 |
|
|
|
238.8 |
|
Janumet |
|
|
18.6 |
|
|
|
|
|
|
|
42.9 |
|
|
|
|
|
Other pharmaceutical (1) |
|
|
679.6 |
|
|
|
796.8 |
|
|
|
2,274.0 |
|
|
|
2,054.0 |
|
|
|
|
|
4,756.8 |
|
|
|
4,725.2 |
|
|
|
14,562.6 |
|
|
|
15,063.5 |
|
|
Vaccines: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gardasil |
|
|
418.4 |
|
|
|
70.0 |
|
|
|
1,141.3 |
|
|
|
79.6 |
|
RotaTeq |
|
|
171.3 |
|
|
|
61.8 |
|
|
|
375.4 |
|
|
|
94.8 |
|
Zostavax |
|
|
61.2 |
|
|
|
10.2 |
|
|
|
150.7 |
|
|
|
11.4 |
|
ProQuad/M-M-R II/Varivax |
|
|
428.5 |
|
|
|
247.5 |
|
|
|
1,018.1 |
|
|
|
588.6 |
|
Hepatitis |
|
|
68.4 |
|
|
|
68.5 |
|
|
|
219.5 |
|
|
|
181.1 |
|
Other vaccines |
|
|
96.5 |
|
|
|
97.4 |
|
|
|
284.6 |
|
|
|
220.6 |
|
|
|
|
|
1,244.3 |
|
|
|
555.4 |
|
|
|
3,189.6 |
|
|
|
1,176.1 |
|
|
Other (3) |
|
|
73.0 |
|
|
|
129.8 |
|
|
|
202.6 |
|
|
|
352.3 |
|
|
|
|
$ |
6,074.1 |
|
|
$ |
5,410.4 |
|
|
$ |
17,954.8 |
|
|
$ |
16,591.9 |
|
|
|
|
|
(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 $416.3 million and $442.5 million for the third quarter
of 2007 and 2006, respectively, and was $1,438.2 million and $1,240.5 million for the first
nine 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
$492.4 million and $656.8 million for the three months ended September 30, 2007 and 2006,
respectively, and by $1,536.1 million and $2,909.2 million for the nine months ended September 30,
2007 and 2006, respectively. The reduction in discounts for both periods compared with the
corresponding prior year periods resulted primarily from the significant decline in Zocor sales due
to the loss of U.S. market exclusivity in June 2006. Inventory levels at key wholesalers for each
of the Companys major pharmaceutical products are generally less than one month.
- 25 -
Segment Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical segment (1) |
|
$ |
4,877.9 |
|
|
$ |
4,764.3 |
|
|
$ |
14,895.9 |
|
|
$ |
15,173.8 |
|
Vaccines segment (1) |
|
|
1,123.3 |
|
|
|
516.3 |
|
|
|
2,856.2 |
|
|
|
1,065.8 |
|
Other segment (2) |
|
|
44.9 |
|
|
|
46.6 |
|
|
|
125.6 |
|
|
|
123.6 |
|
Other (3) |
|
|
28.0 |
|
|
|
83.2 |
|
|
|
77.1 |
|
|
|
228.7 |
|
|
Total revenues |
|
$ |
6,074.1 |
|
|
$ |
5,410.4 |
|
|
$ |
17,954.8 |
|
|
$ |
16,591.9 |
|
|
|
|
|
(1) |
|
In accordance with segment reporting requirements, Vaccines segment revenues exclude
$121.0 million and $39.1 million for the third quarter of 2007 and 2006, respectively, and
$333.4 million and $110.3 million for the first nine 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 increased 2% to $4.88 billion in the third quarter of 2007
reflecting growth of Januvia and Singulair, partially offset by a decline in Zocor. Sales for the
first nine months of 2007 decreased 2% to $14.90 billion 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 $1.02 billion for the third quarter of 2007,
representing growth of 17% over the third quarter of 2006. Sales for the first nine months of 2007
were $3.11 billion, a 19% increase over the comparable prior year period. Singulair continues to
be the number one prescribed product in the U.S. respiratory market.
Global sales of Mercks antihypertensive medicines, Cozaar and Hyzaar were $813.6 million for the
third quarter of 2007, comparable with the third quarter of 2006. Sales for the first nine months
of 2007 were $2.46 billion, an increase of 7% compared with the first nine months of 2006. Cozaar
and Hyzaar are among the leading members of the angiotensin receptor blocker class of medicines.
Global sales for Fosamax and Fosamax Plus D (marketed as Fosavance throughout the European Union
(EU) and as Fosamac in Japan) were $725.2 million for the third quarter of 2007, representing a
decline of 6% compared with the third quarter of 2006. Sales for the first nine months of 2007
were $2.25 billion, a decline of 4% compared with the first nine 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 5% for the third quarter of 2007.
U.S. sales for the first nine months of 2007 were comparable to sales for the same period of 2006.
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 $217.8 million in the
third quarter of 2007, representing a decline of 41% over the third quarter of 2006. Sales for the
first nine months of 2007 were $654.2 million, a decline of 73% over the first nine months of 2006.
