As filed with the Securities and Exchange Commission on February 28, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
_________________________________
(MARK ONE)
☒☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2016
or
☐☐ 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. 1-6571
Merck & Co., Inc.
2000 Galloping Hill Road
Kenilworth, N. J. 07033
(908) 740-4000
Incorporated
in
New
Jersey
I.R.S.
Employer
Identification
No.
22-1918501
Securities Registered pursuant to Section 12(b) of the Act:
Title
of
Each
Class
Common Stock ($0.50 par value)
1.125% Notes due 2021
0.500% Notes due 2024
1.875% Notes due 2026
2.500% Notes due 2034
1.375% Notes due 2036
Name
of
Each
Exchange
on
which
Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2017: 2,745,571,067.
Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2016 based on closing price on June 30, 2016: $159,263,000,000.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒☒ No ☐☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐☐ No ☒☒
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 ☒☒ No ☐☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒☒ No ☐☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
☐☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer ☒☒
Accelerated filer ☐☐
Non-accelerated filer ☐☐
Smaller reporting company ☐☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐☐ No ☒☒
Documents Incorporated by Reference:
(Do not check if a smaller reporting company)
Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 2017,
to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year
covered by this report
Document
Part
of
Form
10-K
Part III
Table of Contents
Table of Contents
Part I
Item 1.
Item 1A.
Business
Risk Factors
Cautionary Factors that May Affect Future Results
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
(a) Financial Statements
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(b) Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Management’s Report
Item 9B.
Other Information
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
Page
1
18
27
28
28
28
28
29
30
32
33
68
69
69
73
126
127
128
128
128
129
130
130
131
131
131
132
135
136
Table of Contents
Item 1.
Business.
PART I
Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines,
vaccines, biologic therapies and animal health products. The Company’s operations are principally managed on a products basis and include four operating
segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments.
The Pharmaceutical segment is the only reportable segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products
marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally
sold by prescription, for the treatment of human disorders. The Company 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, pharmacy benefit managers and other
institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these
human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. Sales of vaccines in most major European markets
were marketed through the Company’s Sanofi Pasteur MSD joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record
vaccine sales in the European markets, which were previously part of the joint venture.
The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the
Company sells to veterinarians, distributors and animal producers. The Company’s Healthcare Services segment provides services and solutions that focus on
engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the
Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014. On October 1, 2014, the Company divested its Consumer
Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products. The Company was incorporated in New Jersey in
1970.
For financial information and other information about the Company’s segments, see Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” below.
All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to,
promoted or distributed by Merck, its subsidiaries or affiliates, except as noted. All other trademarks or services marks are those of their respective owners.
Product Sales
Total Company sales, including sales of the Company’s top pharmaceutical products, as well as total sales of animal health products, were as follows:
2016
2015
2014
$
($
in
millions)
Total Sales
Pharmaceutical
Januvia/Janumet
Zetia/Vytorin
Gardasil/Gardasil
9
ProQuad/M-M-R
II /Varivax
Keytruda
Isentress
Remicade
Cubicin
Singulair
Pneumovax
23
Animal Health
Consumer Care (1)
39,807 $
35,151
6,109
3,701
2,173
1,640
1,402
1,387
1,268
1,087
915
641
3,478
—
1,178
39,498 $
34,782
6,014
3,777
1,908
1,505
566
1,511
1,794
1,127
931
542
3,331
3
1,382
42,237
36,042
6,002
4,166
1,738
1,394
55
1,673
2,372
25
1,092
746
3,454
1,547
1,194
Other Revenues (2)
(1)
On
October
1,
2014,
the
Company
divested
its
Consumer
Care
segment
that
developed,
manufactured
and
marketed
over-the-counter,
foot
care
and
sun
care
products.
(2)
Other
revenues
are
primarily
comprised
of
miscellaneous
corporate
revenues,
including
revenue
hedging
activities,
and
third-party
manufacturing
sales.
1
Table of Contents
Pharmaceutical
The Company’s pharmaceutical products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human
disorders. Certain of the products within the Company’s franchises are as follows:
Primary Care and Women’s Health
Cardiovascular: Zetia
(ezetimibe) (marketed as Ezetrol
in most countries outside the United States); Vytorin
(ezetimibe/simvastatin) (marketed as Inegy
outside the United States); and Atozet
(ezetimibe and atorvastatin) (marketed in certain countries outside of the United States), cholesterol modifying medicines.
Diabetes: Januvia
(sitagliptin) and Janumet
(sitagliptin/metformin HCl) for the treatment of type 2 diabetes.
General Medicine and Women’s Health: NuvaRing
(etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product ;
Implanon
(etonogestrel implant), a single-rod subdermal contraceptive implant/ Nexplanon
(etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive
implant; Dulera
Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate), a combination medicine for the treatment of asthma; and Follistim
AQ
(follitropin beta injection) (marketed as Puregon
in most countries outside the United States), a fertility treatment.
Hospital and Specialty
Hepatitis: Zepatier
(elbasvir and grazoprevir) for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection,
with ribavirin in certain patient populations; and PegIntron
(peginterferon alpha-2b) and Victrelis
(boceprevir), medicines for the treatment of chronic HCV.
HIV: Isentress
(raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection.
Hospital Acute Care: Cubicin
(
daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections or bacteremia, when
caused by designated susceptible organisms; Noxafil
(posaconazole) for the prevention of invasive fungal infections; Invanz
(ertapenem sodium) for the treatment
of certain infections; Cancidas
(caspofungin acetate), an anti-fungal product; Bridion
(sugammadex) Injection, a medication for the reversal of two types of
neuromuscular blocking agents used during surgery; and Primaxin
(imipenem and cilastatin sodium), an anti-bacterial product.
Immunology: Remicade
(infliximab), a treatment for inflammatory diseases; and Simponi
(golimumab), a once-monthly subcutaneous treatment for
certain inflammatory diseases, which the Company markets in Europe, Russia and Turkey.
Oncology
Keytruda
(pembrolizumab) for the treatment of previously untreated metastatic non-small-cell lung cancer (NSCLC) in patients whose tumors express
high levels of PD-L1 (Tumor Proportion Score [TPS] of 50% or more) and previously treated metastatic NSCLC in patients whose tumors express PD-L1 (TPS of
1% or more), as well as advanced melanoma and previously treated recurrent or metastatic head and neck cancer; Emend
(aprepitant) for the prevention of
chemotherapy-induced and post-operative nausea and vomiting; and Temodar
(temozolomide) (marketed as Temodal
outside the United States), a treatment for
certain types of brain tumors.
Diversified Brands
Respiratory: Singulair
(montelukast), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis; and
Nasonex
(mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms .
Other: Cozaar
(losartan potassium) and Hyzaar
(losartan potassium and hydrochlorothiazide), treatments for hypertension; Arcoxia
(etoricoxib) for the
treatment of arthritis and pain, which the Company markets outside the United States; Fosamax
(alendronate sodium) (marketed as Fosamac
in Japan) for the
treatment and prevention of osteoporosis ;
and Zocor
(simvastatin), a statin for modifying cholesterol.
2
Table of Contents
Vaccines
Gardasil
(Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/ Gardasil
9 (Human Papillomavirus 9-valent Vaccine,
Recombinant), vaccines to help prevent certain diseases caused by certain types of human papillomavirus (HPV) ;
ProQuad
(Measles, Mumps, Rubella and
Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella; M-M-R
II (Measles, Mumps and
Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax
(Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox
(varicella); Zostavax
(Zoster Vaccine Live), a vaccine to help prevent shingles (herpes zoster) ;
RotaTeq
(Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to
help protect against rotavirus gastroenteritis in infants and children; and Pneumovax
23 (pneumococcal vaccine polyvalent), a vaccine to help prevent
pneumococcal disease.
Animal
Health
The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. Principal products in this
segment include:
Livestock Products: Nuflor
(Florfenicol) antibiotic range for use in cattle and swine; Bovilis
/ Vista
vaccine lines for infectious diseases in cattle;
Banamine
(Flunixin meglumine) bovine and swine anti-inflammatory; Estrumate
(cloprostenol sodium) for the treatment of fertility disorders in cattle; Matrix
(altrenogest) fertility management for swine; Resflor
(florfenicol and flunixin meglumine) ,
a combination broad-spectrum antibiotic and non-steroidal anti-
inflammatory drug for bovine respiratory disease; Zuprevo
(Tildipirosin) for bovine respiratory disease; Zilmax
(zilpaterol hydrochloride) and Revalor
(trenbolone
acetate and estradiol) to improve production efficiencies in beef cattle; Safe-Guard
(fenbendazole) de-wormer for cattle; M+Pac
(Mycoplasma Hyopneumoniae
Bacterin) swine pneumonia vaccine; and Porcilis
(Lawsonia intracellularis baterin) and Circumvent
(Porcine Circovirus Vaccine, Type 2, Killed Baculovirus
Vector) vaccine lines for infectious diseases in swine.
Poultry Products: Nobilis
/ Innovax
(Live Marek’s Disease Vector) ,
vaccine lines for poultry; and Paracox
and Coccivac
coccidiosis vaccines.
Companion Animal Products: Bravecto
(fluralaner), a line of products that kills fleas and ticks in dogs for up to 12 weeks; Nobivac
vaccine lines for
flexible dog and cat vaccination; Otomax
(Gentamicin sulfate, USP; Betamethasone valerate USP; and Clotrimazole USP ointment)/ Mometamax
(Gentamicin
sulfate, USP, Mometasone Furoate Monohydrate and Clotrimazole, USP, Otic Suspension)/ Posatex
(Orbifloxacin, Mometasone Furoate Monohydrate and
Posaconazole, Suspension) ear ointments for acute and chronic otitis; Caninsulin
/ Vetsulin
(porcine insulin zinc suspension) diabetes mellitus treatment for dogs
and cats; Panacur
(fenbendazole)/ Safeguard
(fenbendazole) broad-spectrum anthelmintic (de-wormer) for use in many animals; Regumate
(altrenogest) fertility
management for horses; Prestige
vaccine line for horses; and Activyl
(Indoxacrb) /Scalibor
(Deltamethrin) /Exspot
for protecting against bites from fleas, ticks,
mosquitoes and sandflies.
Aquaculture Products: Slice
(Emamectin benzoate) parasiticide for sea lice in salmon; Aquavac
(Avirulent Live Culture)/ Norvax
vaccines against
bacterial and viral disease in fish; Compact
PD
vaccine for salmon; and Aquaflor
(Florfenicol) antibiotic for farm-raised fish.
For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” below.
Product Approvals
In January 2016, Merck announced that the U.S. Food and Drug Administration (FDA) approved Zepatier
for the treatment of adult patients with
chronic HCV GT1 or GT4 infection, with ribavirin in certain patient populations.
In February 2016, Merck announced that the FDA approved a supplemental new drug application for single-dose Emend
for injection for the prevention
of delayed nausea and vomiting in adults receiving initial and repeat courses of moderately emetogenic chemotherapy.
In May 2016, the Company received marketing approval from the European Medicines Agency (EMA) for Bravecto
Spot-On Solution for cats and dogs
and, in July 2016, the Company received approval in the United States to market the product under the tradename Bravecto
Topical.
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Table of Contents
In July 2016, the European Commission (EC) approved Zepatier
, a once-daily, single tablet combination therapy in the treatment of chronic HCV GT1
or GT4 infection, with ribavirin in certain patient populations.
In August 2016, Merck announced that the FDA approved Keytruda
for the treatment of patients with recurrent or metastatic head and neck cancer with
disease progression on or after platinum-containing chemotherapy.
In October 2016, Merck announced that the FDA approved Keytruda
for the first-line treatment of patients with NSCLC whose tumors have high PD-
L1 expression (TPS of 50% or more) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations.
In addition, in October 2016, Merck announced that the FDA approved Zinplava
Injection 25 mg/mL. Zinplava
is indicated to reduce recurrence of
Clostridium
difficile
infection (CDI) in patients 18 years of age or older who are receiving antibacterial drug treatment of CDI and are at high risk for CDI
recurrence.
On January 3, 2017, Merck announced that the EC has approved Keytruda
for the first-line treatment of metastatic NSCLC in adults whose tumors have
high PD-L1 expression (TPS of 50% or more) with no EGFR or ALK positive tumor mutations.
Joint Ventures
Sanofi
Pasteur
MSD
On December 31, 2016, Merck and Sanofi Pasteur (Sanofi) terminated the equally-owned joint venture formed by the companies in 1994 to develop
and market human vaccines in Europe.
Licenses
In 1998, a subsidiary of Schering-Plough Corporation (Schering-Plough) entered into a licensing agreement with Centocor Ortho Biotech Inc.
(Centocor), a Johnson & Johnson (J&J) company, to market Remicade
, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s
subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi
, a fully human monoclonal antibody. The
Company has marketing rights to both products throughout Europe, Russia and Turkey. Remicade
lost market exclusivity in major European markets in February
2015 and the Company no longer has market exclusivity in any of its marketing territories. The Company continues to have market exclusivity for Simponi
in all of
its marketing territories. All profits derived from Merck’s distribution of the two products in these countries are equally divided between Merck and J&J.
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry in general are highly competitive and highly regulated. The
Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus,
generic drug manufacturers and animal health care companies. The Company’s operations may be adversely affected by generic and biosimilar competition as the
Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination
products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or
post-marketing surveillance. In addition, patent rights are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result
in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the payment of royalties or in the
recognition of an impairment charge with respect to intangible assets associated with certain products. Competitive pressures have intensified as pressures in the
industry have grown.
Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its
long-standing emphasis on research and development, the Company is well positioned to compete in the search for technological innovations. Additional resources
required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical
information service. The Company is active in acquiring and marketing products through external alliances, such as licensing arrangements, and has been refining
its sales and marketing efforts to further address
4
Table of Contents
changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements,
even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in
slowed sales growth or reduced sales for the Company’s products in that therapeutic category.
The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological
advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by
competitors.
Health
Care
Environment
and
Government
Regulation
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and
state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the
Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health
Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, the United States enacted major health care reform legislation in 2010 (the Patient Protection and Affordable Care Act (ACA)),
which began to be implemented in 2010. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. With
respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to
Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also requires pharmaceutical
manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called
“donut hole”). Approximately $415 million, $550 million and $430 million was recorded by Merck as a reduction to revenue in 2016, 2015 and 2014, respectively,
related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total
annual industry fee was $3.0 billion in 2016 and will increase to $4.0 billion in 2017. The fee is assessed on each company in proportion to its share of prior year
branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. The Company recorded $193 million, $173 million and $390
million of costs within Marketing
and
administrative
expenses in 2016, 2015 and 2014, respectively, for the annual health care reform fee. The higher expenses in
2014 reflect final regulations on the annual health care reform fee issued by the Internal Revenue Service (IRS) on July 28, 2014. The final IRS regulations
accelerated the recognition criteria for the fee obligation by one year to the year in which the underlying sales used to allocate the fee occurred rather than the year
in which the fee was paid. As a result of this change, Merck recorded an additional year of expense of $193 million in 2014. In February 2016, the Centers for
Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides
comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are
required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck at this time. However, the
Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes
a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The Company will
evaluate the financial impact of these two elements when they become effective.
There is significant uncertainty about the future of the ACA in particular and healthcare laws in general in the United States. The Company is
participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the
ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of
operations, financial condition or business.
Also, during 2016, the Vermont legislature passed a pharmaceutical cost transparency law. The law requires manufacturers identified by the Vermont
Green Mountain Care Board to report certain product price information to the Vermont Attorney General. The Attorney General is then required to submit a report
to the legislature. A number of other states have introduced legislation of this kind and the Company expects that states will continue their focus on pharmaceutical
price transparency. The extent to which these proposals will pass into law is unknown at this time.
The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could
negatively affect the Company’s sales and profit margins. In the United States, these
5
Table of Contents
include (i) practices of managed care organizations, federal and state exchanges, and institutional and governmental purchasers, and (ii) U.S. federal laws and
regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the ACA.
Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that
negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. As an example, health care reform is
contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative
proposals that have been debated but not enacted. These types of revenue generating or cost saving proposals include additional direct price controls in the
Medicare prescription drug program (Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines
from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reduction proposals that would
directly or indirectly affect the Company.
In the U.S. private sector, consolidation and integration among healthcare providers is a major factor in the competitive marketplace for pharmaceutical
products. Health plans and pharmacy benefit managers have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance.
Private third-party insurers, as well as governments, increasingly employ formularies to control costs by negotiating discounted prices in exchange for formulary
inclusion. Failure to obtain timely or adequate pricing or formulary placement for Merck’s products or obtaining such pricing or placement at unfavorable pricing
could adversely impact revenue. In addition to formulary tier co-pay differentials, private health insurance companies and self-insured employers have been raising
co-payments required from beneficiaries, particularly for branded pharmaceuticals and biotechnology products. Private health insurance companies also are
increasingly imposing utilization management tools, such as clinical protocols, requiring prior authorization for a branded product if a generic product is available
or requiring the patient to first fail on one or more generic products before permitting access to a branded medicine. These same utilization management tools are
also used in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. As the U.S. payer market
concentrates further and as more drugs become available in generic form, pharmaceutical companies may face greater pricing pressure from private third-party
payers.
In order to provide information about the Company’s pricing practices, the Company recently posted on its website its first Pricing Action
Transparency Report for the United States for the years 2010 - 2016. The report provides the Company’s average annual list price and net price increases across the
Company’s U.S. portfolio dating back to 2010. The report shows that the Company’s average annual net price increases (after taking sales deductions such as
rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits since 2010. Additionally, the weighted
average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of the ACA. In 2016,
the Company’s gross U.S. sales were reduced by 40.9% as a result of rebates, discounts and returns.
Efforts toward health care cost containment also remain intense in European countries. The Company faces competitive pricing pressure resulting from
generic and biosimilar drugs. In addition, a majority of countries in Europe attempt to contain drug costs by engaging in reference pricing in which authorities
examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-
name drugs, including the Company’s. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain
vaccines, which occurred in 2016. Furthermore, the government can order repricings for classes of drugs if it determines that it is appropriate under applicable
rules.
Certain markets outside of the United States have also implemented other cost management strategies, such as health technology assessments (HTA),
which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and
exert downward pressure on available reimbursement. In the United States, HTAs are also being used by government and private payers.
The Company’s focus on emerging markets has continued. Governments in many emerging markets are also focused on constraining health care costs
and have enacted price controls and related measures, such as compulsory
6
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licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access
challenges will continue in 2017 to varying degrees in the emerging markets.
Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in
these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for
health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to
assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that
its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term
approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of
budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt
market reforms in order to improve their citizens’ access to appropriate health care, including medicines.
Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts.
Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and
improve the organization and its business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health care
environment and market forces.
The pharmaceutical industry is also subject to regulation by regional, country, state and local agencies around the world focused on standards and
processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement.
Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness,
manufacturing, labeling, and marketing of prescription pharmaceuticals. In some cases, the FDA requirements and practices have increased the amount of time and
resources necessary to develop new products and bring them to market in the United States. At the same time, the FDA has committed to expediting the
development and review of products bearing the “breakthrough therapy” designation, which has accelerated the regulatory review process for medicines with this
designation.
The European Union (EU) has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution,
integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory
standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. The Company’s policies and
procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company’s
business.
The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment. (See
“Research and Development” below for a discussion of the regulatory approval process.)
Access
to
Medicines
As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes
that it has an important role to play in helping to improve access to its products around the world. The Company’s efforts in this regard are wide-ranging and
include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding
access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and
adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance,
cannot afford their Merck medicine and vaccines. In 2011, Merck launched “Merck for Mothers,” a long-term effort with global health partners to end preventable
deaths from complications of pregnancy and childbirth. Merck has also provided funds to the Merck Foundation, an independent organization, which has partnered
with a variety of organizations dedicated to improving global health.
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Privacy and Data Protection
The Company is subject to a significant number of privacy and data protection laws and regulations globally, many of which place restrictions on the
Company’s ability to transfer, access and use personal data across its business. The legislative and regulatory landscape for privacy and data protection continues to
evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the
Company’s business, including a new EU General Data Protection Regulation, which will become effective in 2018 and impose penalties up to 4% of global
revenue, additional laws and regulations enacted in the United States, Europe, Asia and Latin America, increased enforcement and litigation activity in the United
States and other developed markets, and increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global
privacy program to manage these evolving risks which has been certified as compliant with and approved by the Asia Pacific Economic Cooperation Cross-Border
Privacy Rules System, the EU-U.S. Privacy Shield Program, and the Binding Corporate Rules in the EU.
Distribution
The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed
health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccines are sold primarily to
physicians, wholesalers, physician distributors and government entities. The Company’s professional representatives communicate the effectiveness, safety and
value of the Company’s pharmaceutical and vaccine products to health care professionals in private practice, group practices, hospitals and managed care
organizations. The Company sells its animal health products to veterinarians, distributors and animal producers.
Raw Materials
Raw materials and supplies, which are generally available from multiple sources, are purchased worldwide and are normally available in quantities
adequate to meet the needs of the Company’s business.
Patents, Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of its products in the United States and in
most major foreign markets. Patents may cover products per
se
, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products
or the uses of products. Protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries. The
protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.
The Food and Drug Administration Modernization Act includes a Pediatric Exclusivity Provision that may provide an additional six months of market
exclusivity in the United States for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. Current
U.S. patent law provides additional patent term for periods when the patented product was under regulatory review by the FDA. The EU also provides an additional
six months of pediatric market exclusivity attached to a product’s Supplementary Protection Certificate (SPC). Japan provides the additional term for pediatric
studies attached to market exclusivity unrelated to patent rights.
8
Table of Contents
Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key patent
protection in the United States, the EU and Japan (including the potential for patent term extensions (PTE) and SPCs where indicated) for the following marketed
products:
Year of Expiration (U.S.)
Year of Expiration (EU) (1)
Year of Expiration (Japan)
Product
Invanz
Arcoxia
Cancidas
Zostavax
Dulera
Zetia
(2)
Vytorin
Asmanex
NuvaRing
(3)
Emend
for Injection
Follistim
AQ
Noxafil
RotaTeq
Recombivax
Januvia
Janumet
Janumet
XR
Isentress
Simponi
Bridion
Nexplanon
Bravecto
Gardasil
Gardasil
9
Keytruda
Zerbaxa
Sivextro
Zinplava
Belsomra
2017 (composition)
Not Marketed
2017 (formulation)
Expired
2017 (formulation)/
2020 (combination)
2017
2017
2018 (formulation)
2018 (delivery system)
2019 (4)
2019 (formulation)
2019
2019
2020 (method of making)
2022 (4)
2022 (4)
2022 (4)
2023 (4)
N/A (6)
2026 (4)
(with pending PTE)
2027 (device)
2027 (with pending PTE)
2028
2028
2028
2028 (4)
(with pending PTE)
2028 (4)
2028 (with pending PTE)
2029 (4)
2031 (4)
2017
2017
2017
2018 (use)
N/A
2018
2019
2018 (formulation)
2018 (delivery system)
2020 (4)
2019 (formulation)
2019
Expired
Expired
2022 (4)
2023
N/A
2022 (4)
2024
2023
N/A
Not Marketed
2019
N/A
N/A
2019
2019
2020 (formulation)
N/A
2020
2019 (formulation)
N/A
Expired
Expired
2025-2026 (5)
N/A
N/A
2022
N/A (6)
2024
2025 (device)
Not Marketed
2025 (patent), 2029 (SPCs)
2021 (4)
2025 (patent) ,
2030 (4)
(SPCs)
2028 (patent), 2030 (4)
(SPCs)
2023 (patent), 2028 (4)
(SPCs)
2024 (patent), 2029 (4)
(SPCs)
2025 (7)
N/A
2030 (patent), 2031 (4)
(SPCs)
2029
2017
N/A
2032 (with pending PTE)
N/A
N/A
N/A
2031
Zepatier
N/A:
Note: Compound
patent
unless
otherwise
noted.
Certain
of
the
products
listed
may
be
the
subject
of
patent
litigation.
See
Item
8.
“Financial
Statements
and
Supplementary
Data,”
Note
10.
“Contingencies
and
Environmental
Currently
no
marketing
approval.
2030
Liabilities”
below.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The
EU
date
represents
the
expiration
date
for
the
following
five
countries:
France,
Germany,
Italy,
Spain
and
the
UK
(Major
EU
Markets).
If
an
SPC
has
been
granted
in
some
but
not
all
Major
EU
Markets,
both
the
patent
expiry
date
and
the
SPC
expiry
date
are
listed.
By
agreement,
a
generic
manufacturer
launched
a
generic
version
of
Zetia in
the
United
States
in
December
2016.
In
August
2016,
a
district
court
decision
found
invalid
the
Company’s
patent
claiming
NuvaRing ’s
delivery
system.
That
decision
is
currently
under
appeal.
Eligible
for
6
months
Pediatric
Exclusivity.
The
PTE
system
in
Japan
allows
for
a
patent
to
be
extended
more
than
once
provided
the
later
approval
is
directed
to
a
different
indication
from
that
of
the
previous
approval.
This
may
result
in
multiple
PTE
approvals
for
a
given
patent,
each
with
its
own
expiration
date.
The
Company
has
no
marketing
rights
in
the
U.S.
and
Japan.
SPC
applications
to
be
filed
by
July
2017.
Expected
expiry
2030.