Sales of Zocor in both periods were significantly negatively affected by the continuing impact of
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 $184.6 million in
the third quarter of 2007 and $415.3 million for the first nine months of 2007. Januvia was
approved by the U. S. Food and Drug Administration (FDA) in October 2006. As of the third
quarter 2007, the medicine was approved in 58 countries and territories, is launched in 33 of those
and is under review in another 19. In the United States, managed care formularies have made
Januvia widely available and, as a result, Merck has achieved reimbursement coverage for Januvia
for more than 200 million lives on the second or third tier.
In October 2007, Merck announced that the FDA approved expanded labeling for Januvia. The new
regimens with Januvia described in the updated labeling include, as an adjunct to diet and
exercise, initial therapy in combination with metformin; add-on therapy to a sulfonylurea
(glimepiride) when the single agent alone does not provide adequate
glycemic control; and add-on therapy to the combination of a sulfonylurea (glimepiride) and
metformin when dual therapy does not provide adequate glycemic control.
- 26 -
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 launched in the United
States and Mexico. The Company is seeking the necessary approvals to make the medicine available
for use in many other countries around the world. Sales for Janumet were $18.6 million for the
third quarter of 2007 and $42.9 million for the first nine months of 2007.
Some of the other products experiencing growth in the third quarter and first nine months of 2007
include Cosopt to treat glaucoma, Arcoxia for the treatment of arthritis and pain, Maxalt to treat
migraine pain, Primaxin, an antibiotic, and Propecia for male pattern hair loss.
In October 2007, Merck announced that the FDA granted Isentress (raltegravir, previously known as
MK-0518) tablets accelerated approval for use in combination with other antiretroviral agents for
the treatment of HIV-1 infection in treatment-experienced adult patients who have evidence of viral
replication and HIV-1 strains resistant to multiple antiretroviral agents. Isentress is the first
medicine to be approved in a new class of antiretroviral drugs called integrase inhibitors.
Isentress works by inhibiting the insertion of HIV DNA into human DNA by the integrase enzyme.
Inhibiting integrase from performing this essential function limits the ability of the virus to
replicate and infect new cells. The FDAs decision was based on a 24-week analysis of clinical
trials in which Isentress, in combination with optimized background therapy in
treatment-experienced patients, provided significant reductions in HIV RNA viral load and increases
in CD4 cell counts. The Company is moving forward with regulatory filings in countries outside of
the United States.
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 65 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 $1.12 billion in the third quarter of 2007 compared with
$516.3 million in the third quarter of 2006. Sales of the Vaccines segment for the first nine
months of 2007 were $2.86 billion compared with $1.07 billion 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, primarily Varivax.
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 $1.12 billion reflected in the Vaccines
segment and the $121.0 million reflected in the Pharmaceutical segment) were $1.24 billion for the
third quarter of 2007 compared with $555.4 million in the third quarter of 2006. Total vaccine
sales for the first nine months of 2007 as recorded by Merck (including the $2.86 billion reflected
in the Vaccines segment and the $333.4 million reflected in the Pharmaceutical segment) were $3.19
billion compared with $1.18 billion for the first nine months of 2006. Growth in vaccines was led
by Gardasil, as well as the strong performance of Varivax, RotaTeq and Zostavax.
- 27 -
Total sales as recorded by Merck for Gardasil were $418.4 million for the third quarter of 2007
compared with $70.0 million for the third quarter of 2006 and were $1.14 billion for the first nine
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, compared with $79.6 million
for the same period of 2006. Gardasil was approved by the FDA in June 2006 and is the only
approved vaccine in the United States 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 third quarter 2007, Gardasil has
been approved in 86 countries, many under fast-track or expedited review, with launches under way
in 72 of those countries. The vaccine remains under review in approximately 50 other countries and
territories.
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 2007, 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 $171.3 million for the third quarter of 2007 compared
with $61.8 million for the third quarter of 2006. Sales recorded by Merck were $375.4 million for
the first nine months of 2007 compared with $94.8 million for the same prior year period. RotaTeq
was approved by the FDA in February 2006. As of the third quarter 2007, RotaTeq has been approved
in 69 countries and it has launched in 34 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.
Manufacturing of bulk varicella has resumed, however product will not be available until the
changes have been fully validated and approved by the applicable
regulatory agencies. 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 that protects against measles, mumps, rubella and chickenpox, one of
the VZV-containing vaccines, is currently not available for ordering. 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
$69.0 million for the third quarter of 2007 and were $259.9 million for the first nine months of
2007. Mercks sales of Varivax, the Companys vaccine for the prevention of chickenpox
(varicella), were $284.3 million for the third quarter of 2007 and $585.1 million for the first
nine months of 2007 as the Advisory Committee on Immunization Practices second-dose recommendation
continued to be implemented.
Sales of Zostavax, the Companys vaccine to help prevent shingles (herpes zoster), recorded by
Merck were $61.2 million for the third quarter of 2007 compared with $10.2 million for the third
quarter of 2006. Sales of Zostavax were $150.7 million for the first nine months of 2007 compared
with $11.4 million for the first nine months of 2006. As of the third quarter, the vaccine is
reimbursed by plans covering approximately 93% of lives with private managed care insurance and
more than 90% of all Medicare plans. 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. Since the inception
of the program through the end of the third 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 6,000 positions eliminated throughout the
Company since inception of the program (approximately 1,130 of which were eliminated during the
first nine months 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. Approximately
70% of the cumulative pre-tax costs are estimated as non-cash, relating primarily to accelerated
depreciation for those facilities scheduled for closure. The Company expects to record charges of
approximately $700 million during 2007. The
- 28 -
Company recorded pre-tax restructuring costs of $178.1 million ($117.2 million after tax) and
$249.2 million ($165.9 million after tax) for the three months ended September 30, 2007 and 2006,
respectively. The Company recorded pre-tax restructuring costs of $536.4 million ($350.9 million
after tax) and $714.0 million ($463.3 million after tax) for the nine months ended September 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 and research and development expenses, will yield
cumulative pre-tax savings of $4.5 billion to $5.0 billion from 2006 through 2010.
Materials and production costs were $1.52 billion for the third quarter of 2007, a decline of 2%
compared with the third quarter of 2006. Included in the third quarter of 2007 and 2006 were costs
associated with restructuring activities, primarily accelerated depreciation and asset impairment
costs of $128.8 million and $199.6 million, respectively. For the first nine months of 2007,
materials and production costs were $4.60 billion, an increase of 6% compared with the same period
of last year. Included in materials and production costs for the first nine months of 2007 and
2006 were costs associated with restructuring activities of $365.6 million and $572.1 million,
respectively.
The gross margin was 75.0% in the third quarter of 2007 compared with 71.5% in the third quarter of
2006, which reflect 2.1 and 3.7 percentage point unfavorable impacts, respectively, relating to
costs associated with restructuring activities. The gross margin was 74.4% in the first nine
months of 2007 compared with 73.9% in the first nine months of 2006, which reflect 2.0 and 3.4
percentage point unfavorable impacts, respectively, relating to costs associated with restructuring
activities. The gross margin in the third quarter of 2007 as compared with the third quarter of
2006 was favorably impacted by changes in product mix. For the first nine months of 2007, changes
in product mix had an unfavorable impact on gross margin compared with the same prior year period,
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 $1.95 billion for the third quarter of 2007 compared
with $2.37 billion in the third quarter of 2006. For the first nine months of 2007, marketing and
administrative expenses were $5.84 billion compared with $5.82 billion for the same period of 2006.
The amounts for 2007 include $70 million in the third quarter and $280 million for the first nine
months of additional reserves solely for future Vioxx legal defense costs (see Note 7 to the
consolidated financial statements). The amounts for 2006 include $598 million of such costs.
Excluding these costs, marketing and administrative expenses rose 6% for both the third quarter of
2007 and first nine months of 2007. The increase in both periods largely reflects the necessary
support for new and anticipated product launches.
Research and development expenses totaled $1.44 billion and $3.50 billion for the third quarter and
first nine months of 2007, respectively, compared with $945.4 million and $3.06 billion for the
same periods of 2006, respectively. The third quarter and first nine months of 2007 reflect $325.1
million of acquired research expense related to the NovaCardia, Inc. (NovaCardia) acquisition.
The first nine months of 2006 includes $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 nine months of 2006 reflect $55.4 million
of costs related to the global restructuring program. The increase in research and development
costs in both periods reflects a $75 million initial milestone payment associated with the
licensing of deforolimus (MK-8669), a Phase III compound the Company is developing with ARIAD
Pharmaceuticals, Inc. and 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 For Injection (fosaprepitant dimeglumine), 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
submitted data in response to the approvable letter in the third quarter. 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 August 2007, Merck announced that the NDA for Cordaptive (the proposed trademark for MK-0524A,
extended-release niacin/laropiprant), has been accepted for standard review by the FDA. Cordaptive
is an investigational compound containing Mercks own extended-release niacin and laropiprant, a
novel flushing pathway inhibitor designed to reduce flushing often associated with niacin
treatment. Niacin is widely recognized as an effective lipid-modifying therapy; however, treatment
has been limited as a result of the flushing side effect. Data included in the application support
the proposed use of Cordaptive, either alone or with a statin, as adjunctive therapy to diet for
the treatment of elevated low-
- 29 -
density lipoprotein cholesterol (LDL-C or bad cholesterol), low high-density lipoprotein cholesterol
(HDL-C or good cholesterol) and elevated triglycerides levels. All are conditions associated
with increased risk of heart disease. Merck anticipates FDA action in the second quarter of
2008. The Company is also moving forward as planned with filings in countries outside the United
States.
In September 2007, the Company announced Phase III clinical study results in which Cordaptive
reduced LDL-C levels, increased HDL-C levels and reduced triglyceride levels compared to placebo.
Patients treated with Cordaptive also reported significantly less flushing compared to those
patients treated with extended-release niacin alone. Cordaptive was administered as 1- and 2- gram
doses alone or added to ongoing statin therapy in patients with dyslipidemia. Across weeks 12 to
24 of the study, 2 grams (two 1-gram tablets) of Cordaptive produced significant percent changes
from baseline in LDL-C levels (-18%), HDL-C levels (20%) and triglyceride levels (-26%) relative to
placebo. In addition, patients treated with Cordaptive reported significantly less flushing both
at the initiation of therapy and during maintenance therapy, compared to patients on
extended-release niacin alone.