Eligible
for
pediatric
exclusivity.
While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical product, commercial benefits
may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active
ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in the United States
and certain other countries, market exclusivity that may be available under relevant law. The effect of product patent expiration on pharmaceutical products also
depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of
the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or
similar laws and regulations in other countries.
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Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some
of the benefits of increases in patent life have been partially offset by an increase in the number of incentives for and use of generic products. Additionally,
improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation
of international treaties.
The Company has the following key U.S. patent protection for drug candidates under review in the United States by the FDA. Additional patent term
may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity.
Under Review (in the U.S.)
V419 (pediatric hexavalent combination vaccine)
Currently Anticipated
Year of Expiration (in the U.S.)
2020 (method of making)
The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development:
Phase 3 Drug Candidate
V920 (ebola vaccine)
MK-8228 (letermovir)
MK-0859 (anacetrapib)
MK-7655A (relebactam + imipenem/cilastatin)
MK-8931 (verubecestat)
MK-1439 (doravirine)
MK-8835 (ertuglifozin)
MK-8835A (ertuglifozin + sitagliptin)
MK-8835B (ertuglifozin + metformin)
MK-1242 (vericiguat)
Currently Anticipated
Year of Expiration (in the U.S.)
2023
2024
2027
2030
2030
2031
2030
2030
2030
2031
Unless otherwise noted, the patents in the above charts are compound patents. Each patent is subject to any future patent term restoration of up to five
years and six month pediatric market exclusivity, either or both of which may be available. In addition, depending on the circumstances surrounding any final
regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved;
the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product.
Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer
lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a
new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.
For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary
Data,” Note 10. “Contingencies and Environmental Liabilities” below.
Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance.
Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed
indefinitely.
Royalty income in 2016 on patent and know-how licenses and other rights amounted to $222 million. Merck also incurred royalty expenses amounting
to $1.1 billion in 2016 under patent and know-how licenses it holds.
Research and Development
The Company’s business is characterized by the introduction of new products or new uses for existing products through a strong research and
development program. Approximately 12,300 people are employed in the Company’s research activities. Research and development expenses were $10.1 billion in
2016 , $6.7 billion in 2015 and $7.2 billion in 2014 (which included restructuring costs and acquisition and divestiture-related costs in all years). The Company
prioritizes its research and development efforts and focuses on candidates that it believes represent breakthrough science that will make a difference for patients
and payers.
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Table of Contents
The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs
directed toward product development. The Company’s research and development model is designed to increase productivity and improve the probability of success
by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable
advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck
is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics
capabilities. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a focus on supplementing its
internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as
well as access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company continues to
evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes,
infectious diseases, inflammatory/autoimmune diseases, neurodegenerative diseases, and respiratory diseases.
In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for
the determination of effectiveness and safety of new chemical compounds through preclinical tests and controlled clinical evaluation. Before a new drug or vaccine
may be marketed in the United States, recorded data on preclinical and clinical experience are included in the New Drug Application (NDA) for a drug or the
Biologics License Application (BLA) for a vaccine or biologic submitted to the FDA for the required approval.
Once the Company’s scientists discover a new small molecule compound or biologic that they believe has promise to treat a medical condition, the
Company commences preclinical testing with that compound. Preclinical testing includes laboratory testing and animal safety studies to gather data on chemistry,
pharmacology, immunogenicity and toxicology. Pending acceptable preclinical data, the Company will initiate clinical testing in accordance with established
regulatory requirements. The clinical testing begins with Phase 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary
pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase 2 studies are initiated to determine the efficacy of the compound in
the affected population, define appropriate dosing for the compound, as well as identify any adverse effects that could limit the compound’s usefulness. In some
situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study
as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial
design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company
commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a
study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a
design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study.
Upon completion of Phase 3 trials, if satisfactory, the Company submits regulatory filings with the appropriate regulatory agencies around the world to have the
product candidate approved for marketing. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory
approvals necessary for it to be marketed.
Vaccine development follows the same general pathway as for drugs. Preclinical testing focuses on the vaccine’s safety and ability to elicit a protective
immune response (immunogenicity). Pre-marketing vaccine clinical trials are typically done in three phases. Initial Phase 1 clinical studies are conducted in normal
subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide
the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies.
In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency.
Within 60 days after receipt, the FDA determines if the application is sufficiently complete to permit a substantive review. The FDA also assesses, at that time,
whether the application will be granted
11
Table of Contents
a priority review or standard review. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is
either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review
timelines are determined, the FDA will generally act upon the application within those timelines, unless a major amendment has been submitted (either at the
Company’s own initiative or the FDA’s request) to the pending application. If this occurs, the FDA may extend the review period to allow for review of the new
information, but by no more than three months. Extensions to the review period are communicated to the Company. The FDA can act on an application either by
issuing an approval letter or by issuing a Complete Response Letter (CRL) stating that the application will not be approved in its present form and describing all
deficiencies that the FDA has identified. Should the Company wish to pursue an application after receiving a CRL, it can resubmit the application with information
that addresses the questions or issues identified by the FDA in order to support approval. Resubmissions are subject to review period targets, which vary depending
on the underlying submission type and the content of the resubmission.
The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite
development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation
provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the
manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the
FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive
guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced staff in
the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is
reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the
clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under
standard review.
In addition, under the Generating Antibiotic Incentives Now Act, the FDA may grant Qualified Infectious Disease Product (QIDP) status to
antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel
or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority
Review of the NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and
Cosmetic Act.
The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.”
This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new
chemical compounds and products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set
of safety data and efficacy data as part of a Marketing Authorization Application (MAA) with the EMA. After the EMA evaluates the MAA, it provides a
recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU
through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product
under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.
Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the
Pharmaceuticals and Medical Devices Agency in Japan, Health Canada, Agência Nacional de Vigilância Sanatária in Brazil, Korea Food and Drug Administration
in South Korea, Therapeutic Goods Administration in Australia and China Food and Drug Administration. Each country has a separate and independent review
process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or
the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.
12
Table of Contents
Research
and
Development
Update
The Company currently has several candidates under regulatory review in the United States.
Keytruda
is an FDA-approved anti-PD-1 (programmed death receptor-1) therapy in clinical development for expanded indications in different cancer
types. Keytruda
is currently approved for the treatment of NSCLC, melanoma, advanced melanoma, and head and neck cancer.
In February 2017, the FDA accepted for review two supplemental BLAs (sBLA) for Keytruda
in patients with locally advanced or metastatic urothelial
cancer, including most bladder cancers. The application for first-line use was granted Priority Review for the treatment of these patients who are ineligible for
cisplatin-containing therapy. The application for second-line use was granted Priority Review for these patients with disease progression on or after platinum-
containing chemotherapy. The PDUFA action date for both applications is June 14, 2017. The FDA previously granted Breakthrough Therapy designation to
Keytruda
for the second-line treatment of patients with locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing
chemotherapy.
In January 2017, the FDA accepted for review an sBLA for Keytruda
plus chemotherapy (pemetrexed plus carboplatin) for the first-line treatment of
patients with metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations. This is the
first application for regulatory approval of Keytruda
in combination with another treatment. The FDA granted Priority Review with a PDUFA action date of May
10, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program.
In December 2016, the FDA accepted for review an sBLA for Keytruda
for the treatment of patients with refractory classical Hodgkin lymphoma or for
patients who have relapsed after three or more prior lines of therapy. The FDA granted Priority Review with a PDUFA action date of March 15, 2017. The sBLA
will be reviewed under the FDA’s Accelerated Approval program.
In November 2016, the FDA accepted for review an sBLA for Keytruda
, for the treatment of previously treated patients with advanced microsatellite
instability-high (MSI-H) cancer. The FDA granted Priority Review with a PDUFA action date of March 8, 2017. The sBLA will be reviewed under the FDA’s
Accelerated Approval program. The FDA recently granted Breakthrough Therapy designation to Keytruda
for unresectable or metastatic MSI-H non-colorectal
cancer, and previously granted it for the treatment of patients with unresectable or metastatic MSI-H colorectal cancer.
Additionally, Keytruda
has also received Breakthrough Therapy designation from the FDA for the treatment of patients with primary mediastinal B-cell
lymphoma that is refractory to or has relapsed after two prior lines of therapy.
The Keytruda
clinical development program consists of more than 400 clinical trials, including more than 200 trials that combine Keytruda
with other
cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin
lymphoma, non-Hodgkin lymphoma, melanoma, multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal and triple-negative breast, many of which
are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
MK-1293 is an investigational follow-on biologic insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes under review
by the FDA. MK-1293 was approved in the EU in January 2017. MK-1293 is being developed in collaboration with and partially funded by Samsung Bioepis.
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if
approved, will be commercialized through a partnership between Merck and Sanofi. This vaccine is designed to help protect against six important diseases -
diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus
influenzae
type b (Hib), and hepatitis
B. On November 2, 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are reviewing the CRL and plan to have further
communication with the FDA. In February 2016, the EC granted marketing authorization for V419 for prophylaxis against diphtheria, tetanus, pertussis, hepatitis
B, poliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 is being marketed as Vaxelis
in the EU.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the
Keytruda
programs discussed above.
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Table of Contents
MK-8931, verubecestat, is an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1) for the
treatment of Alzheimer’s disease. In February 2017, Merck announced that its external Data Monitoring Committee (eDMC) recommended termination of the
Phase 2/3 EPOCH study of verubecestat in mild-to-moderate Alzheimer’s disease based on the low probability of success of this study. The same eDMC
recommended that a separate Phase 3 study, APECS, evaluating verubecestat for amnestic mild cognitive impairment due to Alzheimer’s disease, also known as
prodromal Alzheimer’s disease, continue as planned. Estimated primary completion date for the APECS study, which is fully enrolled, is February 2019.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (CETP) in development for raising HDL-C and reducing
LDL-C. Anacetrapib is being evaluated in a 30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL
(Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular disease. In November 2015,
Merck announced that the Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and
recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck
remains blinded to the actual results of this analysis and to other REVEAL safety and efficacy data. Under the study, the last patient’s last visit occurred in January
2017. The Company anticipates receiving the top-line results from the study mid-year 2017.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic).
The FDA has designated this combination a QIDP with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-
associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.
MK-8228, letermovir, is an investigational oral once-daily or an intravenous infusion antiviral candidate for the prevention of clinically-significant
cytomegalovirus (CMV) infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track
designation. In October 2016, Merck announced that the pivotal Phase 3 clinical study of letermovir met its primary endpoint. The global, multicenter, randomized,
placebo-controlled study evaluated the efficacy and safety of letermovir in adult (18 years and older) CMV-seropositive recipients of an allogeneic hematopoietic
stem cell transplant. Merck plans to submit regulatory applications for the approval of letermovir in the United States and EU in 2017.
MK-8835, ertugliflozin, is an investigational oral SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes in collaboration with Pfizer Inc.
(Pfizer). In September 2016, Merck and Pfizer announced that a Phase 3 study (VERTIS SITA2) of ertugliflozin met its primary endpoint. Both 5 mg and 15 mg
daily doses of ertugliflozin showed significantly greater reductions in A1C (an average measure of blood glucose over the past two to three months) when added to
patients on a background of sitagliptin and metformin. Ertugliflozin is also being studied in combination with Januvia
(sitagliptin) and metformin. In December
2016, Merck submitted NDAs to the FDA for ertugliflozin and the two fixed-dose combinations: MK-8835A, ertugliflozin plus Januvia
, and MK-8835B,
ertugliflozin plus metformin. The Company anticipates a response from the FDA in the first quarter of 2017. Ertugliflozin and the two fixed-dose combinations are
currently under review in the EU.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in
collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki),
is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and
NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that
the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the
WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision
to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While
EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck
announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In
December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that
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V920 offers substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both
randomized and non-randomized clusters. Results from other ongoing studies are anticipated in the second half of 2017.
MK-1242, vericiguat, is an investigational treatment for heart failure being studied in a Phase 3 clinical trial in patients suffering from chronic heart
failure. The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer AG.
V212 is an inactivated varicella zoster virus (VZV) vaccine in development for the prevention of herpes zoster. The Company completed the Phase 3
trial in autologous hematopoietic cell transplant patients and is conducting another Phase 3 trial in patients with solid tumor malignancies undergoing
chemotherapy and hematological malignancies. The study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the
results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017.
MK-1439, doravirine, is an investigational non-nucleoside reverse transcriptase inhibitor being developed by Merck for the treatment of HIV-1
infection. In February 2017, the Company received positive results from a first Phase 3 study showing that doravirine was non-inferior to an alternative regimen in
achieving and maintaining HIV-1 suppression in infected adults during 48 weeks of treatment.
In 2016, the Company also divested or discontinued certain drug candidates.
Merck announced that it is discontinuing the development of odanacatib, an investigational cathepsin K inhibitor for osteoporosis, and will not seek
regulatory approval for its use. Merck previously reported a numeric imbalance in adjudicated stroke events in the pivotal Phase 3 fracture outcomes study in
postmenopausal women. The Company has decided to discontinue development after an independent adjudication and analysis of major adverse cardiovascular
events confirmed an increased risk of stroke.
The Company determined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that included MK-
8237, an investigational allergy immunotherapy tablet for house dust mite allergy. Merck has given ALK-Abelló six months’ notice that it is terminating the
agreement and therefore this compound will be returned to ALK-Abelló. This decision was not due to efficacy or safety concerns.
The Company also decided, for business reasons, to discontinue the clinical development of MK-8342B, referred to as the Next Generation Ring, an
investigational combination (etonogestrel and 17ß-estradiol) vaginal ring for contraception and the treatment of dysmenorrhea in women seeking contraception.
This decision was not due to efficacy or safety concerns.
Merck announced that, for business reasons, it will not proceed with submitting marketing applications for omarigliptin, an investigational, once-
weekly DPP-4 inhibitor, in the United States or Europe. This decision did not result from concerns about the efficacy or safety of omarigliptin.
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The chart below reflects the Company’s research pipeline as of February 24, 2017. Candidates shown in Phase 3 include specific products and the date
such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed
compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given
MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the
same therapeutic area (other than with respect to Keytruda
) and additional claims, line extensions or formulations for in-line products are not shown.
Phase 2
Phase 3 (Phase 3 entry date)
Under Review
Asthma
MK-1029
Cancer
MK-3475 Keytruda
PMBCL (Primary Mediastinal
Large B-Cell Lymphoma)
Advanced Solid Tumors
Nasopharyngeal
Ovarian
Prostate
MK-2206
Cough, including cough with IPF
MK-7264
Diabetes Mellitus
MK-8521
Hepatitis C
MK-3682B (MK-3682 (uprifosbuvir)/MK-5172
(grazoprevir)/MK-8408 (ruzasvir))
Pneumoconjugate Vaccine
V114
Alzheimer’s Disease
MK-8931 (verubecestat) (December 2013)
Atherosclerosis
MK-0859 (anacetrapib) (May 2008)
Bacterial Infection
MK-7655A (relebactam+imipenem/cilastatin)
(October 2015)
Cancer
MK-3475 Keytruda
Bladder (October 2014) (EU)
Breast (October 2015)
Colorectal (November 2015)
Esophageal (December 2015)
Gastric (May 2015)
Head and Neck (November 2014) (EU)
Hepatocellular (May 2016)
Hodgkin Lymphoma (July 2016) (EU)
Multiple Myeloma (December 2015)
Renal (October 2016)
CMV Prophylaxis in Transplant Patients
MK-8228 (letermovir) (June 2014)
Diabetes Mellitus
MK-8835 (ertugliflozin) (November 2013)
(U.S.) (1)
MK-8835A (ertugliflozin+sitagliptin)
(September 2015) (U.S.) ( 1)
MK-8835B (ertugliflozin+metformin)
(August 2015) (U.S.) (1)
MK-0431J (sitagliptin+ipragliflozin)
(October 2015) (Japan) (1)
Ebola Vaccine
V920 (March 2015)
Heart Failure
MK-1242 (vericiguat) (September 2016) (1)
Herpes Zoster
V212 (inactivated VZV vaccine) (December 2010)
HIV
MK-1439 (doravirine) (December 2014)
New Molecular Entities/Vaccines
Allergy
MK-8237, House Dust Mite (U.S.) (2)
Diabetes Mellitus
MK-1293 (U.S.) (1)
MK-8835 (ertugliflozin) (EU) (1)
MK-8835A (ertugliflozin+sitagliptin) (EU) ( 1)
MK-8835B (ertugliflozin+metformin) (EU) (1)
Pediatric Hexavalent Combination Vaccine
V419 (U.S.) (3)
Certain Supplemental Filings
Cancer
Keytruda
• Previously Treated Microsatellite Instability-High Cancer (U.S.)
• Relapsed or Refractory Classical Hodgkin Lymphoma (U.S.)
• Combination with Chemotherapy in first-line non-squamous Non-Small-
Cell Lung Cancer (U.S.)
• First Line Cis-ineligible Bladder Cancer (U.S.)
• Second Line Metastatic Bladder Cancer (U.S.)
Footnotes:
(1)
Being developed in a collaboration.
(2)
MK-8237 was being developed as part of a North America partnership
with ALK-Abelló. Merck has given ALK-Abelló six months’ notice
that it is terminating the agreement and, therefore, this compound will
be returned to ALK-Abelló.
(3)
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-
IPV-Hib-HepB, that is being developed and, if approved, will be
commercialized through a partnership of Merck and Sanofi. On November 2,
2015, the FDA issued a CRL with respect to V419. Both companies are
reviewing the CRL and plan to have further communication with the FDA.
Employees
As of December 31, 2016, the Company had approximately 68,000 employees worldwide, with approximately 26,500 employed in the United States,
including Puerto Rico. Approximately 29% of worldwide employees of the Company are represented by various collective bargaining groups.
Restructuring
Activities
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in
connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed
to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as
well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to
reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these
programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations. Since inception of the programs through
December 31, 2016, Merck has eliminated approximately 40,900 positions comprised of
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employee separations, as well as the elimination of contractors and vacant positions. The Company expects to substantially complete the remaining actions under
these programs by the end of 2017.
Environmental Matters
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material
adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites.
Expenditures for remediation and environmental liabilities were $11 million in 2016 , and are estimated at $44 million in the aggregate for the years 2017 through
2021 . These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and,
in management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and
$109 million at December 31, 2016 and 2015 , respectively. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs
of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $64
million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial position,
results of operations, liquidity or capital resources for any year.
Merck believes that climate change could present risks to its business. Some of the potential impacts of climate change to its business include increased
operating costs due to additional regulatory requirements, physical risks to the Company’s facilities, water limitations and disruptions to its supply chain. These
potential risks are integrated into the Company’s business planning including investment in reducing energy, water use and greenhouse gas emissions. The
Company does not believe these risks are material to its business at this time.
Geographic Area Information
The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United
States as a percentage of total Company sales were 54% of sales in 2016, 56% of sales in 2015 and 60% of sales in 2014.
The Company’s worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The
Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations
and adopts strategies responsive to changing economic and political conditions.
Merck has operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific. Business in these developing
areas, while sometimes less stable, offers important opportunities for growth over time.
Financial information about geographic areas of the Company’s business is provided in Item 8. “Financial Statements and Supplementary Data” below.
Available Information
The Company’s Internet website address is www.merck.com
.
The Company will make available, free of charge at the “Investors” portion of its website,
its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or
furnished to, the U.S. Securities and Exchange Commission (SEC). In addition, the Company will provide without charge a copy of its Annual Report on Form 10-
K, including financial statements and schedules, upon the written request of any shareholder to Merck Shareholder Services, Merck & Co., Inc., 2000 Galloping
Hill Road, K1-3049, Kenilworth, NJ 07033 U.S.A.
The Company’s corporate governance guidelines and the charters of the Board of Directors’ four standing committees are available on the Company’s
website at www.merck.com/about/leadership
and all such information is available in print to any stockholder who requests it from the Company.
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Item 1A. Risk Factors.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in
any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the
Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects
could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The
Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces
described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.
The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely
affected.
Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of human health products in the United
States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the
successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products
and where meaningful patent protection is available.
Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or
circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity
for its products. The Company is often involved in patent disputes relating to challenges to its patents or claims by third parties of infringement against the
Company. The Company defends its patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8.
“Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic
pharmaceutical products from time to time file Abbreviated NDAs with the FDA seeking to market generic forms of the Company’s products prior to the
expiration of relevant patents owned or licensed by the Company. The Company normally responds by defending its patent, including by filing lawsuits alleging
patent infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market
exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic
area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in
other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further,
court decisions relating to other companies’ patents, potential legislation relating to patents, as well as regulatory initiatives may result in a more general
weakening of intellectual property protection.
If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of
generic versions of those products becoming available and, in the case of certain products, such a loss could result in a material non-cash impairment charge. The
Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful
replacement products.
A chart listing the patent protection for certain of the Company’s marketed products, and U.S. patent protection for candidates under review and Phase
3 candidates is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”
As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those
products.
The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for
one of the Company’s products typically leads to a significant and rapid loss of sales for that product, as lower priced generic versions of that drug become
available. In the case of products that contribute significantly to the Company’s sales, the loss of market exclusivity can have a material adverse effect on the
Company’s business, cash flow, results of operations, financial position and prospects. For example, pursuant
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to an agreement with a generic manufacturer, that manufacturer launched in the United States a generic version of Zetia
in December 2016. In addition, the
Company will lose U.S. patent protection for Vytorin
in April 2017. The Company expects a significant and rapid loss of sales of Zetia
and Vytorin
in the United
States in 2017.
Key products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its
leading products could have a material and negative impact on results of operations and cash flows.
The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products,
such as Januvia
, Janumet
, Keytruda
, Gardasil/Gardasil
9, Isentress
and Zepatier
. As a result of the Company’s dependence on key products, any event that
adversely affects any of these products or the markets for any of these products could have a significant adverse impact on results of operations and cash flows.
These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s
product or a competitive product, the discovery of previously unknown side effects, results of post-approval trials, increased competition from the introduction of
new, more effective treatments and discontinuation or removal from the market of the product for any reason. Such events could have a material adverse effect on
the sales of any such products.
The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not
be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products
that have lost patent protection.
Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products each year. Expected
declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including
new products which it may develop through joint ventures and products which it is able to obtain through license or acquisition. To accomplish this, the Company
commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations
with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested
by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle.
To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including
later in the process after significant funds have been invested.
For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly
regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals, therefore, the Company
may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process
include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market
first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the
regulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new
product may be disappointing.
The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be
able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful.
The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both
to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by
competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of
operations, cash flow, financial position and prospects.
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The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.
Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:
•
•
•
•
•
findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;
failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, and uncertainties about
the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant
approvals;
failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;
lack of economic feasibility due to manufacturing costs or other factors; and
preclusion from commercialization by the proprietary rights of others.
In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company
may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with acquisitions.
Failure to successfully develop and market new products in the short term or long term would have a material adverse effect on the Company’s
business, results of operations, cash flow, financial position and prospects.
The Company’s products, including products in development, cannot be marketed unless the Company obtains and maintains regulatory
approval.
The Company’s activities, including research, preclinical testing, clinical trials and manufacturing and marketing its products, are subject to extensive
regulation by numerous federal, state and local governmental authorities in the United States, including the FDA, and by foreign regulatory authorities, including in
the EU. In the United States, the FDA is of particular importance to the Company, as it administers requirements covering the testing, approval, safety,
effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and
money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug
safety and effectiveness and, in many cases, cost reduction. The FDA and foreign regulatory authorities have substantial discretion to require additional testing, to
delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.
Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all
required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it
plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval
process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever.
The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.
Developments following regulatory approval may adversely affect sales of the Company’s products.
Even after a product reaches market, certain developments following regulatory approval, including results in post-approval Phase 4 trials or other
studies, may decrease demand for the Company’s products, including the following:
•
•
the re-review of products that are already marketed;
the recall or loss of marketing approval of products that are already marketed;
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•
•
changing government standards or public expectations regarding safety, efficacy or labeling changes; and
greater scrutiny in advertising and promotion.
In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the
industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of
certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that
have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market
reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, following the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and Japan’s
Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear
to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already
marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising
and promotion and, in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s
products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the
product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies
operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research
and/or marketing activities.
The Company faces intense competition from lower cost-generic products.
In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying
strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the United States or in the EU. In the United States and the
EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures which encourages the use of generic and biosimilar
products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the
Company’s patents may not prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability
of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the
United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could
worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial position and prospects.
The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to
non-cash impairment charges.
The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such
an event, the competitors’ products may be safer or more effective, more convenient to use or more effectively marketed and sold than the Company’s products.
Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective
products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could
have a material adverse effect on its business, cash flow, results of operations, financial position and prospects. In addition, if products that were measured at fair
value and capitalized in connection with acquisitions experience difficulties in the market that negatively impact product cash flows, the Company may recognize
material non-cash impairment charges with respect to the value of those products.
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The Company faces pricing pressure with respect to its products.
The Company faces increasing pricing pressure globally and, particularly in mature markets, from managed care organizations, government agencies
and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and
institutional and governmental purchasers, (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug
Improvement and Modernization Act of 2003 and the ACA, and (iii) state activities aimed at increasing price transparency. Changes to the health care system
enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and
private sector beneficiaries, could result in further pricing pressures. In addition, in the U.S., larger customers may, in the future, ask for and receive higher rebates
on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a
product from a formulary can lead to reduced usage in the managed care organization.