Also in September 2007, twelve month results from a Phase IIB study with odanacatib (formerly
MK-0822), an investigational selective inhibitor of cathepsin K, demonstrated dose-dependent
increases in bone mineral density (BMD) at key fracture sites, and reduced bone turnover compared to
placebo in postmenopausal women with low BMD when given at doses of 10, 25 or 50 mg. These
findings were presented at the 29th Annual Meeting of the American
Society for Bone and Mineral
Research. BMD reflects the amount of mineralized bone tissue in a certain volume of bone, and
correlates with the strength of bones and with their resistance to fracture. A BMD test is used to
measure bone density and to help determine fracture risk. Odanacatib, an investigational compound which
is being developed for the treatment of osteoporosis, is a highly selective inhibitor of the
cathepsin K enzyme. The cathepsin K enzyme is believed to play a role in both osteoclastic bone
resorption and in degrading the protein component of bone. The inhibition of the cathepsin K
enzyme by the investigational compound odanacatib is a mechanism of action different from that of
currently approved treatments such as bisphosphonates. The Phase III
clinical trial with odanacatib has been initiated.
Additionally, in September 2007, Merck announced that vaccination in a Phase II clinical trial of
the Companys investigational HIV vaccine (V520) was discontinued because the vaccine was not
effective. The trial, called STEP, was co-sponsored by Merck, the National Institutes of Healths
National Institute of Allergies and Infectious Diseases (NIAID) and the HIV Vaccine Trials
Network. The independent Data Safety Monitoring Board (DSMB) for STEP recommended
discontinuation because the STEP trial would not meet its efficacy endpoints. In October, the
NIAID announced that a separate DSMB for a second clinical trial being conducted in South Africa of
the same vaccine candidate recommended that vaccination and enrollment in the South Africa trial be
permanently discontinued. The South Africa DSMB also recommended that volunteers in that trial be
told whether they received the vaccine or placebo, be strongly encouraged to return to study sites
for protocol-related tests, and be counseled about the possibility that those who received the
vaccine might have an increased susceptibility to HIV infections. Detailed analyses of the
available data are being conducted, including analyses to better understand if there may be an
increased susceptibility to HIV infection among those volunteers who received the vaccine. The
vaccine itself does not cause HIV infection. The first detailed review of the STEP data will occur
on November 7, 2007.
In October 2007, the Company presented results from a Phase IIb study demonstrating that
anacetrapib (formerly known as MK-0859), its investigational selective cholesteryl ester transfer
protein (CETP) inhibitor, significantly reduced LDL-C and Apolipoprotein B and increased HDL-C
and Apolipoprotein A-1 both as monotherapy and in combination with atorvastatin compared to placebo
in patients with dyslipidemia. Anacetrapib produced these positive effects on lipids with no
observed blood pressure changes. CETP inhibitors work by inhibiting CETP, a plasma protein that
facilitates the transport of cholesteryl esters and triglycerides between the lipoproteins,
resulting in higher HDL-C levels and reduced LDL-cholesterol levels.
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.
In September 2007, Merck announced that it had successfully completed the acquisition of
NovaCardia, Inc. (NovaCardia), a privately held clinical-stage pharmaceutical company focused on
cardiovascular disease. This acquisition adds rolofylline (KW-3902) (MK-7418), NovaCardias
investigational Phase III compound for acute heart failure, to Mercks pipeline. Merck acquired
all of the outstanding equity of NovaCardia for a total purchase price of $366.4 million (including
$16.4 million of cash and investments on hand at closing), which was paid through the issuance of
7.3 million shares of Merck common stock to the former NovaCardia shareholders based on Mercks
average closing stock price for the five days prior to closing of the acquisition. In connection
with the acquisition, the Company recorded a charge of $325.1 million for acquired research
associated with rolofylline, since, at the acquisition date, technological
- 30 -
feasibility had not been established and no alternative future use existed. The charge, which is
not deductible for tax purposes, was recorded in Research and development expense and was
determined based upon the present value of expected future cash flows resulting from this
technology adjusted for the probability of its technical and marketing success utilizing an income
approach reflecting an appropriate risk-adjusted discount rate. The ongoing activity with respect
to the future development of rolofylline is not expected to be material to the Companys research
and development expenses. The remaining purchase price was allocated to cash and investments of
$16.4 million, a deferred tax asset related to a net operating loss carryforward of $23.9 million
and other net assets of $1.0 million. Because NovaCardia 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.
NovaCardias results of operations have been included in the Companys consolidated financial
results since the acquisition date.
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 (deforolimus) (MK-8669),
ARIADs novel mTOR inhibitor, for use in cancer. Each party will fund 50 percent of the cost of
global development of MK-8669, except that Merck will fund 100 percent of the cost of ex-U.S.
development that is specific to the development or commercialization of MK-8669 outside the U.S.
that is not currently part of the global development plan. The agreement provided for an initial
payment of $75 million to ARIAD, which the Company recorded as Research and development expense, up
to $452 million more in milestone payments to ARIAD based on the successful development of MK-8669
in multiple cancer indications (including $13.5 million paid in the third quarter for the
initiation of the Phase III clinical trial in metastatic sarcomas and $114.5 million to be paid 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 MK-8669 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 MK-8669; Merck will pay ARIAD tiered double-digit royalties on end-market sales of
MK-8669.
Restructuring costs, primarily representing separation and other related costs associated with the
Companys global restructuring program, were $49.3 million and $170.9 million for the three and
nine months ended September 30, 2007, respectively, and were $49.6 million and $86.5 million for
the three and nine months ended September 30, 2006, respectively. Restructuring costs for the
first nine months of 2006 included gains on sales of facilities in connection with the program.
(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 $768.5 million and $595.4 million for the third quarter of 2007
and 2006, respectively, and was $2.18 billion and $1.71 billion for the first nine months of 2007
and 2006, respectively. The increases in 2007 compared with the corresponding prior year periods,
primarily reflect 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 third quarter of 2007 compared with the third
quarter of 2006 largely reflects a net gain of approximately $100 million resulting from the
settlements of certain patent disputes. The increase for the first nine months of 2007 compared
with the same period of 2006 also reflects the favorable impact of gains on sales of assets and
product divestitures.
Segment Profits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 , |
|
September 30 , |
|
($ in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Pharmaceutical segment |
|
$ |
3,453.0 |
|
|
$ |
3,222.3 |
|
|
$ |
10,468.3 |
|
|
$ |
10,479.9 |
|
Vaccines segment |
|
|
823.3 |
|
|
|
293.3 |
|
|
|
1,924.8 |
|
|
|
558.5 |
|
Other segment |
|
|
112.9 |
|
|
|
88.3 |
|
|
|
395.5 |
|
|
|
328.6 |
|
Other |
|
|
(2,324.6 |
) |
|
|
(2,373.1 |
) |
|
|
(6,237.4 |
) |
|
|
(6,057.5 |
) |
|
Income before income taxes |
|
$ |
2,064.6 |
|
|
$ |
1,230.8 |
|
|
$ |
6,551.2 |
|
|
$ |
5,309.5 |
|
|
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
- 31 -
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 increased 7% in the third quarter of 2007, while profits for the
first nine months of 2007 were comparable with the same period of 2006. The increase in the third
quarter of 2007 was driven by higher sales, primarily for Januvia and Singulair, as well as higher
equity income, primarily driven by the strong performance of the Merck/Schering-Plough partnership.
While these increases were also reflected in the results for the first nine months of 2007, they
were offset by the loss of U.S. market exclusivity for Zocor and Proscar.
Vaccines segment profits were $823.3 million in the third quarter of 2007 compared with $293.3
million in the third quarter of 2006 and were $1.92 billion in the first nine months of 2007
compared with $558.5 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 26.1% for the third quarter of 2007 compared with 23.6% for the third
quarter of 2006. The increase primarily reflects the impact of acquired research expense in 2007
which was not deductible for tax purposes. The effective tax rate was 25.1% in the first nine
months of 2007 compared with 25.4% for the first nine months of 2006. The effective tax rates in
all periods reflect the impact of costs associated with the global restructuring program.
Net income was $1.53 billion for the third quarter of 2007 compared with $940.6 million for the
third quarter of 2006 and was $4.91 billion for the first nine months of 2007 compared with $3.96
billion for the first nine months of 2006. Earnings per common share assuming dilution (EPS) for
the third quarter of 2007 were $0.70 compared with $0.43 in the third quarter of 2006 and were
$2.24 in the first nine months of 2007 compared with $1.81 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. The increase in net income and EPS in the third
quarter of 2007 also reflects lower charges for future Vioxx legal defense costs and a net gain
from the settlements of certain patent disputes, partially offset by an acquired research charge
related to the NovaCardia acquisition. For the first nine months of 2007, gains from the sales of
certain asset and product divestitures and higher prior year restructuring charges also contributed
to the increase in EPS.
Selected Joint Venture and Affiliate Information
The Merck/Schering-Plough partnership reported combined global sales of Zetia and Vytorin of $1.3
billion for the third quarter of 2007, representing growth of 26% over the third quarter of 2006.
Sales for the first nine months of 2007 were $3.73 billion, an increase of 34% over the same period
of 2006. Global sales of Zetia, the cholesterol-absorption inhibitor also marketed as Ezetrol
outside the United States, reached $607.0 million in the third quarter of 2007, an increase of 21%
compared with the third quarter of 2006 and rose to $1.73 billion for the first nine months of
2007, an increase of 24% compared with the first nine months of 2006. Global sales of Vytorin,
marketed outside the United States as Inegy, reached $693.0 million in the third quarter of 2007,
an increase of 32% compared with the third quarter of 2006. Sales of Vytorin for the first nine
months of 2007 were $2.0 billion, an increase of 43% over the comparable period of 2006.
In August 2007, Schering-Plough/Merck Pharmaceuticals (SPM) announced that the NDA filing for
montelukast sodium/ loratadine has been accepted by the FDA for standard review. SPM is seeking
U.S. marketing approval of the medicine for treatment of allergic rhinitis symptoms in patients who
want relief from nasal congestion. The medicine is a single tablet that contains the active
ingredients montelukast sodium and loratadine. Montelukast sodium is sold by Merck as Singulair
and loratadine is sold by Schering-Plough as Claritin, both of which are indicated for the relief
of symptoms of allergic rhinitis.