In order to provide information about the Company’s pricing practices, the Company recently posted on its website its first Pricing Action
Transparency Report for the United States for the years 2010 - 2016. The report provides the Company’s average annual list price and net price increases across the
Company’s U.S. portfolio dating back to 2010. The report shows that the Company’s average annual net price increases (after taking sales deductions such as
rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits since 2010. Additionally, the weighted
average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of the ACA. In 2016,
the Company’s gross U.S. sales were reduced by 40.9% as a result of rebates, discounts and returns.
Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in funding health care and, in
that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government
decision making and budgetary actions with respect to its products.
The Company expects pricing pressures to increase in the future.
The health care industry in the United States will continue to be subject to increasing regulation and political action.
The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future
proposals to reform the health care system are considered by Congress and state legislatures.
In 2010, the United States enacted major health care reform legislation in the form of the ACA. Various insurance market reforms have advanced and
state and federal insurance exchanges were launched in 2014. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated
Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B
drug discount program.
The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the
Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health
care reform fee. The total annual industry fee was $3.0 billion in 2016 and will increase to $4.0 billion in 2017. The fee is assessed on each company in proportion
to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid.
On January 21, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the
ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to
determine the rebates drug manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not
material to Merck, at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation.
These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate
Program until April 1, 2020. The Company will evaluate the financial impact of these two elements when they become effective.
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The Company cannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what
impact they may have on the Company’s results of operations, financial condition or business.
Changes in laws and regulations could materially adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual
property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material
adverse effect on the Company’s business.
In particular, there is significant uncertainty about the future of the ACA and healthcare laws in general in the United States. The Company is
participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the
ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of
operations, financial condition or business.
The uncertainty in global economic conditions together with austerity measures being taken by certain governments could negatively affect the
Company’s operating results.
The uncertainty in global economic conditions may result in a further slowdown to the global economy that could affect the Company’s business by
reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the
Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material
adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In many international markets,
government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s
revenue performance in 2016. The Company anticipates these pricing actions and other austerity measures will continue to negatively affect revenue performance
in 2017.
If credit and economic conditions worsen, the resulting economic and currency impacts in the affected markets and globally could have a material
adverse effect on the Company’s results.
The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material negative
impact on the Company’s results of operations.
The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:
•
changes in medical reimbursement policies and programs and pricing restrictions in key markets;
• multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;
•
•
•
•
trade protection measures and import or export licensing requirements;
foreign exchange fluctuations;
diminished protection of intellectual property in some countries; and
possible nationalization and expropriation.
In addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a significant
geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood,
fire, earthquake, storm or disease.
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Failure to attract and retain highly qualified personnel could affect its ability to successfully develop and commercialize products.
The Company’s success is largely dependent on its continued ability to attract and retain highly qualified scientific, technical and management
personnel, as well as personnel with expertise in clinical research and development, governmental regulation and commercialization. Competition for qualified
personnel in the pharmaceutical industry is intense. The Company cannot be sure that it will be able to attract and retain quality personnel or that the costs of doing
so will not materially increase.
In the past, the Company has experienced difficulties and delays in manufacturing of certain of its products.
Merck has, in the past, experienced difficulties in manufacturing certain of its vaccines and other products. The Company may, in the future, experience
difficulties and delays inherent in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good
Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and
delays in product manufacturing; (ii) construction delays related to the construction of new facilities or the expansion of existing facilities, including those intended
to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites
and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous
supply. Manufacturing difficulties can result in product shortages, leading to lost sales and reputational harm to the Company.
The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its sales in emerging markets. However, there is no guarantee that the Company’s efforts to expand
sales in these markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have
very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain
qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these
countries have currencies that fluctuate substantially and if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial
performance within such countries could be adversely affected.
In addition, in China, commercial and economic conditions may adversely affect the Company’s growth prospects in that market. While the Company
continues to believe that China represents an important growth opportunity, these events, coupled with heightened scrutiny of the health care industry, may
continue to have an impact on product pricing and market access generally. The Company anticipates that the reported inquiries made by various governmental
authorities involving multinational pharmaceutical companies in China may continue.
For all these reasons, sales within emerging markets carry significant risks. However, a failure to maintain the Company’s presence in emerging
markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the
Company has entered and will enter into acquisition, licensing, borrowings or other financial transactions that may give rise to currency and interest rate exposure.
Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates and interest
rates could negatively affect the Company’s results of operations, financial position and cash flows as occurred with respect to Venezuela in 2015 and 2016.
In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While
hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations,
such attempts to mitigate these risks may be costly and not always successful.
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The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.
The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the
Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax
contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however,
due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
In addition, the Company may be affected by changes in tax laws, including tax rate changes, changes to the laws related to the remittance of foreign
earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law interpretations in domestic and
foreign jurisdictions.
Pharmaceutical products can develop unexpected safety or efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls,
withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.
Reliance on third party relationships and outsourcing arrangements could adversely affect the Company’s business.
The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third party service
providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its information technology
systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially
disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.
The Company is increasingly dependent on sophisticated software applications and computing infrastructure.
The Company is increasingly dependent on sophisticated software applications and computing infrastructure to conduct critical operations. Disruption,
degradation, or manipulation of these applications and systems through intentional or accidental means could impact key business processes. Cyber-attacks against
the Company’s applications and systems could result in exposure of confidential information, the modification of critical data, and/or the failure of critical
operations. Misuse of these applications and systems could result in the disclosure of sensitive personal information or the theft of trade secrets and other
confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency
of its business processes; the use of which can create new risks. Although the aggregate impact on the Company’s operations and financial condition has not been
material to date, the Company has been the target of events of this nature and expects them to continue. The Company monitors its data, information technology
and personnel usage of Company systems to reduce these risks and continues to do so on an ongoing basis for any current or potential threats. There can be no
assurance that the Company’s efforts to protect its data and systems will prevent service interruption or the loss of critical or sensitive information from the
Company’s or the Company’s third party providers’ databases or systems that could result in financial, legal, business or reputational harm to the Company.
Negative events in the animal health industry could have a negative impact on future results of operations.
Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal
health business. For example, the outbreak of disease carried by animals, such as Bovine Spongiform Encephalopathy or mad cow disease, could lead to their
widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely impact the Company’s results
of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt
production of vaccines at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to
animal health include
25
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epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the
Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.
Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.
The successful development, testing, manufacturing and commercialization of biologics, particularly human and animal health vaccines, is a long,
expensive and uncertain process. There are unique risks and uncertainties with biologics, including:
•
•
There may be limited access to, and supply of, normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological
materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or
transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the
use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.
The development, manufacturing and marketing of biologics are subject to regulation by the FDA, the EMA and other regulatory bodies. These
regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United
States, a BLA, including both preclinical and clinical trial data and extensive data regarding the manufacturing procedures, is required for human
vaccine candidates, and FDA approval is required for the release of each manufactured commercial lot.
• Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-
organisms. Each lot of an approved biologic must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing
biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control
procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and
quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the
Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the
products before and after such changes.
•
•
Biologics are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics
cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
The use of biologically derived ingredients can lead to allegations of harm, including infections or allergic reactions, or closure of product facilities
due to possible contamination. Any of these events could result in substantial costs.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. With respect to
product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has
evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as
such, has no insurance for certain product liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date. The Company
will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will
be sufficient to fully cover product liabilities that may arise.
Social media platforms present risks and challenges.
The inappropriate and/or unauthorized use of certain media vehicles could cause brand damage or information leakage or could lead to legal
implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or
comments about the Company on
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Table of Contents
any social networking web site could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive
information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social
Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely
secure and protect information. Identifying new points of entry as social media continues to expand also presents new challenges.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
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 management’s 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 “anticipates,” “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 Company’s 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
Company’s 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. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not
possible to predict or identify all such factors, they may include the following:
•
•
Competition from generic and/or biosimilar products as the Company’s products lose patent protection.
Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.
•
The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product
development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive
regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability
to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others.
Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.
•
Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and
governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.
•
Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the
Company’s business.
•
Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or
declining sales.
•
Significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services,
including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance
coverage.
•
Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental
concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the
profitability of existing products.
•
Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.
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•
Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape
for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to
affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.
•
•
Changes in tax laws including changes related to the taxation of foreign earnings.
Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards
Board and the SEC, that are adverse to the Company.
•
Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
The Company’s corporate headquarters is located in Kenilworth, New Jersey. The Company’s U.S. commercial operations are headquartered in Upper
Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania and
Kenilworth, New Jersey. The Company’s vaccines business is conducted through divisional headquarters located in West Point, Pennsylvania. Merck’s Animal
Health global headquarters is located in Madison, New Jersey. Principal U.S. research facilities are located in Rahway and Kenilworth, New Jersey, West Point,
Pennsylvania, Palo Alto, California, Boston, Massachusetts, and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are
located in Switzerland and China. Merck’s manufacturing operations are headquartered in Whitehouse Station, New Jersey. The Company also has production
facilities for human health products at nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or
has an interest in manufacturing plants or other properties in Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America,
and Asia.
Capital expenditures were $1.6 billion in 2016 , $1.3 billion in 2015 and $1.3 billion in 2014 . In the United States, these amounted to $1.0 billion in
2016 , $879 million in 2015 and $873 million in 2014 . Abroad, such expenditures amounted to $594 million in 2016 , $404 million in 2015 and $444 million in
2014 .
The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company
believes that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products
are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some
capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.
Item 3.
Legal Proceedings.
The information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note 10.
“Contingencies and Environmental Liabilities”.
Item 4. Mine Safety Disclosures.
Not Applicable.
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Table of Contents
Executive Officers of the Registrant (ages as of February 1, 2017)
All officers listed above serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or
understanding between the officer and the Board.
Name
Age
Offices and Business Experience
Kenneth C. Frazier
Adele D. Ambrose
Sanat Chattopadhyay
Robert M. Davis
Richard R. DeLuca, Jr.
Julie L. Gerberding
Mirian M. Graddick-Weir
Michael J. Holston
Rita A. Karachun
Roger M. Perlmutter, M.D., Ph.D.
Adam H. Schechter
Chairman, President and Chief Executive Officer (since December 2011); President and Chief
Executive Officer (January 2011-December 2011), President (May 2010-January 2011)
Senior Vice President and Chief Communications Officer (since November 2009)
Executive Vice President and President, Merck Manufacturing Division (since March 2016); Senior
Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)
Executive Vice President, Global Services and Chief Financial Officer (since April 2016);
Executive Vice President and Chief Financial Officer (April 2014-April 2016); Corporate Vice
President and President, Medical Products, Baxter International, Inc. (2010-March 2014)
Executive Vice President and President, Merck Animal Health (since September 2011)
Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public
Policy and Population Health (since July 2016); Executive Vice President for Strategic
Communications, Global Public Policy and Population Health (January 2015-July 2016); President,
Merck Vaccines (January 2010-January 2015)
Executive Vice President, Human Resources (since November 2009)
Executive Vice President and General Counsel (since July 2015); Executive Vice President and
Chief Ethics and Compliance Officer (June 2012-July 2015); Executive Vice President, General
Counsel and Board Secretary, Hewlett-Packard Company (2007-December 2011)
Senior Vice President Finance - Global Controller (since March 2014); Assistant Controller
(November 2009-March 2014)
Executive Vice President and President, Merck Research Laboratories (since April 2013); Executive
Vice President, Research and Development, Amgen Inc. (2001-February 2012)
Executive Vice President and President, Global Human Health (since May 2010)
62
60
57
50
54
61
62
54
53
64
52
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal market for trading of the Company’s Common Stock is the New York Stock Exchange (NYSE) under the symbol MRK. The Common
Stock market price information set forth in the table below is based on historical NYSE market prices.
The following table also sets forth, for the calendar periods indicated, the dividend per share information.
Cash Dividends Paid per Common Share
2016
2015
Common Stock Market Prices
2016
High
Low
2015
High
Low
Year
4th Q
3rd Q
2nd Q
$
$
1.84 $
1.80 $
0.46 $
0.45 $
0.46 $
0.45 $
0.46 $
0.45 $
4th Q
3rd Q
2nd Q
65.46 $
64.00 $
57.87 $
58.29 $
57.18 $
52.44 $
55.77 $
60.07 $
61.70 $
48.35 $
45.69 $
56.22 $
$
$
$
$
1st Q
0.46
0.45
1st Q
53.60
47.97
63.62
55.64
As of January 31, 2017, there were approximately 128,600 shareholders of record.
Issuer purchases of equity securities for the three months ended December 31, 2016 were as follows:
Issuer Purchases of Equity Securities
Period
October 1 — October 31
November 1 — November 30
December 1 — December 31
Total
Total Number
of Shares
Purchased (1)
5,451,200
5,447,800
5,618,000
16,517,000
Average Price
Paid Per
Share
$62.17
$61.39
$60.96
$61.50
($ in millions)
Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs (1)
$5,732
$5,397
$5,055
$5,055
(1)
All
shares
purchased
during
the
period
were
made
as
part
of
a
plan
approved
by
the
Board
of
Directors
in
March
2015
to
purchase
up
to
$10
billion
in
Merck
shares.
Shares
are
approximated.
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Table of Contents
The following graph assumes a $100 investment on December 31, 2011, and reinvestment of all dividends, in each of the Company’s Common Shares,
the S&P 500 Index, and a composite peer group of the major U.S.-based pharmaceutical companies, which are: AbbVie Inc., Bristol-Myers Squibb Company,
Johnson & Johnson, Eli Lilly and Company, and Pfizer Inc.
Performance Graph
Comparison of Five-Year Cumulative Total Return
Merck & Co., Inc., Composite Peer Group and S&P 500 Index
MERCK
PEER GRP.**
S&P 500
End of
Period Value
$186
208
198
2016/2011
CAGR**
13%
16%
15%
MERCK
PEER GRP.
S&P 500
2011
100.00
100.00
100.00
2012
113.09
115.52
115.99
2013
143.42
160.92
153.55
2014
167.76
188.77
174.55
2015
161.33
197.89
176.95
2016
185.64
208.45
198.10
Compound
Annual
Growth
Rate
*
** Peer
group
average
was
calculated
on
a
market
cap
weighted
basis.
In
addition,
AbbVie
Inc.
replaced
Abbott
Laboratories
in
the
peer
group
beginning
2013
following
the
spin
off
from
Abbott
Laboratories.
This Performance Graph will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934, except to the extent that the Company specifically incorporates it by reference. In addition, the Performance Graph will not be deemed to be
“soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Regulation S-K, or to the liabilities of section 18
of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be treated as soliciting material or
specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.
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Table of Contents
Item 6.
Selected Financial Data.
The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report.
Merck & Co., Inc. and Subsidiaries
($
in
millions
except
per
share
amounts)
Results for Year:
Sales
Materials and production
Marketing and administrative
Research and development
Restructuring costs
Other (income) expense, net
Income before taxes
Taxes on income
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Merck & Co., Inc.
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common
shareholders
Cash dividends declared
Cash dividends declared per common share
Capital expenditures
Depreciation
Average common shares outstanding (millions)
Average common shares outstanding assuming dilution (millions)
Year-End Position:
Working capital
(5)
Property, plant and equipment, net
Total assets (5)
Long-term debt (5)
Total equity
Year-End Statistics:
Number of stockholders of record
Number of employees
2016 (1)
2015
(2)
2014 (3)
2013
2012 (4)
$
39,807
$
39,498
$
42,237
$
13,891
9,762
10,124
651
720
4,659
718
3,941
21
3,920
1.42
1.41
5,135
$
$
14,934
10,313
6,704
619
1,527
5,401
942
4,459
17
4,442
1.58
1.56
5,115
$
$
16,768
11,606
7,180
1,013
(11,613)
17,283
5,349
11,934
14
11,920
4.12
4.07
5,156
$
$
1.85
$
1.81
$
1.77
$
1,614
1,611
2,766
2,787
1,283
1,593
2,816
2,841
1,317
2,471
2,894
2,928
$
$
$
$
13,410
$
10,550
$
14,198
$
12,026
95,377
24,274
40,308
129,500
68,000
12,507
101,677
23,829
44,767
135,500
68,000
13,136
98,096
18,629
48,791
142,000
70,000
44,033 $
16,954
11,911
7,503
1,709
411
5,545
1,028
4,517
113
4,404
1.49 $
1.47 $
5,132
1.73 $
1,548
2,225
2,963
2,996
17,461 $
14,973
105,370
20,472
52,326
149,400
77,000
47,267
16,446
12,776
8,168
664
474
8,739
2,440
6,299
131
6,168
2.03
2.00
5,173
1.69
1,954
1,999
3,041
3,076
15,922
16,030
105,876
16,212
55,463
157,400
83,000
(1)
Amounts
for
2016
include
a
charge
related
to
the
settlement
of
worldwide
patent
litigation
related
to
Keytruda .
(2)
Amounts
for
2015
include
a
net
charge
related
to
the
settlement
of
Vioxx shareholder
class
action
litigation,
foreign
exchange
losses
related
to
Venezuela,
gains
on
the
dispositions
of
businesses
and
other
assets
and
the
favorable
benefit
of
certain
tax
items.
(3)
Amounts
for
2014
reflect
the
divestiture
of
Merck’s
Consumer
Care
business
on
October
1,
2014,
including
a
gain
on
the
sale,
as
well
as
a
gain
recognized
on
an
option
exercise
by
AstraZeneca,
gains
on
the
dispositions
of
other
businesses
and
assets,
and
a
loss
on
extinguishment
of
debt.
(4)
Amounts
for
2012
include
a
net
charge
recorded
in
connection
with
the
settlement
of
certain
shareholder
litigation.
(5)
Amounts
have
been
restated
to
give
effect
to
the
adoption
of
accounting
guidance
issued
by
the
Financial
Accounting
Standards
Board.
See
Note
2
to
Item
8(a).
“Financial
Statements.”
32
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Description of Merck’s Business
Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines,
vaccines, biologic therapies and animal health products. The Company’s operations are principally managed on a products basis and include four operating
segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable segment.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint
ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders.
The Company 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, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric,
adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers,
physician distributors and government entities. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD
(SPMSD) joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets that were
previously part of the joint venture.
The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the
Company sells to veterinarians, distributors and animal producers. The Company’s Healthcare Services segment provides services and solutions that focus on
engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the
Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014. On October 1, 2014, the Company divested its Consumer
Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products.
Overview
During 2016, Merck continued to execute its innovation strategy and the Company’s sustained investment in research yielded a number of recent
approvals and regulatory milestones across various therapeutic areas. The Company received several approvals in 2016 that include expanded indications for
Keytruda
, the Company’s anti-PD-1 (programmed death receptor-1) therapy, which was approved by the U.S. Food and Drug Administration (FDA) for the first-
line treatment of metastatic non-small-cell lung cancer (NSCLC), as well as for the treatment of head and neck cancer. Additionally, in 2016, both the FDA and the
European Commission (EC) approved Zepatier
, a once-daily, single tablet combination therapy for the treatment of chronic hepatitis C virus (HCV) genotype
(GT) 1 or GT4 infection, with ribavirin in certain patient populations.
Worldwide sales were $39.8 billion in 2016 , an increase of 1% compared with 2015 , including a 2% unfavorable effect from foreign exchange. Sales
growth was driven by oncology, HCV, vaccine, and hospital acute care products, reflecting in part the ongoing launches of Keytruda
, Zepatier
and Bridion
, as
well as positive performance from Merck’s Animal Health business. Growth in these areas was largely offset by the effects of generic and biosimilar competition
that resulted in declines for products such as Remicade
and Nasonex
.
Business development remains an important component of the Company’s overall strategy as Merck seeks to identify the best external innovation to
augment its portfolio and pipeline, with a particular focus on early-to-mid-stage pipeline assets. Merck looks for growth opportunities that meet the Company’s
strategic criteria. While looking for the best scientific opportunities, Merck remains financially disciplined, pursuing those business opportunities that the Company
believes can contribute to long-term growth and sustainable value for shareholders.
In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a drug discovery company focused on the development of innovative medicines for the
treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. In July 2016, Merck acquired Afferent
Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the P2X3 receptor for the
treatment of common, poorly-managed, neurogenic conditions, such as chronic cough. In addition, in 2016, Merck entered into a strategic collaboration and license
agreement with Moderna Therapeutics (Moderna) to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines.
33
Table of Contents
Merck continues to support its in-line portfolio, as well as ongoing and upcoming product launches. Keytruda
is launching around the world in multiple
indications. In 2016, Merck achieved multiple additional regulatory milestones for Keytruda
including approval from the FDA for the first-line treatment of
patients with NSCLC whose tumors have high PD-L1 expression (tumor proportion score [TPS] of 50% or more) as determined by an FDA-approved test, with no
EGFR or ALK genomic tumor aberrations and also for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma with disease
progression on or after platinum-containing chemotherapy. Additionally, in 2016, the EC approved Keytruda
for the treatment of locally advanced or metastatic
NSCLC in patients whose tumors express PD-L1 and who have received at least one prior chemotherapy regimen. In January 2017, the EC approved Keytruda
for
the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression (TPS of 50% or more) with no EGFR or ALK positive tumor
mutations. Additionally, the Company is continuing its launch of Zepatier
in the United States and in emerging markets and is now launching in the European
Union (EU) and in Japan.
Merck is focusing its research efforts on the therapeutic areas that it believes can have the most impact on human health, such as oncology, diabetes,
cardiometabolic disease, resistant microbial infection and Alzheimer’s disease. In addition to the recent regulatory approvals discussed above, the Company has
continued to advance other programs in its late-stage pipeline with several regulatory submissions. Merck has five supplemental biologics license applications
(sBLA) under Priority Review with the FDA for Keytruda
including: for use in combination with chemotherapy for the first-line treatment of patients with
metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations; for the treatment of patients
with classical Hodgkin lymphoma; for the treatment of previously treated patients with advanced microsatellite instability-high cancer; for the first-line treatment
of patients with locally advanced or metastatic urothelial cancer, including most bladder cancers; and for the second-line treatment of patients with locally
advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy. Merck is driving a broad immuno-oncology
development program and investing in the long-term potential for Keytruda
to become foundational in the treatment of a range of cancers. The Keytruda
clinical
development program includes more than 400 clinical trials in more than 30 tumor types; over 200 of these trials combine Keytruda
with other cancer treatments.
MK-1293, an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes being developed in a collaboration, is also under review with
the FDA.
In addition to Phase 3 programs for Keytruda
in the therapeutic areas of breast, colorectal, esophageal, gastric, hepatocellular, multiple myeloma, and
renal cancers, the Company also has candidates in Phase 3 clinical development in several other therapeutic areas (see “Research and Development” below).
During the past year, the Company continued its focus on productivity improvements, looking for opportunities to reallocate resources across the
portfolio to grow its strongest brands and to support the most promising assets in its pipeline. Marketing
and
administrative
expenses declined in 2016 as compared
with 2015 reflecting in part this continued focus by the Company on prioritizing its resources to the highest growth areas. Research
and
development
expenses in
2016 reflect increased clinical development spending as the Company continues to invest in the pipeline.
In November 2016, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.47 per share from $0.46 per share. During 2016, the
Company returned $8.6 billion to shareholders through dividends and share repurchases.
In January 2017, Merck entered into a settlement and license agreement to resolve worldwide patent infringement litigation related to Keytruda
. In
connection with the settlement, Merck recorded a pretax charge of $625 million in the fourth quarter of 2016 (see Note 10 to the consolidated financial statements).
Earnings per common share assuming dilution attributable to common shareholders (EPS) for 2016 were $1.41 compared with $1.56 in 2015 . EPS in
both years reflect the impact of acquisition and divestiture-related costs, including a charge in 2016 related to the uprifosbuvir clinical development program, as
well as restructuring costs and certain other items. Non-GAAP EPS, which excludes these items, were $3.78 in 2016 and $3.59 in 2015 (see “Non-GAAP Income
and Non-GAAP EPS” below).
34
Table of Contents
Operating Results
Sales
Worldwide sales were $39.8 billion in 2016, an increase of 1% compared with 2015. Foreign exchange unfavorably affected global sales performance
by 2% in 2016, which includes a lower benefit from revenue hedging activities as compared with 2015. Revenue growth primarily reflects higher sales in the
oncology franchise largely from Keytruda
, the launch of the HCV treatment Zepatier,
and growth in vaccine products, including Gardasil/Gardasil
9, Varivax
and
Pneumovax
23. Also contributing to sales growth in 2016 were higher sales of hospital acute care products including Bridion
and Noxafil
, growth within the
diabetes franchise of Januvia
and Janumet
, as well as higher sales of Animal Health products, particularly Bravecto
. These increases were partially offset by sales
declines attributable to the ongoing effects of generic and biosimilar competition for certain products, including Remicade
and Nasonex
, along with other products
within Diversified Brands. Declines in Isentress
, PegIntron
and Dulera
Inhalation Aerosol also partially offset revenue growth in 2016. Sales performance in 2016
reflects a decline of approximately $625 million due to reduced operations by the Company in Venezuela as a result of evolving economic conditions and volatility
in that country.