Total vaccine sales reported by SPMSD were $439.3 million and $229.7 million for the third quarter
of 2007 and 2006, respectively, and were $898.9 million and $579.5 million for the first nine
months of 2007 and 2006, respectively. SPMSD sales included sales of Gardasil of $137.0 million
for the third quarter and $245.0 million for the first nine months of 2007.
- 32 -
The Company records the results from its interest in the Merck/Schering-Plough partnership and
SPMSD in Equity income from affiliates.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
($ in millions) |
|
2007 |
|
|
2006 |
|
|
Cash and investments |
|
$ |
14,892.6 |
|
|
$ |
16,501.2 |
|
Working capital |
|
$ |
3,657.7 |
|
|
$ |
2,507.5 |
|
Total debt to total liabilities and equity |
|
|
12.8 |
% |
|
|
15.3 |
% |
|
The decline in cash and investments at September 30, 2007 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 September 30, 2007 includes the impact of the
reclassification of certain amounts to current liabilities associated
with AZLP (see Notes 5 and 6 to the consolidated
financial statements for further information, as well as for certain
anticipated 2008 AZLP-related cash flows).
During the first nine months of 2007, cash provided by operations was $4.7 billion compared with
cash provided by operations of $5.0 billion for the same period of 2006. Cash provided by
operations reflects the nature and timing of tax payments, which
totaled $3.0 billion for the first
nine months of 2007 including the payment referenced above for certain tax matters, compared with
$2.0 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 $2.0 billion in the first nine months of 2007 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 September 30, 2007, the
Companys Consolidated Balance Sheet reflects a liability for unrecognized tax benefits of $3.61
billion. If the Company were to recognize these benefits, the effective tax rate would reflect a
favorable net impact of $2.52 billion. Accrued interest and penalties included in the Consolidated
Balance Sheet were $1.76 billion as of September 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 is offset by (i) a tax refund of $165 million received in the third quarter 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 in 2007. 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 September 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.
- 33 -
As
previously disclosed, Mercks Canadian tax returns for the years 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 $674 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 2007, the Company pledged collateral two financial institutions, one of
which provided a guarantee to the CRA and the other to the Quebec Ministry of Revenue representing
a portion of the tax and interest assessed. The collateral is included in Other Assets in the
Consolidated Balance Sheet and totaled approximately $1.2 billion at September 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
approximately $21 million (U.S. dollars) plus $19 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 $726.3 million and $684.7 million for the first nine months of 2007
and 2006, respectively. Capital expenditures for full year 2007 are estimated to be $1.2 billion.
Dividends paid to stockholders were $2.5 billion for both the first nine 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 $574.6 million of its common stock (12.0 million shares) for its Treasury
during the first nine 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 September 2007, the Company redeemed its $300 million variable-rate borrowing, which was due in
2009.
Critical Accounting Policies
The Companys significant accounting policies, which include managements best estimates and
judgments, are included in Note 2 to the consolidated financial statements of the Annual Report on
Form 10-K for the year ended December 31, 2006. Certain of these accounting policies are
considered critical as disclosed in the Critical Accounting Policies and Other Matters section of
Managements Discussion and Analysis in the Companys 2006 Annual Report on Form 10-K because of
the potential for a significant impact on the financial statements due to the inherent uncertainty
in such estimates. Other than the adoption of FIN 48, as discussed above (see also Note 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
- 34 -
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 Reports on Form
10-Q for the quarters ended March 31, 2007 and June 30, 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
October 9, 2007, the Company had been served or was aware that it had been named as a defendant in
approximately 26,600 lawsuits, filed on or before September 30, 2007, which include approximately
47,000 plaintiff groups, alleging personal injuries resulting from the use of Vioxx, and in
approximately 264 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 8,800 lawsuits representing approximately
25,800 plaintiff groups are or are slated to be in the federal MDL and approximately 15,850
lawsuits representing approximately 15,850 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 5,550
plaintiff groups had been dismissed as of September 30, 2007. Of these, there have been over 1,625
plaintiff groups whose claims were dismissed with prejudice (i.e., they cannot be brought again)
either by plaintiffs themselves or by the courts. Over 3,925 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 2008. The Company
has provided a list of such trials at its website at www.merck.com which it will
periodically update as appropriate. The Company has included its website address only as an
inactive textual reference and does not intend it to be an active link to its website nor does it
incorporate by reference the information contained therein.
Merck has entered into a tolling agreement (the Tolling Agreement) with the MDL Plaintiffs
Steering Committee that establishes a procedure to halt the running of the statute of limitations
(tolling) as to certain categories of claims allegedly arising from the use of Vioxx by non-New
Jersey citizens. The Tolling Agreement applies to individuals who have not filed lawsuits and may
or may not eventually file lawsuits and only to those claimants who seek to toll claims alleging
injuries resulting from a thrombotic cardiovascular event that results in a myocardial infarction
or ischemic stroke. The Tolling Agreement provides counsel additional time to evaluate potential
claims. The Tolling Agreement requires any tolled
claims to be filed in federal court. As of September 30, 2007, approximately 14,100 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.
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The following sets forth the results of trials and certain significant rulings that occurred in or
after the third quarter of 2007 with respect to the Vioxx Product Liability Lawsuits.