Sales in the United States were $18.5 billion in 2016 , an increase of 5% compared with $17.5 billion in 2015 . Within the Pharmaceutical segment,
sales in the United States grew 5% in 2016 driven primarily by the launches of Zepatier
and Bridion
, along with higher sales of Keytruda
and Gardasil/Gardasil
9,
partially offset by lower sales of Nasonex
, Cubicin
, Dulera
Inhalation Aerosol, and Isentress
.
International sales were $21.3 billion in 2016 , a decline of 3% compared with $22.0 billion in 2015 . Foreign exchange unfavorably affected
international sales performance by 4% in 2016 . International sales within the Pharmaceutical segment declined 3% in 2016, including a 3% unfavorable effect
from foreign exchange, largely reflecting declines in certain emerging markets, offset by an increase in Japan. Sales in emerging markets were $6.7 billion in 2016
, a decline of 9% including a 6% unfavorable effect from foreign exchange, driven primarily by reduced operations in Venezuela, partially offset by growth in other
markets. Sales in Japan grew 6% in 2016 , to $2.8 billion, which includes a 10% favorable effect from foreign exchange. Excluding the favorable effect of foreign
exchange, the sales decline in Japan was largely driven by the loss of market exclusivity for Singulair
combined with the ongoing generic erosion for products
within Diversified Brands, partially offset by higher sales of Belsomra
. Sales in Europe were $7.7 billion in 2016 , essentially flat as compared with 2015,
including a 2% unfavorable effect from foreign exchange. Excluding the unfavorable effect of foreign exchange, sales performance in Europe primarily reflects
volume growth in Keytruda
, Cubicin
, Simponi
, Adempas, Liptruzet
, and the Januvia
franchise, partially offset by ongoing biosimilar competition and generic
erosion for certain products, particularly Remicade,
and other pricing pressures in this region. Total international sales represented 54% and 56% of total sales in
2016 and 2015 , respectively.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States,
health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to
substantial rebates. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other
austerity measures negatively affected the Company’s revenue performance in 2016 . The Company anticipates these pricing actions and other austerity measures
will continue to negatively affect revenue performance in 2017 .
35
Table of Contents
Worldwide sales were $39.5 billion in 2015, a decline of 6% compared with 2014 including a 6% unfavorable effect from foreign exchange. The
acquisition of Cubist Pharmaceuticals, Inc. (Cubist) in 2015, the divestiture of Merck’s Consumer Care (MCC) business in 2014, as well as product divestitures and
the termination of the Company’s relationship with AstraZeneca LP (AZLP) also in 2014, as discussed below, had a net unfavorable impact to sales of
approximately 3%. In addition, sales performance in 2015 reflects declines in PegIntron
and Victrelis
, Remicade
, Pneumovax
23, Nasonex
, and Vytorin
. These
declines were partially offset by volume growth in Keytruda
, Januvia
and Janumet
, Gardasil/Gardasil
9, Noxafil
, Simponi
, Implanon/Nexplanon
, Invanz
,
Dulera
Inhalation Aerosol, and Bridion
, as well as volume growth in Animal Health products and higher third-party manufacturing sales.
In January 2015, the Company acquired Cubist, which contributed sales of $1.3 billion to Merck’s revenues in 2015. In 2014, the Company divested
certain ophthalmic products in several international markets (most of which closed on July 1, 2014). In addition, on October 1, 2014, the Company divested its
MCC business including the prescription rights to Claritin and Afrin. The sales decline in 2015 attributable to these divestitures was approximately $1.9 billion of
which $1.5 billion related to the Consumer Care segment and $400 million related to the Pharmaceutical segment. Also, in 2014, the Company sold the U.S.
marketing rights to Saphris
, an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults, which resulted in revenue of $232
million. Additionally, the Company’s relationship with AZLP terminated on June 30, 2014; therefore, effective July 1, 2014, the Company no longer records
supply sales to AZLP. These supply sales were $463 million in 2014 through the termination date and were reflected in the Alliances segment.
36
Table of Contents
Sales of the Company’s products were as follows:
($
in
millions)
Primary Care and Women’s Health
Cardiovascular
Zetia
Vytorin
Diabetes
Januvia
Janumet
General Medicine and Women’s Health
NuvaRing
Implanon/Nexplanon
Dulera
Follistim
AQ
Hospital and Specialty
Hepatitis
Zepatier
HIV
Isentress
Hospital Acute Care
Cubicin
(1)
Noxafil
Invanz
Cancidas
Bridion
Primaxin
Immunology
Remicade
Simponi
Oncology
Keytruda
Emend
Temodar
Diversified Brands
Respiratory
Singulair
Nasonex
Other
Cozaar/Hyzaar
Arcoxia
Fosamax
Zocor
Vaccines (2)
Gardasil/Gardasil
9
ProQuad/M-M-R
II /Varivax
Zostavax
RotaTeq
Pneumovax
23
Other pharmaceutical (3)
Total Pharmaceutical segment sales
Other segment sales (4)
Total segment sales
Other (5)
$
2016
2015
2014
$
2,560
1,141
3,908
2,201
777
606
436
355
555
1,387
1,087
595
561
558
482
297
1,268
766
1,402
549
283
915
537
511
450
284
186
2,173
1,640
685
652
641
4,703
35,151
3,862
39,013
794
$
2,526
1,251
3,863
2,151
732
588
536
383
—
1,511
1,127
487
569
573
353
313
1,794
690
566
535
312
931
858
667
471
359
217
1,908
1,505
749
610
542
5,105
34,782
3,667
38,449
1,049
2,650
1,516
3,931
2,071
723
502
460
412
—
1,673
25
402
529
681
340
329
2,372
689
55
553
350
1,092
1,099
806
519
470
258
1,738
1,394
765
659
746
6,233
36,042
5,758
41,800
437
(1)
Sales
of
Cubicin in
2015
represent
sales
subsequent
to
the
Cubist
acquisition
date.
Sales
of
Cubicin in
2014
reflect
sales
in
Japan
pursuant
to
a
previously
existing
licensing
agreement.
(2)
These
amounts
do
not
reflect
sales
of
vaccines
sold
in
most
major
European
markets
through
the
Company’s
joint
venture,
SPMSD,
the
results
of
which
are
reflected
in
equity
income
from
affiliates
which
is
included
in
Other (income) expense, net .
These
amounts
do,
however,
reflect
supply
sales
to
SPMSD.
On
December
31,
2016,
Merck
and
Sanofi
Pasteur
terminated
the
SPMSD
joint
venture
(see
Note
8
to
the
consolidated
financial
statements).
(3)
Other
pharmaceutical
primarily
reflects
sales
of
other
human
health
pharmaceutical
products,
including
products
within
the
franchises
not
listed
separately.
(4)
Represents
the
non-reportable
segments
of
Animal
Health,
Healthcare
Services
and
Alliances,
as
well
as
Consumer
Care
until
its
divestiture
on
October
1,
2014.
The
Alliances
segment
includes
revenue
from
the
Company’s
relationship
with
AZLP
until
termination
on
June
30,
2014.
(5)
Other
is
primarily
comprised
of
miscellaneous
corporate
revenues,
including
revenue
hedging
activities,
as
well
as
third-party
manufacturing
sales.
Other
in
2016
and
2014
also
includes
approximately
$170
million
and
$232
million,
respectively,
in
connection
with
the
sale
of
the
marketing
rights
to
certain
products
.
$
39,807
$
39,498
$
42,237
37
Table of Contents
Pharmaceutical Segment
Primary
Care
and
Women’s
Health
Cardiovascular
Combined global sales of Zetia
(marketed in most countries outside the United States as Ezetrol
) and Vytorin
(marketed outside the United States as
Inegy
), medicines for lowering LDL cholesterol, were $3.7 billion in 2016, a decline of 2% compared with 2015 including a 1% unfavorable effect from foreign
exchange. In addition, in 2016, the Company recorded sales of $146 million for Atozet
, a medicine for lowering LDL cholesterol, which the Company markets in
certain countries outside of the United States. Global sales of the ezetimibe family (including Atozet
) were $3.8 billion in 2016, growth of 1% compared with
2015, reflecting volume growth in Europe and higher pricing in the United States, largely offset by lower sales in Venezuela due to reduced operations in this
country and lower volumes in the United States reflecting in part generic competition for Zetia
. By agreement, a generic manufacturer launched a generic version
of Zetia
in the United States in December 2016 and the Company is experiencing a rapid decline in U.S. Zetia
sales. The Company anticipates the decline will
accelerate in future periods. The U.S. patent and exclusivity periods for Zetia
and Vytorin
otherwise expire in April 2017 and the Company anticipates declines in
U.S. Zetia
and Vytorin
sales thereafter. U.S. sales of Zetia
and Vytorin
were $1.6 billion and $473 million, respectively, in 2016. The Company has market
exclusivity in major European markets for Ezetrol
until April 2018 and for Inegy
until April 2019. Combined worldwide sales of the ezetimibe family were $3.8
billion in 2015, a decline of 9% compared with 2014 including an 8% unfavorable effect from foreign exchange. The sales decline was driven primarily by lower
volumes of Ezetrol
in Canada where it lost market exclusivity in September 2014, as well as by lower volumes in the United States, partially offset by higher
pricing in the United States.
Pursuant to a collaboration between Merck and Bayer AG (Bayer) (see Note 3 to the consolidated financial statements), Merck has lead commercial
rights for Adempas, a novel cardiovascular drug for the treatment of pulmonary arterial hypertension, in countries outside the Americas while Bayer has lead rights
in the Americas, including the United States. In 2016, Merck began promoting and distributing Adempas in Europe. Transition in other Merck territories will
continue in 2017. Merck recorded sales for Adempas of $169 million in 2016, which includes sales in Merck’s marketing territories, as well as Merck’s share of
profits from the sale of Adempas in Bayer’s marketing territories.
In September 2016, Merck sold the marketing rights for Zontivity
in the United States and Canada to Aralez Pharmaceuticals Inc. for a $25 million
upfront payment and royalties at graduated rates, plus potential future consideration dependent upon the achievement of certain aggregate annual sales-based
milestones. Previously, in March 2016, following several business decisions that reduced sales expectations for Zontivity
in the United States and Europe, the
Company lowered its cash flow projections for Zontivity
. The Company utilized market participant assumptions and considered several different scenarios to
determine the fair value of the intangible asset related to Zontivity
that, when compared with its related carrying value, resulted in an impairment charge of $252
million recorded in Materials
and
production
costs in 2016.
Diabetes
Worldwide combined sales of Januvia
and Janumet
, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $6.1 billion in
2016, an increase of 2% compared with 2015. Sales growth was driven primarily by higher volumes in the United States, Europe and Canada, partially offset by
pricing pressures in the United States and Europe, and lower sales in Venezuela due to the Company’s reduced operations in that country. Combined global sales of
Januvia
and Janumet
were $6.0 billion in 2015, essentially flat as compared with 2014 including a 7% unfavorable effect from foreign exchange. Sales
performance reflects higher volumes and pricing in the United States, as well as volume growth in emerging markets and Europe. Volume declines of co-marketed
sitagliptin in Japan due to the timing of sales to the licensee partially offset growth in 2015.
General Medicine and Women’s Health
Worldwide sales of NuvaRing
, a vaginal contraceptive product, were $777 million in 2016, an increase of 6% compared with 2015, and were $732
million in 2015, an increase of 1% compared with 2014. Foreign exchange unfavorably affected global sales performance by 1% and 7% in 2016 and 2015,
respectively. Sales growth in both years largely reflects higher pricing in the United States. Volume declines in Europe partially offset revenue growth in 2016. In
August 2016, the U.S. District Court ruled that the Company’s delivery system patent for NuvaRing
is invalid. The Company is appealing this verdict to the U.S.
Court of Appeals for the Federal Circuit. However, given the U.S. District Court’s decision, there may be generic entrants into the U.S. market in advance of the
April 2018 patent
38
Table of Contents
expiration. If this should occur, the Company anticipates a significant decline in U.S. NuvaRing
sales thereafter. U.S. sales of NuvaRing
were $576 million in 2016.
As a result of the unfavorable U.S. District Court decision, the Company evaluated the intangible asset related to NuvaRing
for impairment and concluded that it
was not impaired. The intangible asset value for NuvaRing
was $319 million at December 31, 2016.
Worldwide sales of Implanon/Nexplanon
, single-rod subdermal contraceptive implants, grew to $606 million in 2016, an increase of 3% compared
with 2015 including a 3% unfavorable effect from foreign exchange. Sales growth reflects higher demand in the United States, partially offset by declines in certain
emerging markets, particularly in Venezuela. Implanon/Nexplanon
sales rose to $588 million in 2015, a 17% increase compared with 2014 including a 6%
unfavorable effect from foreign exchange. The increase was driven primarily by higher demand in the United States and in emerging markets.
Global sales of Dulera
Inhalation Aerosol, a combination medicine for the treatment of asthma, were $436 million in 2016, a decline of 19% compared
with 2015 including a 1% unfavorable effect from foreign exchange. The decline was driven by lower sales in the United Sales reflecting competitive pricing
pressures that were partially offset by higher demand. Worldwide sales of Dulera
Inhalation Aerosol grew 16% in 2015 to $536 million driven primarily by higher
demand in the United States.
Global sales of Follistim
AQ
(marketed in most countries outside the United States as Puregon
), a fertility treatment, were $355 million in 2016, a
decline of 7% compared with 2015 including a 2% unfavorable effect from foreign exchange. The sales decline primarily reflects lower volumes in Europe due in
part to supply issues and lower demand in certain emerging markets. Worldwide sales of Follistim
AQ
were $383 million in 2015, a decline of 7% compared with
2014, reflecting a 9% unfavorable effect from foreign exchange that was offset by higher pricing in the United States.
In 2016, the Company determined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that
included both Grastek
and Ragwitek
allergy immunotherapy tablets for sublingual use. This decision was not due to efficacy or safety concerns for the tablets.
Merck provided ALK-Abelló with six months’ notice that it is terminating the agreement and therefore these compounds will be returned to ALK-Abelló. In
connection with this decision, the Company wrote-off $95 million of intangible assets related to these products (see Note 7 to the consolidated financial
statements).
Hospital
and
Specialty
Hepatitis
Global sales of Zepatier
were $555 million in 2016. Zepatier
was approved by the FDA in January 2016 for the treatment of adult patients with chronic
HCV GT1 or GT4 infection, with ribavirin in certain patient populations. Zepatier
was approved by the EC in July 2016 and became available in European markets
in late November 2016. Launches are expected to continue across the EU in 2017. The Company is also launching Zepatier
in Japan and in emerging markets.
Worldwide sales of PegIntron
, a treatment for chronic HCV, declined 65% in 2016 to $63 million and decreased 52% in 2015 to $182 million. The
declines were driven by lower volumes in nearly all regions as the availability of newer therapeutic options resulted in continued loss of market share.
Global sales of Victrelis
, an oral medicine for the treatment of chronic HCV, were $18 million in 2015, a decline of 89% compared with sales of $153
million in 2014, driven by lower volumes in Europe and emerging markets as the availability of newer therapeutic options resulted in continued loss of market
share. Sale of Victrelis
were de
minimis
in 2016.
HIV
Worldwide sales of Isentress,
an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection,
were $1.4 billion in 2016, a decline of 8% compared with 2015 including a 2% unfavorable effect from foreign exchange. The sales decline was driven primarily
by lower volumes in the United States, as well as lower demand and pricing in Europe due to competitive pressures, partially offset by a favorable adjustment to
discount reserves in the United States and higher demand in certain emerging markets. Global sales of Isentress
were $1.5 billion in 2015, a decline of 10%
compared with 2014 including an 8% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States and lower
demand and
39
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pricing in Europe due to competitive pressures, partially offset by higher volumes in Latin America and higher pricing in the United States.
Hospital Acute Care
Global sales of Cubicin
, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia when caused by designated susceptible
organisms, were $1.1 billion in 2016, a decline of 4% compared with 2015. The U.S. composition patent for Cubicin
expired in June 2016 and the Company is
experiencing a significant decline in U.S. Cubicin
sales and expects the decline to continue. The sales decline in the United States was partially offset by sales of
Cubicin
in certain international markets for which the Company acquired marketing rights in the fourth quarter of 2015 (including Europe, Latin America,
Australia, New Zealand, China, South Africa and certain other Asia Pacific countries). The Company anticipates it will lose market exclusivity for Cubicin
in
Europe in 2017.
Worldwide sales of Noxafil
, for the prevention of invasive fungal infections, grew 22% in 2016 to $595 million driven primarily by higher pricing in
the United States, volume growth in Europe reflecting an ongoing positive impact from the approval of new formulations, and higher demand in emerging markets.
Global sales of Noxafil
rose 21% in 2015 to $487 million driven by pricing and higher demand in the United States, as well as volume growth in Europe reflecting
a positive impact from the approval of new formulations. Foreign exchange unfavorably affected global sales performance by 3% in 2016 and 12% in 2015.
Global sales of Invanz
, for the treatment of certain infections, were $561 million in 2016, a decline of 1% compared with 2015 including a 2%
unfavorable effect from foreign exchange. Sales performance in 2016 reflects volume growth in certain emerging markets and higher pricing in the United States,
largely offset by a decline in Venezuela. Worldwide sales of Invanz
were $569 million in 2015, an increase of 8% compared with 2014, reflecting higher sales in
the United States and volume growth in emerging markets that was partially offset by a 9% unfavorable effect from foreign exchange. The Company will lose U.S.
patent protection for Invanz
in November 2017 and the Company anticipates a significant decline in U.S. Invanz
sales thereafter. U.S. sales of Invanz
were $329
million in 2016.
Global sales of Cancidas
, an anti-fungal product sold primarily outside of the United States, were $558 million in 2016, a decline of 3% compared with
2015, reflecting a 4% unfavorable effect from foreign exchange and pricing declines in Europe that were offset by higher volumes in certain emerging markets,
particularly in China. Worldwide sales of Cancidas
were $573 million in 2015, a decrease of 16% compared with 2014 reflecting a 12% unfavorable effect from
foreign exchange and volume declines in certain emerging markets. The EU compound patent for Cancidas
expires in April 2017 and the Company anticipates a
decline in Cancidas
sales in those European markets thereafter. Sales of Cancidas
in Europe were $297 million in 2016.
Global sales of Bridion
, for the reversal of two types of neuromuscular blocking agents used during surgery, were $482 million in 2016, growth of 37%
compared with 2015 including a 2% favorable effect from foreign exchange. Sales growth reflects volume growth in most markets, including in the United States
where it was approved by the FDA in December 2015, partially offset by a decline in Venezuela due to reduced operations by the Company in this country. Sales
of Bridion
increased 4% in 2015 to $353 million driven by volume growth in international markets. Foreign exchange unfavorably affected global sales
performance by 19% in 2015.
In October 2016, Merck announced that the FDA approved Zinplava
Injection 25 mg/mL. Zinplava
is indicated to reduce recurrence of Clostridium
difficile
infection (CDI) in patients 18 years of age or older who are receiving antibacterial drug treatment of CDI and are at high risk for CDI recurrence. Zinplava
became available in the United States in February 2017. Zinplava
was approved by the EC in January 2017. The Company anticipates Zinplava
will be available in
the EU in March 2017.
Immunology
Sales of Remicade,
a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $1.3 billion in 2016, a
decline of 29% compared with 2015, and were $1.8 billion in 2015, a decline of 24% compared with 2014. Foreign exchange unfavorably affected sales
performance by 1% in 2016 and by 14% in 2015. In February 2015, the Company lost market exclusivity for Remicade
in major European markets and no longer
has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar
competition and expects the declines to continue.
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Sales of Simponi
, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey),
were $766 million in 2016, an increase of 11% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales growth was driven primarily
by higher volumes in Europe reflecting in part an ongoing positive impact from the ulcerative colitis indication. Sales of Simponi
were $690 million in 2015,
essentially flat as compared with 2014, driven by higher demand in Europe, reflecting in part an ongoing positive impact from the ulcerative colitis indication,
which was offset by a 19% unfavorable effect from foreign exchange.
Oncology
Sales of Keytruda
, an anti-PD-1 therapy, were $1.4 billion in 2016, $566 million in 2015 and $55 million in 2014. The year-over-year increases
primarily reflect higher sales in the United States, Europe and in emerging markets as the Company continues to launch Keytruda
.
In October 2016, Merck announced that the FDA approved Keytruda
for the first-line treatment of patients with NSCLC whose tumors have high PD-
L1 expression (TPS of 50% or more) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations. With this new indication,
Keytruda
is now the only anti-PD-1 therapy to be approved in the first-line treatment setting for these patients. In addition, the FDA approved a labeling update to
include data from KEYNOTE-010 in the second-line or greater treatment setting for patients with metastatic NSCLC whose tumors express PD-L1 (TPS of 1% or
more) as determined by an FDA-approved test, with disease progression on or after platinum-containing chemotherapy. Patients with EGFR or ALK genomic
tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving Keytruda
. In December 2016, Keytruda
was
approved in Japan for the treatment of certain patients with PD-L1-positive unresectable advanced/recurrent NSCLC in the first- and second-line treatment settings.
Additionally, in January 2017, the EC approved Keytruda
for the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression
(TPS of 50% or more) with no EGFR or ALK positive tumor mutations.
In August 2016, Merck announced that the FDA approved Keytruda
for the treatment of patients with recurrent or metastatic head and neck squamous
cell carcinoma (HNSCC) with disease progression on or after platinum-containing chemotherapy.
Keytruda
is now approved in the United States and in the EU for the treatment of previously untreated metastatic NSCLC in patients whose tumors
express high levels of PD-L1 and previously treated metastatic NSCLC in patients whose tumors express PD-L1, as well as for the treatment of advanced
melanoma. Keytruda
is also approved in the United States for previously treated recurrent or metastatic HNSCC. The Company has launched Keytruda
in over 50
markets globally.
Merck has five sBLAs under Priority Review with the FDA for Keytruda
including: for use in combination with chemotherapy for the first-line
treatment of patients with metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations;
for the treatment of patients with classical Hodgkin lymphoma; for the treatment of previously treated patients with advanced microsatellite instability-high cancer;
for the first-line treatment of patients with locally advanced or metastatic urothelial cancer, including most bladder cancers; and for the second-line treatment of
patients with locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy. The Company plans
additional regulatory filings in the United States and other countries. The Keytruda
clinical development program includes studies across a broad range of cancer
types (see “Research and Development” below). In January 2017, Merck entered into a settlement and license agreement to resolve worldwide patent infringement
litigation related to Keytruda
(see Note 10 to the consolidated financial statements).
Global sales of Emend
, for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $549 million in 2016, an increase of
3% compared with 2015 including a 1% unfavorable effect from foreign exchange, largely reflecting higher pricing in the United States, partially offset by volume
declines in Japan. In February 2016, Merck announced that the FDA approved a supplemental new drug application for single-dose Emend
for injection for the
prevention of delayed nausea and vomiting in adults receiving initial and repeat courses of moderately emetogenic chemotherapy. Worldwide sales of Emend
were
$535 million in 2015, a decline of 3% reflecting a 6% unfavorable effect from foreign exchange that was partially offset by higher pricing in the United States and
volume growth in Europe.
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Diversified
Brands
Merck’s diversified brands include human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no
longer protected by patents in developed markets, but continue to be a core part of the Company’s offering in other markets around the world.
Respiratory
Worldwide sales of Singulair,
a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, were
$915 million in 2016, a decrease of 2% compared with 2015 including a 2% favorable effect from foreign exchange. Sales performance primarily reflects lower
volumes in Japan. The patents that provided market exclusivity for Singulair
in Japan expired in February and October of 2016. As a result, the Company is
experiencing Singulair
volume declines in Japan and expects the decline to continue. Singulair
sales in Japan were $455 million in 2016. In years prior to 2016, the
Company lost market exclusivity for Singulair
in the United States and in most major international markets with the exception of Japan. The Company no longer
has market exclusivity for Singulair
in any major market. Global sales of Singulair
were $931 million in 2015, a decline of 15% compared with 2014 including a
10% unfavorable effect from foreign exchange. The sales decline in 2015 was driven primarily by lower volumes in Japan and lower demand in Europe as a result
of generic competition.
Global sales of Nasonex
, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were $537 million in 2016, a decline of 37%
compared with 2015, driven primarily by lower volumes in the United States resulting from generic competition. In March 2016, Apotex launched a generic
version of Nasonex
in the United States pursuant to a June 2012 U.S. District Court for the District of New Jersey ruling (upheld on appeal to the U.S. Court of
Appeals for the Federal Circuit) holding that Apotex’s generic version of Nasonex
does not infringe on the Company’s formulation patent. Accordingly, the
Company is experiencing a substantial decline in U.S. Nasonex
sales and expects the decline to continue. The decline in global Nasonex
sales in 2016 was also
driven by lower volumes and pricing in Europe from ongoing generic erosion and lower sales in Venezuela due to reduced operations by the Company in this
country. Worldwide sales of Nasonex
were $858 million in 2015, a decline of 22% compared with 2014 including a 6% unfavorable effect from foreign exchange.
The decline was driven primarily by lower volumes in the United States reflecting competition from alternative generic treatment options, as well as from supply
constraints. In addition, lower volumes and pricing in Europe from ongoing generic erosion also contributed to the Nasonex
sales decline in 2015.
Other
Global sales of Cozaar
and its companion agent Hyzaar
(a combination of Cozaar
and hydrochlorothiazide), treatments for hypertension, declined 23%
in 2016 to $511 million and decreased 17% in 2015 to $667 million. Foreign exchange unfavorably affected global sales performance by 3% and 9% in 2016 and
2015, respectively. The patents that provided market exclusivity for Cozaar
and Hyzaar
in the United States and in most major international markets have expired.
Accordingly, the Company is experiencing declines in Cozaar
and Hyzaar
sales and expects the declines to continue.
Vaccines
The following discussion of vaccines does not include sales of vaccines sold in most major European markets through SPMSD, the Company’s joint
venture with Sanofi Pasteur (Sanofi), the results of which are reflected in equity income from affiliates included in Other
(income)
expense,
net
(see “Selected Joint
Venture and Affiliate Information” below). Supply sales to SPMSD, however, are included. On December 31, 2016, Merck and Sanofi terminated SPMSD and
ended their joint vaccines operations in Europe (see Note 8 to the consolidated financial statements). Beginning in 2017, Merck will record vaccine sales in the
European markets that were previously part of the SPMSD joint venture.
Merck’s sales of Gardasil/Gardasil
9, vaccines to help prevent certain cancers and diseases caused by certain types of HPV, were $2.2 billion in 2016,
growth of 14% compared with 2015. Sales growth was driven primarily by higher volumes and pricing in the United States, as well as higher demand in certain
emerging markets that was partially offset by a decline in government tenders in Brazil. In October 2016, the FDA approved a 2-dose vaccination regimen for
Gardasil
9, for use in girls and boys 9 through 14 years of age, and the U.S. Centers for Disease Control and Prevention’s Advisory Committee on Immunization
Practices voted to recommend the 2-dose vaccination regimen for certain 9 through 14 year olds. The Company anticipates the 2-dose vaccination regimen will
have an unfavorable effect on sales of Gardasil
9 during the period of transition. Merck’s sales of Gardasil/Gardasil
9 were $1.9 billion in 2015, an increase of
10% compared with 2014 including a 1% unfavorable effect from foreign exchange. Sales growth
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was driven primarily by higher sales in the United States resulting from higher pricing and increased volumes reflecting the timing of public sector purchases, as
well as increased government tenders in the Asia Pacific region, partially offset by declines in Latin America due to both price and volume. Gardasil
9, Merck’s 9-
valent HPV vaccine, was approved by the FDA in December 2014 for use in females 9 through 26 years of age, and males 9 through 15 years of age. Gardasil
9
includes the greatest number of HPV types in any available HPV vaccine. In December 2015, the FDA approved an expanded age indication for Gardasil
9, to
include use in males 16 through 26 years of age for the prevention of anal cancers, precancerous or dysplastic lesions and genital warts caused by certain HPV
types. The Company is a party to certain third-party license agreements with respect to Gardasil/Gardasil
9 (including a cross-license and settlement agreement
with GlaxoSmithKline). As a result of these agreements, the Company pays royalties on worldwide Gardasil/Gardasil
9 sales of 16% to 24% which vary by
country and are included in Materials
and
production
costs.
Merck’s sales of ProQuad
, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $495 million in 2016,
$454 million in 2015 and $395 million in 2014. Sales growth in 2016 as compared with 2015 was driven primarily by higher demand and pricing in the United
States. Sales growth in 2015 as compared with 2014 primarily reflects higher sales in the United States reflecting increased volumes, which were driven in part by
measles outbreaks in the United States, as well as higher pricing.
Merck’s sales of M-M-R
II, a vaccine to help protect against measles, mumps and rubella, were $353 million in 2016, $365 million in 2015 and $326
million in 2014. Sales performance in 2015 as compared with 2016 and 2014 was driven by higher demand resulting from measles outbreaks in the United States.
Merck’s sales of Varivax,
a vaccine to help prevent chickenpox (varicella), were $792 million in 2016, $686 million in 2015 and $672 million in 2014.
Sales growth in 2016 as compared with 2015 was driven primarily by higher sales in the United States reflecting the effects of public sector purchasing and higher
pricing that were partially offset by lower demand. Volume growth in certain emerging markets reflecting the timing of government tenders also contributed to the
sales increase in 2016 as compared with 2015. Sales growth in 2015 as compared with 2014 reflects higher volumes in certain emerging markets and higher pricing
in the United States, partially offset by lower volumes in the United States.
Merck’s sales of Zostavax,
a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $685 million in 2016, a decline of
9% compared with 2015 including a 1% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States,
partially offset by higher pricing in the United States and higher demand in certain emerging markets. Merck’s sales of Zostavax
were $749 million in 2015, a
decline of 2% compared with 2014 including a 2% unfavorable effect from foreign exchange. Sales performance in 2015 as compared with 2014 reflects lower
volumes in the United States, partially offset by higher demand in Canada and higher pricing in the United States. The Company is continuing to educate U.S.
customers on the broad managed care coverage for Zostavax
and the process for obtaining reimbursement. Merck is continuing to launch Zostavax
outside of the
United States.
Merck’s sales of RotaTeq,
a vaccine to help protect against rotavirus gastroenteritis in infants and children, were $652 million in 2016, an increase of
7% compared with 2015, and were $610 million in 2015, a decline of 7% compared with 2014 including a 3% unfavorable effect from foreign exchange. Sales
performance in both periods was driven primarily by the effects of public sector purchasing in the United States. Volume growth in certain emerging markets also
contributed to sales growth in 2016.
Merck’s sales of Pneumovax
23, a vaccine to help prevent pneumococcal disease, were $641 million in 2016, an increase of 18% compared with 2015,
driven primarily by higher volumes and pricing in the United States and higher demand in certain emerging markets. Merck’s sales of Pneumovax
23 were $542
million in 2015, a decrease of 27% compared with 2014, driven primarily by lower demand in the United States and sales declines in emerging markets. Foreign
exchange favorably affected sales performance by 1% in 2016 and unfavorably affected sales performance by 2% in 2015.
Other Segments
The Company’s other segments are the Animal Health, Healthcare Services and Alliances segments, which are not material for separate reporting. The
Alliances segment includes revenue from AZLP until the termination of the Company’s relationship with AZLP on June 30, 2014 (see “Selected Joint Venture and
Affiliate Information” below).
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Prior to its disposition on October 1, 2014, the Company also had a Consumer Care segment which had sales of $1.5 billion in 2014.
Animal
Health
Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion
animal species. Animal Health sales are affected by competition and the frequent introduction of generic products. Worldwide sales of Animal Health products
were $3.5 billion in 2016, $3.3 billion in 2015 and $3.5 billion in 2014. Global sales of Animal Health products increased 4% in 2016 compared with 2015
including a 4% unfavorable effect from foreign exchange. Sales growth primarily reflects volume growth across most species areas, particularly in products for
companion animals, driven primarily by higher sales of Bravecto,
as well as in poultry and swine products. Worldwide sales of Animal Health products declined
4% in 2015 compared with 2014 including a 13% unfavorable effect from foreign exchange. Sales performance in 2015 reflects volume growth in companion
animal products, driven primarily by higher sales of Bravecto,
which began launching in Europe and the United States in 2014, as well as volume growth in swine
and aqua products.
In May 2016, the Company received marketing approval from the European Medicines Agency (EMA) for Bravecto
Spot-On Solution for cats and
dogs, and in July 2016, the Company received approval in the United States to market the product under the tradename Bravecto
Topical.
In July 2016, Merck announced it had executed an agreement to acquire a controlling interest in Vallée, a leading privately held producer of animal
health products in Brazil (see Note 3 to the consolidated financial statements).
Costs, Expenses and Other
($
in
millions)
Materials and production
Marketing and administrative
Research and development
Restructuring costs
Other (income) expense, net
*
100%
or
greater.
Materials
and
Production
2016
Change
2015
Change
2014
$
$
13,891
9,762
10,124
651
720
35,148
-7 % $
-5 %
51 %
5 %
-53 %
3 % $
14,934
10,313
6,704
619
1,527
34,097
-11 % $
-11 %
-7 %
-39 %
*
37 % $
16,768
11,606
7,180
1,013
(11,613)
24,954
Materials and production costs were $13.9 billion in 2016 , $14.9 billion in 2015 and $16.8 billion in 2014 . Costs include expenses for the amortization
of intangible assets recorded in connection with business acquisitions which totaled $3.7 billion in 2016, $4.7 billion in 2015 and $4.2 billion in 2014. Costs in
2016 , 2015 and 2014 also include intangible asset impairment charges of $347 million , $45 million and $1.1 billion , respectively, related to marketed products
and other intangibles (see Note 7 to the consolidated financial statements). The Company may recognize additional non-cash impairment charges in the future
related to intangible assets that were measured at fair value and capitalized in connection with business acquisitions and such charges could be material. In
addition, expenses for 2015 include $105 million of amortization of purchase accounting adjustments to Cubist’s inventories. Also included in materials and
production costs are expenses associated with restructuring activities which amounted to $181 million , $361 million and $482 million in 2016 , 2015 and 2014 ,
respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated
with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring
costs
as discussed below.
Gross margin was 65.1% in 2016 compared with 62.2% in 2015 and 60.3% in 2014 . The improvement in gross margin in 2016 as compared with 2015
was driven primarily by a lower net impact from the amortization of intangible assets and purchase accounting adjustments to inventories, as well as intangible
asset impairment charges and restructuring costs as noted above, which reduced gross margin by 10.6 percentage points in 2016 compared with 13.2 percentage
points in 2015. Lower inventory write-offs and the favorable effects of foreign exchange also contributed to the gross margin improvement in 2016 as compared
with 2015. The gross margin improvement in 2015 as compared with 2014 was driven primarily by the favorable effects of foreign exchange and lower inventory
write-offs, as well
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as the net impact of acquisitions and divestitures. The amortization of intangible assets and purchase accounting adjustments to inventories, as well as the
restructuring and intangible asset impairment charges noted above reduced gross margin by13.6 percentage points in 2014 .
Marketing
and
Administrative
Marketing and administrative (M&A) expenses were $9.8 billion in 2016, a decline of 5% compared with 2015 driven largely by lower acquisition and
divestiture-related costs, the favorable effects of foreign exchange, lower administrative expenses, such as legal defense costs, as well as lower selling costs. Higher
promotional spending largely related to product launches and higher restructuring costs partially offset the decline. M&A expenses were $10.3 billion in 2015, a
decline of 11% compared with 2014, largely reflecting the favorable effects of foreign exchange, the 2014 divestiture of MCC, additional expenses in 2014 related
to the health care reform fee as discussed below, lower restructuring costs, as well as lower selling costs, partially offset by higher promotional spending largely
related to product launches, higher costs related to the January acquisition of Cubist, and higher acquisition and divestiture-related costs. M&A expenses include
acquisition and divestiture-related costs of $78 million, $436 million and $234 million in 2016, 2015 and 2014, respectively, consisting of integration, transaction,
and certain other costs related to business acquisitions, including severance costs which are not part of the Company’s formal restructuring programs, as well as
transaction and certain other costs related to divestitures of businesses. Acquisition and divestiture-related costs in 2015 include costs related to the acquisition of
Cubist (see Note 3 to the consolidated financial statements). M&A expenses for 2016 , 2015 and 2014 also include restructuring costs of $95 million , $78 million
and $200 million , respectively, related primarily to accelerated depreciation for facilities to be closed or divested. Separation costs associated with sales force
reductions have been incurred and are reflected in Restructuring
costs
as discussed below.
On July 28, 2014, the Internal Revenue Service (IRS) issued final regulations on the annual non-tax deductible health care reform fee imposed by the
Patient Protection and Affordable Care Act that is based on an allocation of a company’s market share of prior year branded pharmaceutical sales to certain
government programs. The final IRS regulations accelerated the recognition criteria for the fee obligation by one year to the year in which the underlying sales
used to allocate the fee occurred rather than the year in which the fee was paid. As a result of this change, Merck recorded an additional year of expense of $193
million during 2014.
Research
and
Development
Research and development (R&D) expenses were $10.1 billion in 2016 compared with $6.7 billion in 2015. The increase was driven primarily by
higher acquired in-process research and development (IPR&D) impairment charges, increased clinical development spending, higher restructuring and licensing
costs, partially offset by a reduction in expenses associated with a decrease in the estimated fair value measurement of liabilities for contingent consideration, as
well as by the favorable effects of foreign exchange. R&D expenses were $6.7 billion in 2015, a decline of 7% compared with 2014, driven primarily by the
favorable effects of foreign exchange, expenses recognized in 2014 to increase the estimated fair value of liabilities for contingent consideration, lower
restructuring costs, a charge in 2014 related to a collaboration with Bayer AG (Bayer), and the 2014 divestiture of MCC, partially offset by the acquisition of
Cubist, higher licensing costs and higher clinical development spending in 2015.
R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division
that focuses on human health-related activities, which were approximately $4.3 billion in 2016, $4.0 billion in 2015 and $3.7 billion in 2014. Also included in R&D
expenses are costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, as well as licensing
activity, and certain costs from operating segments, including the Pharmaceutical and Animal Health segments, which in the aggregate were $2.5 billion, $2.6
billion and $2.8 billion for 2016, 2015 and 2014, respectively. R&D expenses also include IPR&D impairment charges of $3.6 billion , $63 million and $49 million
in 2016 , 2015 and 2014 , respectively (see “Research and Development” below). The Company may recognize additional non-cash impairment charges in the
future related to the cancellation or delay of other pipeline programs that were measured at fair value and capitalized in connection with business acquisitions and
such charges could be material. In addition, R&D expenses include expense or income related to changes in the estimated fair value measurement of liabilities for
contingent consideration recorded in connection with acquisitions. During 2016 and 2015, the Company recorded a reduction in expenses of $402 million and $24
million, respectively, to decrease the estimated fair value of liabilities for contingent consideration related to the discontinuation or delay of certain programs (see
Note 3 to the consolidated financial statements). During 2014, the Company recorded a charge of $316 million to
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increase the estimated fair value of liabilities for contingent consideration. R&D expenses in 2016 , 2015 and 2014 also reflect $142 million , $52 million and $283
million , respectively, of accelerated depreciation and asset abandonment costs associated with restructuring activities.
Restructuring
Costs
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in
connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed
to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as
well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to
reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these
programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations.
Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $651 million , $619
million and $1.0 billion in 2016 , 2015 and 2014 , respectively. In 2016 , 2015 and 2014 , separation costs of $216 million , $208 million and $674 million ,
respectively, were incurred associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions
that were probable and could be reasonably estimated. Merck eliminated approximately 2,625 positions in 2016 , 3,770 positions in 2015 and 6,085 positions in
2014 related to these restructuring activities. These position eliminations are comprised of actual headcount reductions, and the elimination of contractors and
vacant positions. Also included in restructuring costs are asset abandonment, shut-down and other related costs, as well as employee-related costs such as
curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For
segment reporting, restructuring costs are unallocated expenses.
Additional costs associated with the Company’s restructuring activities are included in Materials
and
production
, Marketing
and
administrative
and
Research
and
development
as discussed above. The Company recorded aggregate pretax costs of $1.1 billion in 2016, $1.1 billion in 2015 and $2.0 billion in 2014
related to restructuring program activities (see Note 4 to the consolidated financial statements). The Company expects to substantially complete the remaining
actions under the programs by the end of 2017 and incur approximately $700 million of additional pretax costs.
Other
(Income)
Expense,
Net
Other (income) expense, net was $720 million of expense in 2016 , $1.5 billion of expense in 2015 and $11.6 billion of income in 2014 . For details on
the components of Other
(income)
expense,
net
, see Note 14 to the consolidated financial statements.
Segment
Profits
($
in
millions)
Pharmaceutical segment profits
Other non-reportable segment profits
Other
Income before income taxes
2016
2015
2014
$
$
22,180 $
21,658 $
1,507
(19,028)
1,573
(17,830)
4,659 $
5,401 $
22,164
2,386
(7,267)
17,283
Segment profits are comprised of segment sales less standard costs, certain operating expenses directly incurred by the segment, components of equity
income or loss from affiliates and certain depreciation and amortization expenses. For internal management reporting presented to the chief operating decision
maker, Merck does not allocate materials and production costs, other than standard costs, the majority of research and development expenses or general and
administrative expenses, nor 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 acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments and intangible asset impairment
charges, restructuring costs, 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
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miscellaneous income or expense. These unallocated items, including a charge related to the settlement of worldwide Keytruda
patent litigation, gains on
divestitures, a net charge related to the settlement of Vioxx
shareholder class action litigation, the gain on AstraZeneca’s option exercise, foreign exchange losses
related to the devaluation of the Company’s net monetary assets in Venezuela, the loss on extinguishment of debt and an additional year of expense related to the
health care reform fee, are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits
(losses) related to third-party manufacturing sales.
Pharmaceutical segment profits grew 2% in 2016 compared with 2015 primarily reflecting higher sales. Pharmaceutical segment profits declined 2% in
2015 compared with 2014 primarily reflecting the unfavorable effects of foreign exchange.
Taxes
on
Income
The effective income tax rates of 15.4% in 2016 , 17.4% in 2015 and 30.9% in 2014 reflect the impacts of acquisition and divestiture-related costs,
which in 2016 include $3.6 billion of IPR&D impairment charges, as well as restructuring costs and the beneficial impact of foreign earnings. The effective income
tax rate for 2015 also reflects the favorable impact of a net benefit of $410 million related to the settlement of certain federal income tax issues, the impact of the
net charge related to the settlement of Vioxx
shareholder class action litigation being fully deductible at combined U.S. federal and state tax rates and the favorable
impact of tax legislation enacted in the fourth quarter of 2015, as well as the unfavorable effect of non-tax deductible foreign exchange losses related to Venezuela
(see Note 14 to the consolidated financial statements). The effective income tax rate for 2014 reflects the impact of the gain on the divestiture of MCC being taxed
at combined U.S. federal and state tax rates. In addition, the effective income tax rate for 2014 includes a net tax benefit of $517 million recorded in connection
with AstraZeneca’s option exercise (see Note 8 to the consolidated financial statements) and a benefit of approximately $300 million associated with a capital loss
generated in connection with the sale of Sirna (see Note 3 to the consolidated financial statements). The effective income tax rate for 2014 also includes the
unfavorable impact of an additional year of expense for the non-tax deductible health care reform fee that the Company recorded in accordance with final
regulations issued by the IRS.
The Company is under examination by numerous tax authorities in various jurisdictions globally. The ultimate finalization of the Company’s
examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the
reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures.
However, there is one item that is currently under discussion with the IRS relating to the 2006 through 2008 examination. The Company has concluded that its
position should be sustained upon audit. However, if this item were to result in an unfavorable outcome or settlement, it could have a material adverse impact on
the Company’s financial position, liquidity and results of operations.
Net
Income
and
Earnings
per
Common
Share
Net income attributable to Merck & Co., Inc. was $3.9 billion in 2016 , $4.4 billion in 2015 and $11.9 billion in 2014 . EPS was $1.41 in 2016 , $1.56
in 2015 and $4.07 in 2014 .
Non-GAAP
Income
and
Non-GAAP
EPS
Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance that Merck is providing because management believes
this information enhances investors’ understanding of the Company’s results as it permits investors to understand how management assesses performance. Non-
GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business
performance and trends. The excluded items (which should not be considered non-recurring) consist of acquisition and divestiture-related costs, restructuring costs
and certain other items. These excluded items are significant components in understanding and assessing financial performance.
Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of
operating results that includes non-GAAP EPS. Management uses these measures internally for planning and forecasting purposes and to measure the performance
of the Company along with other metrics. Senior management’s annual compensation is derived in part using non-GAAP income and non-GAAP EPS. Since non-
GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and,
therefore, may not be comparable to the calculation of
47
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similar measures of other companies. The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or
superior to, net income and EPS prepared in accordance with generally accepted accounting principles in the United States (GAAP).
A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:
($
in
millions
except
per
share
amounts)
Pretax income as reported under GAAP
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs
Restructuring costs
Other items:
Charge related to the settlement of worldwide Keytruda
patent litigation
Foreign currency devaluation related to Venezuela
Net charge related to the settlement of Vioxx
shareholder class action litigation
Gain on sale of certain migraine clinical development programs
Gain on divestiture of certain ophthalmic products
Gain on divestiture of Merck Consumer Care
Gain on AstraZeneca option exercise
Loss on extinguishment of debt
Additional year of expense for health care reform fee
Other
Taxes on income as reported under GAAP
Estimated tax benefit (provision) on excluded items (1)
Net tax benefits from the settlements of federal income tax issues
Tax benefits related to sale of Sirna Therapeutics, Inc. subsidiary
Non-GAAP net income
Less: Net income attributable to noncontrolling interests as reported under GAAP
Acquisition and divestiture-related costs attributable to non-controlling interests
Non-GAAP net income attributable to Merck & Co., Inc.
EPS assuming dilution as reported under GAAP
EPS difference (2)
Non-GAAP EPS assuming dilution
2016
2015
2014
$
4,659 $
5,401 $
17,283
7,312
1,069
5,398
1,110
5,946
1,978
625
—
—
—
—
—
—
—
—
(67)
—
876
680
(250)
(147)
—
—
—
—
(34)
13,598
13,034
718
2,321
—
—
942
1,470
410
—
3,039
2,822
10,559
10,212
21
—
21
17
—
17
—
—
—
—
(480)
(11,209)
(741)
628
193
(9)
13,589
5,349
(2,345)
—
300
3,304
10,285
14
56
70
$
$
$
10,538 $
10,195 $
10,215
1.41 $
2.37
3.78 $
1.56 $
2.03
3.59 $
4.07
(0.58)
3.49
(1)
(2)
The
estimated
tax
impact
on
the
excluded
items
is
determined
by
applying
the
statutory
rate
of
the
originating
territory
of
the
non-GAAP
adjustments.
Amount
for
2014
includes
a
net
benefit
of
$517
million
recorded
in
connection
with
AstraZeneca’s
option
exercise.
Represents
the
difference
between
calculated
GAAP
EPS
and
calculated
non-GAAP
EPS,
which
may
be
different
than
the
amount
calculated
by
dividing
the
impact
of
the
excluded
items
by
the
weighted-average
shares
for
the
applicable
year
.
Acquisition
and
Divestiture-Related
Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with business acquisitions and divestitures.
These amounts include the amortization of intangible assets and amortization of purchase accounting adjustments to inventories, as well as intangible asset
impairment charges and expense or income related to changes in the estimated fair value measurement of contingent consideration. Also excluded are integration,
transaction, and certain other costs associated with business acquisitions, including severance costs which are not part
48
Table of Contents
of the Company’s formal restructuring programs, as well as transaction and certain other costs associated with divestitures of businesses.
Restructuring
Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 4 to the consolidated financial statements). These
amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent
the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or
divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also
include asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated
with pension and other postretirement benefit plans and share-based compensation costs.
Certain
Other
Items
Non-GAAP income and non-GAAP EPS exclude certain other items. These items are adjusted for after evaluating them on an individual basis,
considering their quantitative and qualitative aspects, and typically consist of items that are unusual in nature, significant to the results of a particular period or not
indicative of future operating results. Excluded from non-GAAP income and non-GAAP EPS in 2016 is a charge to settle worldwide patent litigation related to
Keytruda
(see Note 10 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2015 are foreign exchange losses
related to the devaluation of the Company’s net monetary assets in Venezuela (see Note 14 to the consolidated financial statements), a net charge related to the
settlement of Vioxx
shareholder class action litigation (see Note 10 to the consolidated financial statements), a gain on the sale of certain migraine clinical
development programs (see Note 3 to the consolidated financial statements), a gain on the divestiture of the Company’s remaining ophthalmics business in
international markets (see Note 3 to the consolidated financial statements), as well as a net tax benefit related to the settlement of certain federal income tax issues
(see Note 15 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2014 are certain gains, including a gain on the
divestiture of MCC (see Note 3 to the consolidated financial statements), a gain recognized in conjunction with AstraZeneca’s option exercise, including a related
net tax benefit on the transaction (see Note 8 to the consolidated financial statements), a gain on the divestiture of certain ophthalmic products in several
international markets (see Note 3 to the consolidated financial statements), as well as a loss on extinguishment of debt (see Note 9 to the consolidated financial
statements), an additional year of expense related to the health care reform fee as discussed above, and tax benefits from the sale of the Company’s Sirna
Therapeutics, Inc. (Sirna) subsidiary (see Note 3 to the consolidated financial statements).
Research and Development
A chart reflecting the Company’s current research pipeline as of February 24, 2017 is set forth in Item 1. “Business
—
Research and Development”
above.
Research
and
Development
Update
The Company currently has several candidates under regulatory review in the United States.
Keytruda
is an FDA-approved anti-PD-1 therapy in clinical development for expanded indications in different cancer types. Keytruda
is currently
approved for the treatment of NSCLC, melanoma, advanced melanoma, and head and neck cancer (see “Pharmaceutical Segment” above).
In February 2017, the FDA accepted for review two sBLAs for Keytruda
in patients with locally advanced or metastatic urothelial cancer, including
most bladder cancers. The application for first-line use was granted Priority Review for the treatment of these patients who are ineligible for cisplatin-containing
therapy. The application for second-line use was granted Priority Review for these patients with disease progression on or after platinum-containing chemotherapy.
The Prescription Drug User Fee Act (PDUFA) action date for both applications is June 14, 2017. The FDA previously granted Breakthrough Therapy designation
to Keytruda
for the second-line treatment of patients with locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing
chemotherapy.