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 October 5, 2007, the jury in Kozic v. Merck, a case tried in state court in Tampa, Florida found
unanimously in favor of Merck on all counts, rejecting a claim that the Company was liable for
plaintiffs heart attack.
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. On August 20, 2007,
Judge Fallon denied Mercks motion for a new trial. The Company has appealed the judgment.
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. Judge
Chaney has rescheduled the re-trial of the combined trial of Appell and Arrigale for January 8,
2008.
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 has appealed both cases and the Appellate
Division has scheduled oral argument on both cases for December 19, 2007.
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. The
plaintiff filed a supplemental motion for a new trial on September 5, 2007.
On December 15, 2006, the jury in Albright v. Merck, a case tried in state court in Birmingham,
Alabama, returned a verdict for Merck on all counts. Plaintiff appealed in July 2007 to the
Alabama Supreme Court.
Juries
have now decided in favor of Merck 12 times and in plaintiffs favor
five times. One Merck verdict was set aside by the court and has not
been retried. Another Merck verdict was set aside and retried,
leading to one of the five plaintiff verdicts. There
have been two unresolved mistrials.
On September 28, 2006, the New Jersey Superior Court, Appellate Division, heard argument on
plaintiffs appeal of Judge Higbees dismissal of the Sinclair 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. The appeal was argued on October 22, 2007.
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. Plaintiffs have appealed the decision.
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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. Plaintiffs have asked
the New Jersey Supreme Court to review the decision. The Court has not yet decided whether it will
exercise its discretion to do so.
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, due to disputes of fact, Judge Fallon declined to grant
the Companys statute of limitations motion for summary judgment in three individual cases. 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.
On October 15, 2007, Judge Higbee granted Mercks motion for summary judgment in Oldfield v. Merck
finding that the case, filed in December 2006, was barred because the two-year New Jersey statute
of limitations had run out. In so doing, Judge Higbee rejected plaintiffs argument that the
statute of limitations only started to run in 2006 pursuant to New Jerseys Discovery Rule, a
rule which delays the running of the statute of limitations until the plaintiff is, or should be,
aware of facts giving rise to a potential claim. Judge Higbee found that the wide publicity
surrounding Vioxx at the time Merck voluntarily withdrew it in September 2004 should have put the
plaintiff on notice of a potential claim.
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 sought
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. On March 31, 2006, the New Jersey Superior Court, Appellate Division, affirmed the class
certification order. On September 6, 2007, the New Jersey Supreme Court reversed the certification
of a nationwide class action of third-party payors, finding that the suit does not meet the
requirements for a class action.
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. In addition,
on September 17, 2007, the Attorney General of New York and the City of New York commenced a
similar lawsuit against the Company. 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. The putative class action, which requested damages on behalf
of purchasers of Company stock between May 21, 1999 and October 29, 2004, 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 asserted claims under Section 20A of
the Securities and Exchange Act against certain defendants relating to their sales of Merck stock
and under Sections 11, 12 and 15 of the Securities Act of 1933 against certain defendants based on
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 the complaint with prejudice. Plaintiffs have appealed Judge
Cheslers decision to the United States Court of Appeals for the Third Circuit.
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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. In September 2007, the Dutch pension fund filed an amended complaint rather than
responding to Defendants motion to dismiss. In September 2007, five new complaints were filed in
the District of New Jersey on behalf of various foreign institutional investors also alleging
violations of federal securities laws as well as violations of state law against the Company and
certain officers. Defendants expect to move to dismiss the amended complaint filed by the Dutch
pension fund as well as the new complaints.
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 under
Oregon securities law. A trial date has been set for October 2008.
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. The District Court has set a
briefing schedule and plaintiffs brief in support of their request for leave to amend their
complaint is due in November 2007.
In addition, as previously disclosed, various putative class actions filed in federal court under
the Employee Retirement Income Security Act (ERISA) against the Company and certain current and
former officers and directors (the Vioxx ERISA Lawsuits and, together with the Vioxx Securities
Lawsuits and the Vioxx Derivative Lawsuits, the Vioxx Shareholder Lawsuits) have been transferred
to the Shareholder MDL and consolidated for all purposes. The consolidated complaint asserts
claims on behalf of certain of the Companys current and former employees who are participants in
certain of the Companys retirement plans for breach of fiduciary duty. The lawsuits make similar
allegations to the allegations contained in the Vioxx Securities Lawsuits. On July 11, 2006, Judge
Chesler granted in part and denied in part defendants motion to dismiss the ERISA Complaint.
As
previously disclosed, on October 29, 2004, two individual
shareholders made a demand on the Board to take legal action against
Mr. Raymond Gilmartin, former Chairman, President and Chief
Executive Officer and other individuals for allegedly causing damage
to the Company with respect to the allegedly improper marketing of
Vioxx. In December 2004, the Special Committee of the Board of
Directors retained the Honorable John S. Martin, Jr. of Debevoise
& Plimpton LLP to conduct an independent investigation of, among
other things, the allegations set forth in the demand. Judge
Martins report was made public in September 2006. Based on the
Special Committees recommendation made after careful
consideration of the Martin report and the impact that derivative
litigation would have on the Company, the Board rejected the demand.