In January 2017, the FDA accepted for review an sBLA for Keytruda
plus chemotherapy (pemetrexed plus carboplatin) for the first-line treatment of
patients with metastatic or advanced non-squamous NSCLC regardless of
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PD-L1 expression and with no EGFR or ALK genomic tumor aberrations. This is the first application for regulatory approval of Keytruda
in combination with
another treatment. The FDA granted Priority Review with a PDUFA action date of May 10, 2017. The sBLA will be reviewed under the FDA’s Accelerated
Approval program.
In December 2016, the FDA accepted for review an sBLA for Keytruda
for the treatment of patients with refractory classical Hodgkin lymphoma or for
patients who have relapsed after three or more prior lines of therapy. The FDA granted Priority Review with a PDUFA action date of March 15, 2017. The sBLA
will be reviewed under the FDA’s Accelerated Approval program.
In November 2016, the FDA accepted for review an sBLA for Keytruda
for the treatment of previously treated patients with advanced microsatellite
instability-high (MSI-H) cancer. The FDA granted Priority Review with a PDUFA action date of March 8, 2017. The sBLA will be reviewed under the FDA’s
Accelerated Approval program. The FDA recently granted Breakthrough Therapy designation to Keytruda
for unresectable or metastatic MSI-H non-colorectal
cancer, and previously granted it for the treatment of patients with unresectable or metastatic MSI-H colorectal cancer.
Additionally, Keytruda
has also received Breakthrough Therapy designation from the FDA for the treatment of patients with primary mediastinal B-cell
lymphoma that is refractory to or has relapsed after two prior lines of therapy.
The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in
combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial
improvement over existing therapies on one or more clinically significant endpoints.
The Keytruda
clinical development program consists of more than 400 clinical trials, including more than 200 trials that combine Keytruda
with other
cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin
lymphoma, non-Hodgkin lymphoma, melanoma, multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal and triple-negative breast, many of which
are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
MK-1293 is an investigational follow-on biologic insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes under review
by the FDA. MK-1293 was approved in the EU in January 2017. MK-1293 is being developed in collaboration with and partially funded by Samsung Bioepis.
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if
approved, will be commercialized through a partnership between Merck and Sanofi. This vaccine is designed to help protect against six important diseases -
diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus
influenzae
type b (Hib), and hepatitis
B. On November 2, 2015, the FDA issued a Complete Response Letter (CRL) with respect to the Biologics License Application for V419. Both companies are
reviewing the CRL and plan to have further communication with the FDA. In February 2016, the EC granted marketing authorization for V419 for prophylaxis
against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 is being
marketed as Vaxelis
in the EU.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the
Keytruda
programs discussed above.
MK-8931, verubecestat, is an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1) for the
treatment of Alzheimer’s disease. In February 2017, Merck announced that its external Data Monitoring Committee (eDMC) recommended termination of the
Phase 2/3 EPOCH study of verubecestat in mild-to-moderate Alzheimer’s disease based on the low probability of success of this study. The same eDMC
recommended that a separate Phase 3 study, APECS, evaluating verubecestat for amnestic mild cognitive impairment due to Alzheimer’s disease, also known as
prodromal Alzheimer’s disease, continue as planned. Estimated primary completion date for the APECS study, which is fully enrolled, is February 2019.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (CETP) in development for raising HDL-C and reducing
LDL-C. Anacetrapib is being evaluated in a 30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL
(Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular disease. In November
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2015, Merck announced that the Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and
recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck
remains blinded to the actual results of this analysis and to other REVEAL safety and efficacy data. Under the study, the last patient’s last visit occurred in January
2017. The Company anticipates receiving the top-line results from the study mid-year 2017.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic).
The FDA has designated this combination a Qualified Infectious Disease Product with designated Fast Track status for the treatment of hospital-acquired bacterial
pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.
MK-8228, letermovir, is an investigational oral once-daily or an intravenous infusion antiviral candidate for the prevention of clinically-significant
cytomegalovirus (CMV) infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track
designation. In October 2016, Merck announced that the pivotal Phase 3 clinical study of letermovir met its primary endpoint. The global, multicenter, randomized,
placebo-controlled study evaluated the efficacy and safety of letermovir in adult (18 years and older) CMV-seropositive recipients of an allogeneic hematopoietic
stem cell transplant. Merck plans to submit regulatory applications for the approval of letermovir in the United States and EU in 2017.
MK-8835, ertugliflozin, is an investigational oral SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes in collaboration with Pfizer Inc.
(Pfizer). In September 2016, Merck and Pfizer announced that a Phase 3 study (VERTIS SITA2) of ertugliflozin met its primary endpoint. Both 5 mg and 15 mg
daily doses of ertugliflozin showed significantly greater reductions in A1C (an average measure of blood glucose over the past two to three months) when added to
patients on a background of sitagliptin and metformin. Ertugliflozin is also being studied in combination with Januvia
(sitagliptin) and metformin. In December
2016, Merck submitted New Drug Applications to the FDA for ertugliflozin and the two fixed-dose combinations: MK-8835A, ertugliflozin plus Januvia
, and
MK-8835B, ertugliflozin plus metformin. The Company anticipates a response from the FDA in the first quarter of 2017. Ertugliflozin and the two fixed-dose
combinations are currently under review in the EU. Under the terms of the collaboration agreement with Pfizer, Merck will make a $90 million milestone payment
to Pfizer in 2017.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in
collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki),
is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and
NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that
the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the
WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision
to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While
EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck
announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In
December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that V920 offers
substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-
randomized clusters. Results from other ongoing studies are anticipated in the second half of 2017.
MK-1242, vericiguat, is an investigational treatment for heart failure being studied in a Phase 3 clinical trial in patients suffering from chronic heart
failure. The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer (see Note 3 to the consolidated financial
statements).
V212 is an inactivated varicella zoster virus vaccine in development for the prevention of herpes zoster. The Company completed the Phase 3 trial in
autologous hematopoietic cell transplant patients and is conducting another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and
hematological malignancies. The
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study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the results from this study at the American Society for
Blood and Marrow Transplantation Meetings in February 2017.
MK-1439, doravirine, is an investigational non-nucleoside reverse transcriptase inhibitor being developed by Merck for the treatment of HIV-1
infection. In February 2017, the Company received positive results from a first Phase 3 study showing that doravirine was non-inferior to an alternative regimen in
achieving and maintaining HIV-1 suppression in infected adults during 48 weeks of treatment.
In 2016, the Company also divested or discontinued certain drug candidates.
Merck announced that it is discontinuing the development of odanacatib, an investigational cathepsin K inhibitor for osteoporosis, and will not seek
regulatory approval for its use. Merck previously reported a numeric imbalance in adjudicated stroke events in the pivotal Phase 3 fracture outcomes study in
postmenopausal women. The Company has decided to discontinue development after an independent adjudication and analysis of major adverse cardiovascular
events confirmed an increased risk of stroke.
The Company determined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that included MK-
8237, an investigational allergy immunotherapy tablet for house dust mite allergy. Merck has given ALK-Abelló six months’ notice that it is terminating the
agreement and therefore this compound will be returned to ALK-Abelló. This decision was not due to efficacy or safety concerns. In connection with the decision,
the Company recorded an IPR&D impairment charge (see Note 7 to the consolidated financial statements).
The Company also decided, for business reasons, to discontinue the clinical development of MK-8342B, referred to as the Next Generation Ring, an
investigational combination (etonogestrel and 17ß-estradiol) vaginal ring for contraception and the treatment of dysmenorrhea in women seeking contraception.
This decision was not due to efficacy or safety concerns. As a result of this decision, the Company recorded an IPR&D impairment charge (see Note 7 to the
consolidated financial statements).
Merck announced that, for business reasons, it will not proceed with submitting marketing applications for omarigliptin, an investigational, once-
weekly DPP-4 inhibitor, in the United States or Europe. This decision did not result from concerns about the efficacy or safety of omarigliptin.
The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs
directed toward product development. The Company’s research and development model is designed to increase productivity and improve the probability of success
by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable
advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck
is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics
capabilities. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a focus on supplementing its
internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as
well as access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company continues to
evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes,
infectious diseases, inflammatory/autoimmune diseases, neurodegenerative diseases, and respiratory diseases.
Acquired
In-Process
Research
and
Development
In connection with business acquisitions, the Company has recorded the fair value of in-process research projects which, at the time of acquisition, had
not yet reached technological feasibility. At December 31, 2016 , the balance of IPR&D was $1.7 billion . During 2016, the Company recorded IPR&D for projects
obtained in connection with the acquisitions of Afferent and IOmet as discussed below.
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During 2016 , 2015 and 2014 , $8 million , $280 million and $654 million , respectively, of IPR&D projects received marketing approval in a major
market and the Company began amortizing these assets based on their estimated useful lives.
All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the
Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates. The time
periods to receive approvals from the FDA and other regulatory agencies are subject to uncertainty. Significant delays in the approval process, or the Company’s
failure to obtain approval at all, would delay or prevent the Company from realizing revenues from these products. Additionally, if certain of the IPR&D programs
fail or are abandoned during development, then the Company will not realize the future cash flows it has estimated and recorded as IPR&D as of the acquisition
date, and the Company may also not recover the research and development expenditures made since the acquisition to further develop such program. If such
circumstances were to occur, the Company’s future operating results could be adversely affected and the Company may recognize impairment charges and such
charges could be material.
During 2016, the Company recorded $3.6 billion of IPR&D impairment charges within Research
and
development
expenses. Of this amount, $2.9
billion relates to the clinical development program for uprifosbuvir, a nucleotide prodrug in clinical development being evaluated for the treatment of HCV. The
Company determined that recent changes to the product profile, as well as changes to Merck’s expectations for pricing and the market opportunity, taken together
constituted a triggering event that required the Company to evaluate the uprifosbuvir intangible asset for impairment. Utilizing market participant assumptions, and
considering different scenarios, the Company concluded that its best estimate of the current fair value of the intangible asset related to uprifosbuvir was $240
million, resulting in the recognition of the pretax impairment charge noted above. The IPR&D impairment charges in 2016 also include charges of $180 million
and $143 million related to the discontinuation of programs obtained in connection with the acquisitions of cCAM Biotherapeutics Ltd. and OncoEthix,
respectively, resulting from unfavorable efficacy data. An additional $72 million relates to programs obtained in connection with the SmartCells acquisition
following a decision to terminate the lead compound due to a lack of efficacy and to pursue a back-up compound which reduced projected future cash flows. The
IPR&D impairment charges in 2016 also include $112 million related to an in-licensed program for house dust mite allergies that, for business reasons, will be
returned to the licensor. The remaining IPR&D impairment charges for 2016 primarily relate to deprioritized pipeline programs that were deemed to have no
alternative use during the period, including a $79 million impairment charge for an investigational candidate for contraception. The discontinuation or delay of
certain of these clinical development programs resulted in a reduction of the related liabilities for contingent consideration (see Note 3 to the consolidated financial
statements).
During 2015, the Company recorded $63 million of IPR&D impairment charges, of which $50 million related to the surotomycin clinical development
program. During 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an
assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above.
During 2014, the Company recorded $49 million of IPR&D impairment charges primarily as a result of changes in cash flow assumptions for certain
compounds obtained in connection with the Company’s joint venture with Supera Farma Laboratorios S.A., as well as for the discontinuation of certain Animal
Health programs.
Additional research and development will be required before any of the remaining programs reach technological feasibility. The costs to complete the
research projects will depend on whether the projects are brought to their final stages of development and are ultimately submitted to the FDA or other regulatory
agencies for approval. As of December 31, 2016 , the estimated costs to complete projects acquired in connection with acquisitions in Phase 3 development for
human health were approximately $290 million.
Acquisitions,
Research
Collaborations
and
License
Agreements
Merck continues to remain focused on pursuing opportunities that have the potential to drive both near- and long-term growth. Certain of the more
recent significant transactions are described below. Merck is actively monitoring the landscape for growth opportunities that meet the Company’s strategic criteria.
In July 2016, Merck acquired Afferent, a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the
P2X3 receptor for the treatment of common, poorly-managed, neurogenic
53
Table of Contents
conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is a selective, non-narcotic, orally-administered P2X3 antagonist being
evaluated in a Phase 2b clinical trial for the treatment of refractory, chronic cough as well as in a Phase 2 clinical trial in idiopathic pulmonary fibrosis with cough.
Total consideration transferred of $510 million included cash paid for outstanding Afferent shares of $487 million , as well as share-based compensation payments
to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders
are eligible to receive a total of up to an additional $750 million contingent upon the attainment of certain clinical development and commercial milestones for
multiple indications and candidates, including MK-7264. This transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and
liabilities assumed were recorded at their respective fair values as of the acquisition date. The Company determined the fair value of the contingent consideration
was $223 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment using an
appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized an intangible asset for IPR&D of $832 million , net
deferred tax liabilities of $258 million , and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over
the fair value of net assets acquired of $130 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax
purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated
based upon the asset’s probability-adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful
completion. The net cash flows were then discounted to present value using a discount rate of 11.5% . Actual cash flows are likely to be different than those
assumed.
In June 2016, Merck and Moderna entered into a strategic collaboration and license agreement to develop and commercialize novel mRNA-based
personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based
personalized cancer vaccines in combination with Merck’s Keytruda
. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of
$200 million , which was recorded in Research
and
development
expenses. Following human proof of concept studies, Merck has the right to elect to make an
additional payment to Moderna. If Merck exercises this right, the two companies will then equally share cost and profits under a worldwide collaboration for the
development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines in the United States. The
agreement entails exclusivity around combinations with Keytruda
. Moderna and Merck will each have the ability to combine mRNA-based personalized cancer
vaccines with other (non-PD-1) agents.
In January 2016, Merck acquired IOmet, a privately held UK-based drug discovery company focused on the development of innovative medicines for
the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition provides Merck with IOmet’s
preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The transaction was
accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of $150 million and future additional
milestone payments of up to $250 million that are contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair
value of the contingent consideration was $94 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected
timing of each payment utilizing a discount rate of 10.5% . Merck recognized intangible assets for IPR&D of $155 million and net deferred tax assets of $32
million . The excess of the consideration transferred over the fair value of net assets acquired of $57 million was recorded as goodwill that was allocated to the
Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an
income approach. The assets’ probability-adjusted future net cash flows were then discounted to present value also using a discount rate of 10.5% . Actual cash
flows are likely to be different than those assumed.
Selected Joint Venture and Affiliate Information
Sanofi
Pasteur
MSD
On December 31, 2016, Merck and Sanofi terminated the equally-owned joint venture formed in 1994 to develop and market vaccines in Europe (see
Note 8 to the consolidated financial statements).
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Table of Contents
Sales of joint venture products (prior to termination) were as follows:
($
in
millions)
Gardasil/Gardasil
9
Influenza vaccines
Other viral vaccines
RotaTeq
Zostavax
Hepatitis vaccines
Other vaccines
AstraZeneca
LP
2016
2015
2014
$
$
216 $
106
95
56
52
48
435
1,008 $
184 $
128
77
56
87
62
329
923 $
248
159
87
65
103
38
430
1,130
On June 30, 2014, AstraZeneca exercised an option that resulted in the redemption of Merck’s remaining interest in AstraZeneca LP (AZLP), the
partnership between Merck and AstraZeneca, for $419 million in cash (see Note 8 to the consolidated financial statements). Of this amount, $327 million reflected
an estimate of the fair value of Merck’s interest in Nexium and Prilosec (products sold by AZLP). This portion of the exercise price, which is subject to a true-up in
2018 based on actual sales from closing in 2014 to June 2018, was deferred and recognized as income of $5 million , $182 million and $140 million , during 2016,
2015, and 2014, respectively, in Other
(income)
expense,
net
as the contingency was eliminated as sales occurred. Once the deferred income amount was fully
amortized, in the first quarter of 2016, the Company began recognizing income and a corresponding receivable for amounts that will be due to Merck from
AstraZeneca based on the sales performance of Nexium and Prilosec subject to the true-up in June 2018. The Company recognized $93 million of such income in
2016 included in Other
(income)
expense,
net
.
The remaining exercise price of $91 million primarily represents a multiple of ten times Merck’s average 1% annual profit allocation in the partnership
for the three years prior to exercise. Merck recognized the $91 million as a gain in 2014 within Other
(income)
expense,
net
. The Company also recognized a non-
cash gain of approximately $650 million in 2014 within Other
(income)
expense,
net
resulting from the retirement of $2.4 billion of preferred stock, the elimination
of the Company’s $1.4 billion investment in AZLP and a $340 million reduction of goodwill. This transaction resulted in a net tax benefit of $517 million in 2014
primarily reflecting the reversal of deferred taxes on the AZLP investment balance.
In 2014, prior to termination, Merck recorded revenue from AZLP of $463 million and earned partnership returns of $192 million, which were recorded
in equity income from affiliates included in Other
(income)
expense,
net
.
Capital Expenditures
Capital expenditures were $1.6 billion in 2016 , $1.3 billion in 2015 and $1.3 billion in 2014 . Expenditures in the United States were $1.0 billion in
2016 , $879 million in 2015 and $873 million in 2014 .
Depreciation expense was $1.6 billion in 2016 , $1.6 billion in 2015 and $2.5 billion in 2014 of which $1.0 billion, $1.1 billion and $2.0 billion,
respectively, applied to locations in the United States. Total depreciation expense in 2016 , 2015 and 2014 included accelerated depreciation of $227 million , $174
million and $900 million , respectively, associated with restructuring activities (see Note 4 to the consolidated financial statements).
Analysis of Liquidity and Capital Resources
Merck’s strong financial profile enables it to fund research and development, focus on external alliances, support in-line products and maximize
upcoming launches while providing significant cash returns to shareholders.
Selected
Data
($
in
millions)
Working capital
Total debt to total liabilities and equity
Cash provided by operations to total debt
2016
2015
2014
$
13,410
$
10,550
$
26.0%
0.4:1
26.0%
0.5:1
14,198
21.7%
0.4:1
Cash provided by operating activities was $10.4 billion in 2016 , $12.5 billion in 2015 and $8.0 billion in 2014 . Cash provided by operating activities
in 2016 reflects a net payment of approximately $680 million to fund the
55
Table of Contents
Vioxx
shareholder class action litigation settlement not covered by insurance proceeds (see Note 10 to the consolidated financial statements). Cash provided by
operating activities in 2014 reflects approximately $5.0 billion of taxes paid on the divestiture of MCC. Cash provided by operating activities continues to be the
Company’s primary source of funds to finance operating needs, capital expenditures, a portion of treasury stock purchases and dividends paid to shareholders.
Cash used in investing activities was $3.2 billion in 2016 compared with $4.8 billion in 2015. The lower use of cash in 2016 was driven primarily by
cash used in 2015 for the acquisition of Cubist, as well as lower purchases of securities and other investments in 2016, partially offset by lower proceeds from the
sales of securities and other investments in 2016 and the use of cash in 2016 for the acquisitions of Afferent and StayWell. Cash used in investing activities was
$4.8 billion in 2015 compared with $374 million in 2014 primarily reflecting cash received in 2014 from the divestiture of MCC, higher cash received in 2014
from other dispositions of businesses and in connection with AstraZeneca’s option exercise, as well as cash used for the acquisition of Cubist in 2015, partially
offset by lower purchases of securities and other investments, higher proceeds from the sales of securities and other investments, cash used in 2014 for the
acquisition of Idenix, and a cash payment made in 2014 upon the formation of the collaboration with Bayer.
Cash used in financing activities was $9.0 billion in 2016 compared with $5.4 billion in 2015 driven primarily by lower proceeds from the issuance of
debt, partially offset by a decrease in short-term borrowings in the prior year, lower payments on debt, lower purchases of treasury stock and higher proceeds from
the exercise of stock options. Cash used in financing activities was $5.4 billion in 2015 compared with $15.2 billion in 2014 driven primarily by higher proceeds
from the issuance of debt, lower payments on debt and lower purchases of treasury stock, partially offset by lower proceeds from the exercise of stock options and
a decrease in short-term borrowings.
During 2015, the Company recorded charges of $876 million related to the devaluation of its net monetary assets in Venezuela, the large majority of
which was cash (see Note 14 to the consolidated financial statements).
At December 31, 2016 , the total of worldwide cash and investments was $25.8 billion , including $14.3 billion of cash, cash equivalents and short-term
investments, and $11.4 billion of long-term investments. Generally 80%-90% of cash and investments are held by foreign subsidiaries and would be subject to
significant tax payments if such cash and investments were repatriated in the form of dividends. The Company records U.S. deferred tax liabilities for certain
unremitted earnings, but when amounts earned overseas are expected to be indefinitely reinvested outside of the United States, no accrual for U.S. taxes is
provided. The amount of cash and investments held by U.S. and foreign subsidiaries fluctuates due to a variety of factors including the timing and receipt of
payments in the normal course of business. Cash provided by operating activities in the United States continues to be the Company’s primary source of funds to
finance domestic operating needs, capital expenditures, a portion of treasury stock purchases and dividends paid to shareholders.
The Company’s contractual obligations as of December 31, 2016 are as follows:
Payments
Due
by
Period
($
in
millions)
Purchase obligations (1)
Loans payable and current portion of long-term debt (2)
$
Long-term debt
Interest related to debt obligations
Keytruda
patent litigation settlement
Unrecognized tax benefits (3)
Operating leases
Total
2017
2018—2019
2020—2021
Thereafter
2,131 $
655 $
744 $
435 $
570
24,266
9,189
625
2,014
754
570
—
683
625
2,014
200
—
4,277
1,276
—
—
263
—
4,156
1,101
—
—
151
297
—
15,833
6,129
—
—
140
$
39,549 $
4,747 $
6,560 $
5,843 $
22,399
(1)
Includes
future
inventory
purchases
the
Company
has
committed
to
in
connection
with
certain
divestitures.
(2)
In
February
2017,
$300
million
of
floating
rate
notes
matured
and
were
repaid.
(3)
As
of
December
31,
2016
,
the
Company’s
Consolidated
Balance
Sheet
reflects
liabilities
for
unrecognized
tax
benefits,
interest
and
penalties
of
$4.4
billion
,
including
$2.0
billion
reflected
as
a
current
liability.
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
years
beyond
2017
cannot
be
made.
56
Table of Contents
Purchase obligations are enforceable and legally binding obligations for purchases of goods and services including minimum inventory contracts,
research and development and advertising. Amounts reflected for research and development obligations do not include contingent milestone payments. In 2017, the
Company will make a $90 million milestone payment in connection with a clinical program being developed in a collaboration (see “Research and Development”
above). Also excluded from research and development obligations are potential future funding commitments of up to approximately $90 million for investments in
research venture capital funds. Loans payable and current portion of long-term debt reflects $267 million of long-dated notes that are subject to repayment at the
option of the holders. Required funding obligations for 2017 relating to the Company’s pension and other postretirement benefit plans are not expected to be
material. However, the Company currently anticipates contributing approximately $50 million to its U.S. pension plans, $160 million to its international pension
plans and $25 million to its other postretirement benefit plans during 2017 .
In November 2016, the Company issued €1.0 billion principal amount of senior unsecured notes consisting of €500 million principal amount of 0.50%
notes due 2024 and €500 million principal amount of 1.375% notes due 2036. The Company intends to use the net proceeds of the offering of $1.1 billion for
general corporate purposes, including without limitation, the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming
maturities.
In June 2016, the Company terminated its existing credit facility and entered into a new $6.0 billion, five-year credit facility that matures in June 2021.
The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has
not drawn funding from this facility.
In December 2015, the Company filed a securities registration statement with the U.S. Securities and Exchange Commission (SEC) under the automatic
shelf registration process available to “well-known seasoned issuers” which is effective for three years.
In February 2015, Merck issued $8.0 billion aggregate principal amount of senior unsecured notes. The Company used a portion of the net proceeds of
the offering of $7.9 billion to repay commercial paper issued to substantially finance the Company’s acquisition of Cubist. The remaining net proceeds were used
for general corporate purposes, including for repurchases of the Company’s common stock, and the repayment of outstanding commercial paper borrowings and
debt maturities.
Also in February 2015, the Company redeemed $1.9 billion of legacy Cubist debt acquired in the acquisition (see Note 3 to the consolidated financial
statements).
In October 2014, the Company issued €2.5 billion principal amount of senior unsecured notes. The net proceeds of the offering of $3.1 billion were
used in part to repay debt that was validly tendered in connection with tender offers launched by the Company for certain outstanding notes and debentures. The
Company paid $2.5 billion in aggregate consideration (applicable purchase price together with accrued interest) to redeem $1.8 billion principal amount of debt. In
November 2014, Merck redeemed an additional $2.0 billion principal amount of senior unsecured notes.
Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp &
Dohme Corp. (MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for
payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.
The Company continues to maintain a conservative financial profile. The Company places its cash and investments in instruments that meet high credit
quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issuer. The Company does
not participate in any off-balance sheet arrangements involving unconsolidated subsidiaries that provide financing or potentially expose the Company to
unrecorded financial obligations.
In November 2016, the Board of Directors declared a quarterly dividend of $0.47 per share on the Company’s common stock payable in January 2017.