On October 11, 2007, the shareholders filed a lawsuit in state
court in Atlantic County against numerous current and former
executives and directors of the Company alleging that the
Boards rejection of their demand was unreasonable and improper.
In addition, the lawsuit alleges that the defendants breached various
duties to the Company in allowing Vioxx to be marketed.
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. The
amounts actually recovered under the policies discussed in this
paragraph may be less than the amounts specified.
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
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insurance policies. Pursuant to negotiated
agreements, three of the Companys insurers, which represent
approximately 25% of the upper level excess product
liability insurance, have committed to pay approximately $120 million in the aggregate with respect
to such insurance. Most of the funds have been received. The amounts recovered from the insurers
substantially offset previously established receivables and therefore
have not impacted
Net Income in periods received. Remaining receivables for product liability insurance recovery,
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 2008. Other than the Oregon case, which is set for trial in October 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 nine months of 2007, the Company spent approximately $418 million in the aggregate in legal
defense costs worldwide, including $160 million in the third 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). During the first nine
months of 2007, the Company recorded charges of $280 million, including $70 million in the third
quarter of 2007, to increase the reserve solely for its future legal defense costs related to the
Vioxx Litigation to $720 million at September 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 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
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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 September 30, 2007, approximately 340
cases, which include approximately 850 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, about 300 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 nine
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.
As previously disclosed, the Company had received a letter from the DOJ advising it of the
existence of a qui tam complaint alleging that the Company violated certain rules related to its
calculations of best price and other federal pricing benchmark calculations, certain of which may
affect the Companys Medicaid rebate obligation. The DOJ has informed the Company that it does not
intend to intervene in this action and has closed its investigation. The DOJ recently informed the
Company that the qui tam action also has been voluntarily dismissed.
Vaccine Litigation
The Company is aware that there are approximately 4,900 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
- 40 -
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 hearing in the first of the eight additional test cases was held in October 2007. A ruling is
expected in 2008. 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, 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), montelukast (Singulair), 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 the third quarter the Company resolved certain patent disputes which resulted in a net gain to
the Company.
Environmental Litigation
On September 13, 2007, approximately 1,400 plaintiffs filed an amended complaint against Merck and
12 other defendants in United States District Court, Eastern District of California asserting
claims under the Clean Water Act, the Resource Conservation and Recovery Act, as well as negligence
and nuisance. The suit seeks damages for diminution of property value, medical monitoring and
other alleged real and personal property damage associated with groundwater and soil contamination
found at the site of a former Merck subsidiary in Merced, California. The Company intends to
defend itself against these claims.
Other Litigation
There are various other legal proceedings, principally product liability and intellectual property
suits involving the Company, which are pending. While it is not feasible to predict the outcome of
such proceedings or the proceedings discussed in this Item, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered, should not ultimately
result in any liability that would have a material adverse effect on the financial position,
liquidity or results of operations of the Company, other than proceedings for which a separate
assessment is provided in this Item.
- 41 -
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. As previously disclosed, the Company is undergoing a
multi-year initiative to standardize a number of its information systems. On October 1st, the
Company implemented an SAP environment for selected business processes at
a limited number of its non-U.S. locations. This initiative, as well as the Companys plan to move certain
transaction processing activities into shared service environments, will support efforts to
create a leaner organization.
On August 14, 2007, Peter N. Kellogg replaced 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.
- 42-
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 September 30, 2007 were as
follows:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
Total Number |
|
Average Price |
|
Approximate Dollar Value of Shares |
|
|
of Shares |
|
Paid Per |
|
That May Yet Be Purchased |
Period |
|
Purchased(1) |
|
Share |
|
Under the Plans or Programs(1) |
July 1 - July 31, 2007 |
|
|
351,470 |
|
|
$ |
50.25 |
|
|
$ |
6,017.8 |
|
|
August 1 - August 31, 2007 |
|
|
1,272,530 |
|
|
$ |
51.07 |
|
|
$ |
5,952.8 |
|
|
September 1 - September 30, 2007 |
|
|
0 |
|
|
|
N/A |
|
|
$ |
5,952.8 |
|
|
Total |
|
|
1,624,000 |
|
|
$ |
50.89 |
|
|
$ |
5,952.8 |
|
|
|
|
(1) |
|
All shares purchased during the period were made as part of a plan announced
in July 2002 to purchase $10 billion in Merck shares. |
Item 6. Exhibits
|
|
|
Number |
|
Description |
3.1
|
|
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 |
|
|
|
3.2
|
|
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 |
|
|
|
12
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
- 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.
|
|
|
|
|
|
MERCK & CO., INC.
|
|
Date: November 1, 2007 |
/s/ Bruce N. Kuhlik
|
|
|
BRUCE N. KUHLIK |
|
|
Senior Vice President and General Counsel |
|
|
|
|
|
Date: November 1, 2007 |
/s/ John Canan
|
|
|
JOHN CANAN |
|
|
Vice President, Controller |
|
|
- 44-
EXHIBIT INDEX
|
|
|
Number |
|
Description |
3.1
|
|
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 |
|
|
|
3.2
|
|
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 |
|
|
|
12
|
|
Computation of Ratios of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a 14(a)/15d 14(a) Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
- 45-