In March 2015, Merck’s board of directors authorized additional purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury
stock purchase authorization has no time limit and will be made over time
57
Table of Contents
in open-market transactions, block transactions, on or off an exchange, or in privately negotiated transactions. The Company purchased $3.4 billion of its common
stock ( 60 million shares) for its treasury during 2016 . The Company has approximately $5.1 billion remaining under the March share repurchase program. The
Company purchased $4.2 billion and $7.7 billion of its common stock during 2015 and 2014 , respectively, under this and previously authorized share repurchase
programs.
Financial Instruments Market Risk Disclosures
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets
and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and
accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.
Foreign
Currency
Risk
Management
The Company has established revenue hedging, balance sheet risk management, and net investment hedging programs to protect against volatility of
future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar
value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will
hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur
over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales
hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales. The portion of forecasted sales hedged is based on assessments
of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The
Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts, and purchased collar options.
Because Merck principally sells foreign currency in its revenue hedging program, a uniform weakening of the U.S. dollar would yield the largest overall
potential loss in the market value of these hedge instruments. The market value of Merck’s hedges would have declined by an estimated $538 million and $502
million at December 31, 2016 and 2015 , respectively, from a uniform 10% weakening of the U.S. dollar. The market value was determined using a foreign
exchange option pricing model and holding all factors except exchange rates constant. Although not predictive in nature, the Company believes that a 10%
threshold reflects reasonably possible near-term changes in Merck’s major foreign currency exposures relative to the U.S. dollar. The cash flows from these
contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
The Company manages operating activities and net asset positions at the local level in order to mitigate the effect of exchange on monetary assets and
liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency
other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange
contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in
developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical
to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument.
The cash flows from these contracts are reported as operating activities in the Consolidated Statements of Cash Flows.
A sensitivity analysis to changes in the value of the U.S. dollar on foreign currency denominated derivatives, investments and monetary assets and
liabilities indicated that if the U.S. dollar uniformly weakened by 10% against all currency exposures of the Company at December 31, 2016 , Income
before
taxes
would have declined by approximately $26 million in 2016 . Because the Company was in a net short (payable) position relative to its major foreign currencies
after consideration of forward contracts, a uniform weakening of the U.S. dollar will yield the largest overall potential net loss in earnings due to exchange. At
December 31, 2015, the Company was in a net long (receivable)
58
Table of Contents
position relative to its major foreign currencies after consideration of forward contracts, therefore a uniform 10% strengthening of the U.S. dollar would have
reduced Income
before
taxes
by approximately $45 million. This measurement assumes that a change in one foreign currency relative to the U.S. dollar would not
affect other foreign currencies relative to the U.S. dollar. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible
near-term changes in Merck’s major foreign currency exposures relative to the U.S. dollar. The cash flows from these contracts are reported as operating activities
in the Consolidated Statement of Cash Flows.
Since January 2010, Venezuela has been designated hyperinflationary and, as a result, local foreign operations are remeasured in U.S. dollars with the
impact recorded in results of operations. In 2015, the Venezuelan government identified multiple exchange rates, which included the CENCOEX rate (6.3 VEF per
U.S. dollar) and the SIMADI rate. While the Venezuelan government had indicated that essential goods, including food and medicine, would remain at the
CENCOEX rate, during the second quarter of 2015, upon evaluation of evolving economic conditions in Venezuela and volatility in the country, combined with a
decline in transactions that were settled at the CENCOEX rate, the Company determined it was unlikely that all outstanding net monetary assets would be settled at
the CENCOEX rate. Accordingly, during the second quarter of 2015, the Company recorded a charge of $715 million within Other
(income)
expense,
net
to
devalue its net monetary assets in Venezuela to an amount that represented the Company’s estimate of the U.S. dollar amount that would ultimately be collected.
During the third quarter of 2015, the Company recorded additional exchange losses of $138 million in the aggregate reflecting the ongoing effect of translating
transactions and net monetary assets consistent with the second quarter. As a result of the further deterioration of economic conditions in Venezuela and continued
declines in transactions which were settled at the CENCOEX rate (subsequently replaced by the DIPRO rate), in the fourth quarter of 2015, the Company began
using the SIMADI rate, which was 198.70 VEF per U.S. at December 31, 2015, to report its Venezuelan operations. The Company also revalued its remaining net
monetary assets at the SIMADI rate (subsequently replaced with the DICOM rate), which resulted in an additional charge in the fourth quarter of 2015 of $161
million.
The Company may also use forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The
forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its
foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates that are recorded in Other
(income)
expense,
net
. The effective
portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within Other
Comprehensive
Income
( OCI
), and
remains in Accumulated
Other
Comprehensive
Income
( AOCI)
until either the sale or complete or substantially complete liquidation of the subsidiary. The cash
flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been
designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to
spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI
.
Interest
Rate
Risk
Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes
and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that
would put principal capital at risk.
In May 2016, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0
billion, 0.70% fixed-rate notes due 2016 to variable rate debt. At December 31, 2016 , the Company was a party to 26 pay-floating, receive-fixed interest rate swap
contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table
below.
59
Table of Contents
($
in
millions)
Debt Instrument
1.30% notes due 2018
5.00% notes due 2019
1.85% notes due 2020
3.875% notes due 2021
2.40% notes due 2022
2.35% notes due 2022
Par Value of Debt
Number of Interest Rate
Swaps Held
Total Swap Notional
Amount
2016
1,000
1,250
1,250
1,150
1,000
1,250
4
3
5
5
4
5
1,000
550
1,250
1,150
1,000
1,250
The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank
Offered Rate (LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense and offset by
the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
The Company’s investment portfolio includes cash equivalents and short-term investments, the market values of which are not significantly affected by
changes in interest rates. The market value of the Company’s medium- to long-term fixed-rate investments is modestly affected by changes in U.S. interest rates.
Changes in medium- to long-term U.S. interest rates have a more significant impact on the market value of the Company’s fixed-rate borrowings, which generally
have longer maturities. A sensitivity analysis to measure potential changes in the market value of Merck’s investments and debt from a change in interest rates
indicated that a one percentage point increase in interest rates at December 31, 2016 and 2015 would have positively affected the net aggregate market value of
these instruments by $1.3 billion and $1.2 billion, respectively. A one percentage point decrease at December 31, 2016 and 2015 would have negatively affected
the net aggregate market value by $1.6 billion and $1.5 billion, respectively. The fair value of Merck’s debt was determined using pricing models reflecting one
percentage point shifts in the appropriate yield curves. The fair values of Merck’s investments were determined using a combination of pricing and duration
models.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP and, accordingly, include certain amounts that are based on
management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value
determinations of assets and liabilities, primarily IPR&D, other intangible assets and contingent consideration, as well as subsequent fair value measurements.
Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of
inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension
and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including
intangible assets and goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these
estimates. Application of the following accounting policies result in accounting estimates having the potential for the most significant impact on the financial
statements.
Acquisitions
To determine whether acquisitions qualify as business combinations or asset acquisitions, the Company makes certain judgments, which include
assessment of the inputs, processes, and outputs associated with the acquired set of activities. On October 1, 2016, the Company adopted new accounting guidance
intended to clarify whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If the Company determines that substantially
all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business.
To be considered a business, the assets in a transaction need to include an input and a substantive process that together significantly contribute to the ability to
create outputs. Prior to the adoption of the new guidance, the Company would consider an acquisition or disposition a business if there were inputs, as well as
processes that when applied to those inputs had the ability to create outputs.
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of
the acquisition at their respective fair values with limited exceptions.
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Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be
estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is
recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not
reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets
acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired
business are reflected in the Company’s consolidated financial statements after the date of the acquisition. The fair values of intangible assets, including acquired
IPR&D, are determined utilizing information available near the acquisition date based on expectations and assumptions that are deemed reasonable by
management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists
for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing
until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a separate determination as to the then useful life of
the asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. Certain of
the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones,
including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the
acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement
of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each
reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in
any of the inputs may result in a significantly different fair value adjustment.
The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset
lives, can materially affect the Company’s results of operations.
If the Company determines the transaction will not be accounted for as an acquisition of a business, the transaction will be accounted for as an
acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired IPR&D with no alternative
future use is charged to expense at the acquisition date.
The fair values of identifiable intangible assets related to currently marketed products and product rights are primarily determined by using an income
approach through which fair value is estimated based on each asset’s discounted projected net cash flows. The Company’s estimates of market participant net cash
flows consider historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and
therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the time and investment that will be required to
develop products and technologies; the ability to obtain marketing and regulatory approvals; the ability to manufacture and commercialize the products; the extent
and timing of potential new product introductions by the Company’s competitors; and the life of each asset’s underlying patent, if any. The net cash flows are then
probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows
utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to IPR&D are also determined using an income approach, through which fair value is estimated
based on each asset’s probability-adjusted future net cash flows, which reflect the different stages of development of each product and the associated probability of
successful completion. The net cash flows are then discounted to present value using an appropriate discount rate.
Revenue
Recognition
Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically at time of delivery. Recognition of revenue
also requires reasonable assurance of collection of sales proceeds and
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completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, indirectly through an
intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under
certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are
recorded net of time value of money discounts for customers for which collection of accounts receivable is expected to be in excess of one year.
The provision for aggregate indirect customer discounts covers chargebacks and rebates. Chargebacks are discounts that occur when a contracted
customer purchases directly through an intermediary wholesaler. The contracted customer generally purchases product at its contracted price plus a mark-up from
the wholesaler. The wholesaler, in turn, charges the Company back for the difference between the price initially paid by the wholesaler and the contract price paid
to the wholesaler by the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted
customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with
private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan
participant. The provision is based on expected payments, which are driven by patient usage and contract performance by the benefit provider customers.
The Company uses historical customer segment mix, adjusted for other known events, in order to estimate the expected provision. Amounts accrued for
aggregate indirect customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance
organizations, pharmacy benefit managers and other customers to the amounts accrued. Adjustments are recorded when trends or significant events indicate that a
change in the estimated provision is appropriate.
The Company continually monitors its provision for aggregate indirect customer discounts. There were no material adjustments to estimates associated
with the aggregate indirect customer discount provision in 2016 , 2015 or 2014 .
Summarized information about changes in the aggregate indirect customer discount accrual related to U.S. sales is as follows:
($
in
millions)
Balance January 1
Current provision
Adjustments to prior years
Payments
Balance December 31
2016
2015
2,798 $
9,831
(169)
(9,515)
2,945 $
2,154
8,068
(77)
(7,347)
2,798
$
$
Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates as current liabilities. The accrued balances
relative to these provisions included in Accounts
receivable
and Accrued
and
other
current
liabilities
were $196 million and $2.7 billion , respectively, at
December 31, 2016 and were $145 million and $2.7 billion , respectively, at December 31, 2015 .
The Company maintains a returns policy that allows its U.S. pharmaceutical customers to return product within a specified period prior to and
subsequent to the expiration date (generally, three to six months before and 12 months after product expiration). The estimate of the provision for returns is based
upon historical experience with actual returns. Additionally, the Company considers factors such as levels of inventory in the distribution channel, product dating
and expiration period, whether products have been discontinued, entrance in the market of additional generic competition, changes in formularies or launch of over-
the-counter products, among others. The product returns provision for U.S. pharmaceutical sales as a percentage of U.S. net pharmaceutical sales was 1.4% in 2016
, 1.5% in 2015 and 1.7% in 2014 .
Through its distribution programs with U.S. wholesalers, the Company encourages wholesalers to align purchases with underlying demand and
maintain inventories below specified levels. The terms of the programs allow the wholesalers to earn fees upon providing visibility into their inventory levels, as
well as by achieving certain performance parameters such as inventory management, customer service levels, reducing shortage claims and reducing product
returns. Information provided through the wholesaler distribution programs includes items such as sales trends, inventory on-hand, on-order quantity and product
returns.
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Wholesalers generally provide only the above mentioned data to the Company, as there is no regulatory requirement to report lot level information to
manufacturers, which is the level of information needed to determine the remaining shelf life and original sale date of inventory. Given current wholesaler
inventory levels, which are generally less than a month, the Company believes that collection of order lot information across all wholesale customers would have
limited use in estimating sales discounts and returns.
Inventories
Produced
in
Preparation
for
Product
Launches
The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically,
capitalization of such inventory does not begin until the related product candidates are in Phase 3 clinical trials and are considered to have a high probability of
regulatory approval. The Company monitors the status of each respective product within the regulatory approval process; however, the Company generally does
not disclose specific timing for regulatory approval. If the Company is aware of any specific risks or contingencies other than the normal regulatory approval
process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling, the related
inventory would generally not be capitalized. Expiry dates of the inventory are affected by the stage of completion. The Company manages the levels of inventory
at each stage to optimize the shelf life of the inventory in relation to anticipated market demand in order to avoid product expiry issues. For inventories that are
capitalized, anticipated future sales and shelf lives support the realization of the inventory value as the inventory shelf life is sufficient to meet initial product
launch requirements. Inventories produced in preparation for product launches capitalized at December 31, 2016 and 2015 were $80 million and $63 million ,
respectively.
Contingencies
and
Environmental
Liabilities
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 certain additional matters (see Note 10 to the consolidated financial statements.) The Company records accruals for
contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as
assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and
considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent
losses are accrued when probable and reasonably estimable.
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the
significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the
Company’s legal defense strategy and structure in light of the scope of its 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
associated litigation. The amount of legal defense reserves as of December 31, 2016 and 2015 of approximately $185 million and $245 million , respectively,
represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such
as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the
Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the
reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation
and Liability Act, commonly known as Superfund, and other federal and state equivalents. When a legitimate claim for contribution is asserted, a liability is
initially accrued based upon the estimated transaction costs to manage the site. Accruals are adjusted as site investigations, feasibility studies and related cost
assessments of remedial techniques are completed, and as the extent to which other potentially responsible parties who may be jointly and severally liable can be
expected to contribute is determined.
The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and takes an active role in
identifying and accruing for these costs. In the past, Merck performed a worldwide survey to assess all sites for potential contamination resulting from past
industrial activities. Where assessment indicated that physical investigation was warranted, such investigation was performed, providing a better evaluation of the
need for remedial action. Where such need was identified, remedial action was then initiated. As
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definitive information became available during the course of investigations and/or remedial efforts at each site, estimates were refined and accruals were
established or adjusted accordingly. These estimates and related accruals continue to be refined annually.
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material
adverse effect on the Company. Expenditures for remediation and environmental liabilities were $11 million in 2016 , and are estimated at $44 million in the
aggregate for the years 2017 through 2021 . In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have
been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015 , respectively. These liabilities are undiscounted, do not consider potential
recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15
years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any
reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $64 million in the aggregate. Management also does not
believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for
any year.
Share-Based
Compensation
The Company expenses all share-based payment awards to employees, including grants of stock options, over the requisite service period based on the
grant date fair value of the awards. The Company determines the fair value of certain share-based awards using the Black-Scholes option-pricing model which uses
both historical and current market data to estimate the fair value. This method incorporates various assumptions such as the risk-free interest rate, expected
volatility, expected dividend yield and expected life of the options. Total pretax share-based compensation expense was $300 million in 2016 , $299 million in
2015 and $278 million in 2014 . At December 31, 2016 , there was $443 million of total pretax unrecognized compensation expense related to nonvested stock
option, restricted stock unit and performance share unit awards which will be recognized over a weighted average period of 1.9 years. For segment reporting,
share-based compensation costs are unallocated expenses.
Pensions
and
Other
Postretirement
Benefit
Plans
Net periodic benefit cost for pension and other postretirement benefit plans totaled $56 million in 2016 , $253 million in 2015 and $169 million in 2014
. Pension and other postretirement benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for
plan benefit obligations and an expected rate of return on plan assets. The changes in net periodic benefit cost year over year for pension plans are largely
attributable to changes in the discount rate affecting net amortization. The decrease in net periodic benefit cost for other postretirement benefit plans in 2016 as
compared with 2015 is largely attributable to changes in retiree medical benefits approved by the Company in December 2015.
The Company reassesses its benefit plan assumptions on a regular basis. For both the pension and other postretirement benefit plans, the discount rate is
evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide
the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The discount rates for the Company’s U.S. pension and other
postretirement benefit plans ranged from 3.40% to 4.30% at December 31, 2016, compared with a range of 3.80% to 4.80% at December 31, 2015 .
The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets
over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term compound
annualized returns of historical market data as well as actual returns on the Company’s plan assets. Using this reference information, the Company develops
forward-looking return expectations for each asset category and a weighted-average expected long-term rate of return for a target portfolio allocated across these
investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2017 , the expected rate of return for
the Company’s U.S. pension and other postretirement benefit plans will range from 8.00% to 8.75% , as compared to a range of 7.30% to 8.75% in 2016 .
The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to
deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s
U.S. pension and other
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postretirement benefit plans is allocated 40% to 60% in U.S. equities, 20% to 40% in international equities, 15% to 25% in fixed-income investments, and up to 5%
in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual
standard deviation of returns of the target portfolio, which approximates 13% , reflects both the equity allocation and the diversification benefits among the asset
classes in which the portfolio invests. For non-U.S. pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local
government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of
strategies that are diversified within management guidelines.
Actuarial assumptions are based upon management’s best estimates and judgment. A reasonably possible change of plus (minus) 25 basis points in the
discount rate assumption, with other assumptions held constant, would have an estimated $81 million favorable (unfavorable) impact on the Company’s current
year net periodic benefit cost. A reasonably possible change of plus (minus) 25 basis points in the expected rate of return assumption, with other assumptions held
constant, would have an estimated $46 million favorable (unfavorable) impact on Merck’s current year net periodic benefit cost. Required funding obligations for
2017 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. The preceding hypothetical changes in the discount
rate and expected rate of return assumptions would not impact the Company’s funding requirements.
Net loss amounts, which reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as
the effects of changes in actuarial assumptions, are recorded as a component of AOCI
. Expected returns for pension plans are based on a calculated market-related
value of assets. Under this methodology, asset gains/losses resulting from actual returns that differ from the Company’s expected returns are recognized in the
market-related value of assets ratably over a five-year period. Also, net loss amounts in AOCI
in excess of certain thresholds are amortized into net periodic benefit
cost over the average remaining service life of employees.
Restructuring
Costs
Restructuring costs have been recorded in connection with restructuring programs designed to streamline the Company’s cost structure. As a result, the
Company has made estimates and judgments regarding its future plans, including future termination benefits and other exit costs to be incurred when the
restructuring actions take place. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the
range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. In connection
with these actions, management also assesses the recoverability of long-lived assets employed in the business. In certain instances, asset lives have been shortened
based on changes in the expected useful lives of the affected assets. Severance and other related costs are reflected within Restructuring
costs
. Asset-related
charges are reflected within Materials
and
production
costs, Marketing
and
administrative
expenses and Research
and
development
expenses depending upon the
nature of the asset.
Impairments
of
Long-Lived
Assets
The Company assesses changes in economic, regulatory and legal conditions and makes assumptions regarding estimated future cash flows in
evaluating the value of the Company’s property, plant and equipment, goodwill and other intangible assets.
The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its long-lived assets to be held and used
may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset
groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the
difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted
value of estimated future cash flows approach.
Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired and is assigned to reporting units.
The Company tests its goodwill for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of the factors considered in the assessment
include general macroeconomic conditions, conditions specific to the industry and market, cost factors which could have a significant effect on earnings or cash
flows, the overall financial performance of the reporting unit, and whether there have been sustained declines in the Company’s share price. Additionally, the
Company evaluates
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the extent to which the fair value exceeded the carrying value of the reporting unit at the last date a valuation was performed. If the Company concludes it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Other acquired intangible assets (excluding IPR&D) are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a
straight-line basis over their estimated useful lives. When events or circumstances warrant a review, the Company will assess recoverability from future operations
using pretax undiscounted cash flows derived from the lowest appropriate asset groupings. Impairments are recognized in operating results to the extent that the
carrying value of the intangible asset exceeds its fair value, which is determined based on the net present value of estimated future cash flows.
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time
of acquisition, have not reached technological feasibility. The amounts are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment
testing until completion or abandonment of the project. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators
exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying
amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of
the IPR&D intangible asset with its carrying value is performed. For impairment testing purposes, the Company may combine separately recorded IPR&D
intangible assets into one unit of account based on the relevant facts and circumstances. Generally, the Company will combine IPR&D intangible assets for testing
purposes if they operate as a single asset and are essentially inseparable. If the fair value is less than the carrying amount, an impairment loss is recognized within
the Company’s operating results.
The judgments made in evaluating impairment of long-lived intangibles can materially affect the Company’s results of operations.
Impairments
of
Investments
The Company reviews its investments for impairments based on the determination of whether the decline in market value of the investment below the
carrying value is other-than-temporary. The Company considers available evidence in evaluating potential impairments of its investments, including the duration
and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-
than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not
intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis,
the amount of the other-than-temporary impairment recognized in earnings is limited to the portion attributed to credit loss. The remaining portion of the other-
than-temporary impairment related to other factors is recognized in OCI
.
Taxes
on
Income
The Company’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in
which the Company operates. An estimated effective tax rate for a year is applied to the Company’s quarterly operating results. In the event that there is a
significant unusual or one-time item recognized, or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would
be separately calculated and recorded at the same time as the unusual or one-time item. The Company considers the resolution of prior year tax matters to be such
items. Significant judgment is required in determining the Company’s tax provision and in evaluating its tax positions. The recognition and measurement of a tax
position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company evaluates tax
positions to 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. If the more likely than not threshold is not met in the period for which a tax
position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires,
or if the more likely than not threshold is met in a subsequent period (see Note 15 to the consolidated financial statements.)
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Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. Timing
differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in
future years for which the Company has already recorded the tax benefit in the financial statements. The Company establishes valuation allowances for its deferred
tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent
tax expense recognized in the financial statements for which payment has been deferred or expense for which the Company has already taken a deduction on the
tax return, but has not yet recognized as expense in the financial statements. At December 31, 2016 , foreign earnings of $63.1 billion have been retained
indefinitely by subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such
earnings and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued amended accounting guidance on revenue recognition that will be applied to all
contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful
information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective
date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each
prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of
initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified
retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences.
However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain
discount and trade promotion programs.
In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity
investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net
income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure
requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the
impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees
recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term
lease). Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current
operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new
guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of
adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces
an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale
debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and
annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated
financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce
diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied
retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating
the effect of the standard on its Consolidated Statement of Cash Flows.
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In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than
inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold
to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of
inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new
guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of
adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is
effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is
permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are
recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new
guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its
consolidated financial statements.
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 management’s 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 “anticipates,” “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 Company’s 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
Company’s 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 Company’s filings with the Securities and Exchange Commission, especially on this Form 10-K and Forms 10-Q
and 8-K. In Item 1A. “Risk Factors” of this annual report on Form 10-K the Company discusses in more detail various important risk 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.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
The information required by this Item is incorporated by reference to the discussion under “Financial Instruments Market Risk Disclosures” in Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Table of Contents
Item 8.
Financial Statements and Supplementary Data.
(a)
Financial Statements
The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 2016 and 2015 , and the related consolidated statements of
income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2016 , the notes to consolidated
financial statements, and the report dated February 28, 2017 of PricewaterhouseCoopers LLP, independent registered public accounting firm, are as follows:
Consolidated Statement of Income
Merck & Co., Inc. and Subsidiaries
Years
Ended
December
31
($
in
millions
except
per
share
amounts)
Sales
Costs, Expenses and Other
Materials and production
Marketing and administrative
Research and development
Restructuring costs
Other (income) expense, net
Income Before Taxes
Taxes on Income
Net Income
Less: Net Income Attributable to Noncontrolling Interests
Net Income Attributable to Merck & Co., Inc.
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders
Consolidated Statement of Comprehensive Income
Merck & Co., Inc. and Subsidiaries
Years
Ended
December
31
($
in
millions)
Net Income Attributable to Merck & Co., Inc.
Other Comprehensive Income (Loss) Net of Taxes:
Net unrealized (loss) gain on derivatives, net of reclassifications
Net unrealized (loss) gain on investments, net of reclassifications
Benefit plan net (loss) gain and prior service (cost) credit, net of amortization
Cumulative translation adjustment
2016
2015
2014
$
39,807 $
39,498 $
42,237
13,891
9,762
10,124
651
720
14,934
10,313
6,704
619
16,768
11,606
7,180
1,013
1,527
(11,613)
35,148
34,097
4,659
718
3,941
21
5,401
942
4,459
17
24,954
17,283
5,349
11,934
14
$
$
$
3,920 $
4,442 $
11,920
1.42 $
1.41 $
1.58 $
1.56 $
4.12
4.07
2016
2015
2014
$
3,920 $
4,442 $
11,920
(66)
(44)
(799)
(169)
(1,078)
(126)
(70)
579
(208)
175
398
57
(2,077)
(504)
(2,126)
Comprehensive Income Attributable to Merck & Co., Inc.
$
2,842 $
4,617 $
9,794
The
accompanying
notes
are
an
integral
part
of
these
consolidated
financial
statements.
69
Table of Contents
Consolidated Balance Sheet
Merck & Co., Inc. and Subsidiaries
December
31
($
in
millions
except
per
share
amounts)
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable (net of allowance for doubtful accounts of $195 in 2016
and $165 in 2015) (excludes accounts receivable of $10 in 2015
classified in Other assets)
Inventories (excludes inventories of $1,117 in 2016 and $1,569
in 2015 classified in Other assets - see Note 6)
Other current assets
Total current assets
Investments
Property, Plant and Equipment (at cost)
Land
Buildings
Machinery, equipment and office furnishings
Construction in progress
Less: accumulated depreciation
Goodwill
Other Intangibles, Net
Other Assets
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt
Trade accounts payable
Accrued and other current liabilities
Income taxes payable
Dividends payable
Total current liabilities
Long-Term Debt
Deferred Income Taxes
Other Noncurrent Liabilities
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2016 and 2015
Other paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less treasury stock, at cost:
828,372,200 shares in 2016 and 795,975,449 shares in 2015
Total Merck & Co., Inc. stockholders’ equity
Noncontrolling Interests
Total equity
2016
2015
$
6,515 $
7,826
8,524
4,903
7,018
6,484
$
$
4,866
4,389
30,614
11,416
412
11,439
14,053
1,871
27,775
15,749
12,026
18,162
17,305
5,854
4,700
5,140
29,751
13,039
490
12,154
14,261
1,525
28,430
15,923
12,507
17,723
22,602
6,055
95,377 $
101,677
568 $
2,807
10,274
2,239
1,316
17,204
24,274
5,077
8,514
1,788
39,939
44,133
(5,226)
80,634
40,546
40,088
220
2,583
2,533
11,216
1,560
1,309
19,201
23,829
6,535
7,345
1,788
40,222
45,348
(4,148)
83,210
38,534
44,676
91
40,308
44,767
$
95,377 $
101,677
The
accompanying
notes
are
an
integral
part
of
this
consolidated
financial
statement.
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Table of Contents
Consolidated Statement of Equity
Merck & Co., Inc. and Subsidiaries
Years
Ended
December
31
($
in
millions
except
per
share
amounts)
Balance January 1, 2014
Net income attributable to Merck & Co., Inc.
Other comprehensive loss, net of tax
Cash dividends declared on common stock ($1.77 per share)
Treasury stock shares purchased
AstraZeneca option exercise
Net income attributable to noncontrolling interests
Distributions attributable to noncontrolling interests
Share-based compensation plans and other
Balance December 31, 2014
Net income attributable to Merck & Co., Inc.
Other comprehensive income, net of tax
Cash dividends declared on common stock ($1.81 per share)
Treasury stock shares purchased
Changes in noncontrolling ownership interests
Net income attributable to noncontrolling interests
Distributions attributable to noncontrolling interests
Share-based compensation plans and other
Balance December 31, 2015
Net income attributable to Merck & Co., Inc.
Other comprehensive loss, net of tax
Cash dividends declared on common stock ($1.85 per share)
Treasury stock shares purchased
Changes in noncontrolling ownership interests
Net income attributable to noncontrolling interests
Distributions attributable to noncontrolling interests
Share-based compensation plans and other
Balance December 31, 2016
Common
Stock
$1,788
Other
Paid-In
Capital
$ 40,508
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Non-
controlling
Interests
Total
$
39,257
$
(2,197)
$
(29,591)
$
2,561
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(85)
1,788
40,423
—
—
—
—
—
—
—
—
—
—
—
—
(20)
—
—
(181)
1,788
40,222
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(283)
$ 39,939
11,920
—
(5,156)
—
—
—
—
—
46,021
4,442
—
(5,115)
—
—
—
—
—
45,348
3,920
—
(5,135)
—
—
—
—
—
—
(2,126)
—
—
—
—
—
—
—
—
—
(7,703)
—
—
—
2,032
(4,323)
(35,262)
—
175
—
—
—
—
—
—
—
—
—
(4,186)
—
—
—
914
(4,148)
(38,534)
—
(1,078)
—
—
—
—
—
—
—
—
—
(3,434)
—
—
—
1,422
—
—
—
—
(2,400)
14
(77)
46
144
—
—
—
—
(55)
17
(15)
—
91
—
—
—
—
124
21
(16)
—
52,326
11,920
(2,126)
(5,156)
(7,703)
(2,400)
14
(77)
1,993
48,791
4,442
175
(5,115)
(4,186)
(75)
17
(15)
733
44,767
3,920
(1,078)
(5,135)
(3,434)
124
21
(16)
1,139
$
1,788
$
44,133
$
(5,226)
$
(40,546)
$
220
$
40,308
The
accompanying
notes
are
an
integral
part
of
this
consolidated
financial
statement.
71
Table of Contents
Consolidated Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years
Ended
December
31
($
in
millions)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Intangible asset impairment charges
Charge related to the settlement of worldwide Keytruda
patent litigation
Foreign currency devaluation related to Venezuela
Net charge related to the settlement of Vioxx
shareholder class action litigation
Gain on divestiture of Merck Consumer Care business
Gain on AstraZeneca option exercise
Loss on extinguishment of debt
Equity income from affiliates
Dividends and distributions from equity method affiliates
Deferred income taxes
Share-based compensation
Other
Net changes in assets and liabilities:
Accounts receivable
Inventories
Trade accounts payable
Accrued and other current liabilities
Income taxes payable
Noncurrent liabilities
Other
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Capital expenditures
Purchases of securities and other investments
Proceeds from sales of securities and other investments
Divestiture of Merck Consumer Care business, net of cash divested
Dispositions of other businesses, net of cash divested
Proceeds from AstraZeneca option exercise
Acquisition of Cubist Pharmaceuticals, Inc., net of cash acquired
Acquisition of Idenix Pharmaceuticals, Inc., net of cash acquired
Acquisitions of other businesses, net of cash acquired
Acquisition of Bayer AG collaboration rights
Cash inflows from net investment hedges
Other
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Net change in short-term borrowings
Payments on debt
Proceeds from issuance of debt
Purchases of treasury stock
Dividends paid to stockholders
Other dividends paid
Proceeds from exercise of stock options
Other
Net Cash Used in Financing Activities
2016
2015
2014
$
3,941
$
4,459 $
11,934
5,441
3,948
625
—
—
—
—
—
(86)
16
(1,521)
300
313
(619)
206
278
(2,018)
124
(809)
237
10,376
(1,614)
(15,651)
14,353
—
—
—
—
—
(780)
—
29
453
(3,210)
—
(2,386)
1,079
(3,434)
(5,124)
—
939
(118)
(9,044)
6,375
162
—
876
680
—
—
—
(205)
50
(764)
299
874
(480)
805
(37)
(8)
(266)
(277)
(5)
12,538
(1,283)
(16,681)
20,413
—
316
—
(7,598)
—
(146)
—
139
82
(4,758)
(1,540)
(2,906)
7,938
(4,186)
(5,117)
—
485
(61)
(5,387)
6,691
1,222
—
—
—
(11,209)
(741)
628
(257)
185
(2,600)
278
34
(554)
79
593
1,635
(21)
190
(98)
7,989
(1,317)
(24,944)
15,114
13,951
1,169
419
—
(3,700)
(181)
(1,000)
195
(80)
(374)
(460)
(6,617)
3,146
(7,703)
(5,170)
(77)
1,560
79
(15,242)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
(131)
(2,009)
8,524
6,515
$
(1,310)
1,083
7,441
8,524 $
(553)
(8,180)
15,621
7,441
$
The
accompanying
notes
are
an
integral
part
of
this
consolidated
financial
statement.
72
Table of Contents
Notes to Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($
in
millions
except
per
share
amounts)
1. Nature of Operations
Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines,
vaccines, biologic therapies and animal health products. The Company’s operations are principally managed on a products basis and include four operating
segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable segment.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint
ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders.
The Company 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, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric,
adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers,
physician distributors and government entities. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD
(SPMSD) joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets that were
previously part of the joint venture.
The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the
Company sells to veterinarians, distributors and animal producers. The Company’s Healthcare Services segment provides services and solutions that focus on
engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the
Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company divested
its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products (see Note 3).
2. Summary of Accounting Policies
Principles
of
Consolidation
—
The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a
controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the
absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both.
For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as Noncontrolling
interests
in equity.
Investments in affiliates over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the
Company and a third party that are under shared control, are carried on the equity basis.
Acquisitions
—
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as
of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise
from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed
that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset
or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company
may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price
(consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired
company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of
the acquisition. If the Company determines the assets acquired do not meet the
73
Table of Contents
definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business
combination and, therefore, no goodwill will be recorded.
Foreign
Currency
Translation
—
The net assets of international subsidiaries where the local currencies have been determined to be the functional
currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at
changing rates are recorded in the foreign currency translation account, which is included in Accumulated
other
comprehensive
income
(loss)
( AOCI
) and
reflected as a separate component of equity. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar has
been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and
liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other
(income)
expense,
net
.
Cash
Equivalents
—
Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.
Inventories
—
Inventories are valued at the lower of cost or market. The cost of a substantial majority of domestic pharmaceutical and vaccine
inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined
using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product
launches that are considered to have a high probability of regulatory approval. In evaluating the recoverability of inventories produced in preparation for product
launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product
within the regulatory approval process.
Investments
— Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair values of the
Company’s investments are determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value
that are considered temporary are reported net of tax in Other
Comprehensive
Income
( OCI
). For declines in the fair value of equity securities that are considered
other-than-temporary, impairment losses are charged to Other
(income)
expense,
net
. The Company considers available evidence in evaluating potential
impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to
hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost
basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt
security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in Other
(income)
expense,
net
, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized
in OCI
. Realized gains and losses for both debt and equity securities are included in Other
(income)
expense,
net
.
Revenue
Recognition
—
Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically upon delivery.
Recognition of revenue also requires reasonable assurance of collection of sales proceeds and completion of all performance obligations. Domestically, sales
discounts are issued to customers as direct discounts at the point-of-sale, indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the
form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales
discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts if collection of accounts
receivable is expected to be in excess of one year. Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates are
recorded as current liabilities. The accrued balances relative to the provisions for chargebacks and rebates included in Accounts
receivable
and Accrued
and
other
current
liabilities
were $196 million and $2.7 billion , respectively, at December 31, 2016 and $145 million and $2.7 billion , respectively, at December 31, 2015 .
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Table of Contents
The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with
Securities and Exchange Commission (SEC) Interpretation ,
Commission
Guidance
Regarding
Accounting
for
Sales
of
Vaccines
and
BioTerror
Countermeasures
to
the
Federal
Government
for
Placement
into
the
Pediatric
Vaccine
Stockpile
or
the
Strategic
National
Stockpile
.
Depreciation
—
Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes,
accelerated tax methods are used. The estimated useful lives primarily range from 25 to 45 years for Buildings
, and from 3 to 15 years for Machinery,
equipment
and
office
furnishings
. Depreciation expense was $1.6 billion in 2016 , $1.6 billion in 2015 and $2.5 billion in 2014 .
Advertising
and
Promotion
Costs
—
Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion
expenses of $2.1 billion , $2.1 billion and $2.3 billion in 2016 , 2015 and 2014 , respectively.
Software
Capitalization
—
The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including
external direct costs of material and services, and payroll costs for employees directly involved with the software development. Capitalized software costs are
included in Property,
plant
and
equipment
and amortized beginning when the software project is substantially complete and the asset is ready for its intended use.
Capitalized software costs associated with projects that are being amortized over 6 to 10 years (including the Company’s on-going multi-year implementation of
an enterprise-wide resource planning system) were $452 million and $421 million , net of accumulated amortization at December 31, 2016 and 2015 , respectively.
All other capitalized software costs are being amortized over periods ranging from 3 to 5 years. Costs incurred during the preliminary project stage and post-
implementation stage, as well as maintenance and training costs, are expensed as incurred.
Goodwill
—
Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is
assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative
factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Acquired
Intangibles
—
Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an
estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives ranging from 2 to 20 years (see Note 7). The Company
periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such
circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying
value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value
of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.
Acquired
In-Process
Research
and
Development
—
Acquired in-process research and development (IPR&D) that the Company acquires through
business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological
feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment
of the projects. Upon successful completion of each project, Merck will make a determination as to the then useful life of the intangible asset, generally determined
by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment
at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair
value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying
amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. If the fair value is less than the carrying
amount, an impairment loss is recognized in operating results.
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Table of Contents
Contingent
Consideration
—
Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent
upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of
contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of
projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-
weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with
changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
Research
and
Development
—
Research and development is expensed as incurred. Upfront and milestone payments due to third parties in connection
with research and development collaborations prior to regulatory approval are expensed as incurred. Payments due to third parties upon or subsequent to regulatory
approval are capitalized and amortized over the shorter of the remaining license or product patent life. Amounts due from collaborative partners related to
development activities are generally reflected as a reduction of research and development expenses when the specific milestone has been achieved. Nonrefundable
advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or
when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment
charges in all periods. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of
liabilities for contingent consideration.
Share-Based
Compensation
—
The Company expenses all share-based payments to employees over the requisite service period based on the grant-date
fair value of the awards.
Restructuring
Costs
—
The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is
incurred. In accordance with existing benefit arrangements, employee termination costs are accrued when the restructuring actions are probable and estimable.
When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the
range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. Costs for one-time termination benefits in which
the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.
Contingencies
and
Legal
Defense
Costs
—
The Company records accruals for contingencies and legal defense costs expected to be incurred in
connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Taxes
on
Income
—
Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based
on enacted tax laws and rates. The Company evaluates tax positions to 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. The Company recognizes
interest and penalties associated with uncertain tax positions as a component of Taxes
on
income
in the Consolidated Statement of Income.
Use
of
Estimates
—
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United
States (GAAP) and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for
amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities, primarily IPR&D, other intangible assets and
contingent consideration, as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales
discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts
recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation
assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and
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goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Reclassifications
—
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Recently
Adopted
Accounting
Standards
—
In the first quarter of 2016, the Company adopted accounting guidance issued by the Financial Accounting
Standards Board (FASB) in April of 2015, which requires debt issuance costs to be presented as a direct deduction from the carrying amount of that debt on the
balance sheet as opposed to being presented as a deferred charge. Approximately $100 million of debt issuance costs were reclassified in the first quarter of 2016 as
a result of the adoption of the new standard. Prior period amounts have been recast to conform to the new presentation.
In the second quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB in March of 2016 intended to
simplify the accounting and reporting for employee share-based payment transactions. Among other provisions, the new standard requires that excess tax benefits
and deficiencies that arise upon vesting or exercise of share-based payments be recognized in the income statement (as opposed to previous guidance under which
tax effects were recorded to Other
paid-in-capital
in certain instances). This aspect of the new guidance, which was required to be adopted prospectively, resulted
in the recognition of $79 million of excess tax benefits in Taxes
on
income
in 2016 arising from share-based payments. The new guidance also amended the
presentation of certain share-based payment items in the statement of cash flows. Cash flows related to excess income tax benefits are now classified as an
operating activity (formerly included as a financing activity). The Company elected to adopt this aspect of the new guidance prospectively. The standard also
clarified that cash payments made to taxing authorities on the employees’ behalf for shares withheld should be presented as a financing activity. This aspect of the
guidance was adopted retrospectively; accordingly, the Company reclassified $117 million and $129 million of such payments from operating activities to
financing activities in the Consolidated Statement of Cash Flows for the years ended December 31, 2015 and 2014, respectively, to conform to the current
presentation. The Company has elected to continue to estimate the impact of forfeitures when determining the amount of compensation cost to be recognized each
period rather than account for them as they occur.
In the fourth quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB on January 5, 2017 intended to
clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a
group of similar assets), the assets would not represent a business. To be considered a business, the assets in the transaction need to include an input and a
substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, an acquisition or disposition
would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Entities are permitted to
apply the updated guidance to transactions occurring before the guidance was issued as long as the applicable financial statements have not been
issued. Accordingly, the Company elected to adopt this guidance prospectively as of October 1, 2016.
Recently
Issued
Accounting
Standards
—
In May 2014, the FASB issued amended accounting guidance on revenue recognition that will be applied to
all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more
useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the
effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively
to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the
date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified
retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences.
However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain
discount and trade promotion programs.
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In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity
investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net
income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure
requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the
impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees
recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term
lease). Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current
operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new
guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of
adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces
an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale
debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and
annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated
financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce
diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied
retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating
the effect of the standard on its Consolidated Statement of Cash Flows.
In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than
inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold
to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of
inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new
guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of
adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is
effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is
permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are
recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new
guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its
consolidated financial statements.
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3. Acquisitions, Divestitures, Research Collaborations and License Agreements
The Company continues to acquire businesses and establish external alliances such as research collaborations and licensing agreements to complement
its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and
milestone, royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. The
Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio
assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the
acquired entity are not significant when compared with the Company’s financial results.
2016
Transactions
In July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic
candidates targeting the P2X3 receptor for the treatment of common, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264
(formerly AF-219), is a selective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 2b clinical trial for the treatment of refractory,
chronic cough as well as in a Phase 2 clinical trial in idiopathic pulmonary fibrosis with cough. Total consideration transferred of $510 million included cash paid
for outstanding Afferent shares of $487 million , as well as share-based compensation payments to settle equity awards attributable to precombination service and
cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a total of up to an additional $750 million
contingent upon the attainment of certain clinical development and commercial milestones for multiple indications and candidates, including MK-7264. This
transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values
as of the acquisition date. The Company determined the fair value of the contingent consideration was $223 million at the acquisition date utilizing a probability-
weighted estimated cash flow stream adjusted for the expected timing of each payment using an appropriate discount rate dependent on the nature and timing of the
milestone payment. Merck recognized an intangible asset for in-process research and development (IPR&D) of $832 million , net deferred tax liabilities of $258
million , and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets
acquired of $130 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the
identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated based upon the asset’s probability-
adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The net cash flows
were then discounted to present value using a discount rate of 11.5% . Actual cash flows are likely to be different than those assumed.
Also in July 2016, Merck, through its wholly owned subsidiary Healthcare Services & Solutions, LLC, acquired a majority ownership interest in The
StayWell Company LLC (StayWell), a portfolio company of Vestar Capital Partners (Vestar). StayWell is a health engagement company that helps its clients
engage and educate people to improve health and business results. Under the terms of the transaction, Merck paid $150 million for a majority ownership interest.
Additionally, Merck provided StayWell with a $150 million intercompany loan to pay down preexisting third-party debt. Merck has an option to buy, and Vestar
has an option to require Merck to buy, some or all of Vestar’s remaining ownership interest at fair value beginning three years from the acquisition date. This
transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $238 million , deferred tax liabilities of $84 million , other net
liabilities of $5 million and noncontrolling interest of $124 million . The excess of the consideration transferred over the fair value of net assets acquired of $275
million was recorded as goodwill and is largely attributable to anticipated synergies expected to arise after the acquisition. The goodwill was allocated to the
Healthcare Services segment and is not deductible for tax purposes. The intangible assets recognized primarily relate to customer relationships, which are being
amortized over a 10 -year useful life, and medical information and solutions content, which are being amortized over a five -year useful life.
Additionally, in July 2016, Merck announced it had executed an agreement to acquire a controlling interest in Vallée S.A. (Vallée), a leading privately
held producer of animal health products in Brazil. Vallée has an extensive portfolio of products spanning parasiticides, anti-infectives and vaccines that include
products for livestock, horses, and companion animals. Under the terms of the agreement, Merck will acquire approximately 93% of the shares of Vallée for
approximately $400 million , based on exchange rates at the time of the announcement. This agreement is subject to regulatory review and certain closing
conditions.
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In June 2016, Merck and Moderna Therapeutics (Moderna) entered into a strategic collaboration and license agreement to develop and commercialize
novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include
the evaluation of mRNA-based personalized cancer vaccines in combination with Merck’s Keytruda
. Pursuant to the terms of the agreement, Merck made an
upfront cash payment to Moderna of $200 million , which was recorded in Research
and
development
expenses. Following human proof of concept studies, Merck
has the right to elect to make an additional payment to Moderna. If Merck exercises this right, the two companies will then equally share cost and profits under a
worldwide collaboration for the development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines
in the United States. The agreement entails exclusivity around combinations with Keytruda
. Moderna and Merck will each have the ability to combine mRNA-
based personalized cancer vaccines with other (non-PD-1) agents.
In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a privately held UK-based drug discovery company focused on the development of
innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition
provides Merck with IOmet’s preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO
inhibitors. The transaction was accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of $150
million and future additional milestone payments of up to $250 million that are contingent upon certain clinical and regulatory milestones being achieved. The
Company determined the fair value of the contingent consideration was $94 million at the acquisition date utilizing a probability-weighted estimated cash flow
stream adjusted for the expected timing of each payment utilizing a discount rate of 10.5% . Merck recognized intangible assets for IPR&D of $155 million and net
deferred tax assets of $32 million . The excess of the consideration transferred over the fair value of net assets acquired of $57 million was recorded as goodwill
that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were
determined using an income approach. The assets’ probability-adjusted future net cash flows were then discounted to present value also using a discount rate of
10.5% . Actual cash flows are likely to be different than those assumed.
2015
Transactions
In December 2015, the Company divested its remaining ophthalmics portfolio in international markets to Mundipharma Ophthalmology Products
Limited. Merck received consideration of approximately $170 million and recognized a gain of $147 million recorded in Other
(income)
expense,
net
in 2015.
In July 2015, Merck acquired cCAM Biotherapeutics Ltd. (cCAM), a privately held biopharmaceutical company focused on the discovery and
development of novel cancer immunotherapies. Total purchase consideration in the transaction included an upfront payment of $96 million in cash and future
additional payments of up to $510 million associated with the attainment of certain clinical development, regulatory and commercial milestones. The transaction
was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $180 million related to CM-24, a monoclonal antibody, as
well as a liability for contingent consideration of $105 million , goodwill of $14 million and other net assets of $7 million . During 2016, as a result of unfavorable
efficacy data, the Company determined that it would discontinue development of the pipeline program. Accordingly, the Company recorded an IPR&D impairment
charge of $180 million related to CM-24 and reversed the related liability for contingent consideration, which had a fair value of $116 million at the time of
program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in
Research
and
development
expenses in 2016.
Also in July 2015, Merck and Allergan plc (Allergan) entered into an agreement pursuant to which Allergan acquired the exclusive worldwide rights to
MK-1602 and MK-8031, Merck’s investigational small molecule oral calcitonin gene-related peptide (CGRP) receptor antagonists, which are being developed for
the treatment and prevention of migraine. Under the terms of the agreement, Allergan acquired these rights for upfront payments of $250 million , of which $125
million was paid in August 2015 upon closing of the transaction and the remaining $125 million was paid in April of 2016. The Company recorded a gain of $250
million within Other
(income)
expense,
net
in 2015 related to the transaction. Allergan is fully responsible for development of the CGRP programs, as well as
manufacturing and commercialization upon approval and launch of the products. Under the agreement, Merck is entitled to receive potential development and
commercial milestone payments and royalties at tiered double-digit rates based on commercialization
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of the programs. During 2016, Merck recognized gains of $100 million within Other
(income)
expense,
net
resulting from payments by Allergan for the
achievement of research and development milestones.
In February 2015, Merck and NGM Biopharmaceuticals, Inc. (NGM), a privately held biotechnology company, entered into a multi-year collaboration
to research, discover, develop and commercialize novel biologic therapies across a wide range of therapeutic areas. Under the terms of the agreement, Merck made
an upfront payment to NGM of $94 million , which was included in Research
and
development
expenses, and purchased a 15% equity stake in NGM for $106
million . Merck committed up to $250 million to fund all of NGM’s efforts under the initial five -year term of the collaboration, with the potential for additional
funding if certain conditions are met. Prior to Merck initiating a Phase 3 study for a licensed program, NGM may elect to either receive milestone and royalty
payments or, in certain cases, to co-fund development and participate in a global cost and revenue share arrangement of up to 50% . The agreement also provides
NGM with the option to participate in the co-promotion of any co-funded program in the United States. Merck has the option to extend the research agreement for
two additional two -year terms.
In January 2015, Merck acquired Cubist Pharmaceuticals, Inc. (Cubist), a leader in the development of therapies to treat serious infections caused by a
broad range of bacteria. Total consideration transferred of $8.3 billion included cash paid for outstanding Cubist shares of $7.8 billion , as well as share-based
compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Cubist. Share-based
compensation payments to settle non-vested equity awards attributable to postcombination service were recognized as transaction expense in 2015. In addition, the
Company assumed all of the outstanding convertible debt of Cubist, which had a fair value of approximately $1.9 billion at the acquisition date. Merck redeemed
this debt in February 2015. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Cubist is as follows:
Estimated fair value at January 21, 2015
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Property, plant and equipment
Identifiable intangible assets:
Products and product rights (11 year weighted-average useful life)
IPR&D
Other noncurrent assets
Current liabilities
(1)
Deferred income tax liabilities
Long-term debt
Other noncurrent liabilities (1)
Total identifiable net assets
Goodwill (2)
Consideration transferred
$
$
733
123
216
55
151
6,923
50
184
(233)
(2,519)
(1,900)
(122)
3,661
4,670
8,331
(1)
Included
in
current
liabilities
and
other
noncurrent
liabilities
is
contingent
consideration
of
$73
million
and
$50
million
,
respectively.
(2)
The
goodwill
recognized
is
largely
attributable
to
anticipated
synergies
expected
to
arise
after
the
acquisition
and
was
allocated
to
the
Pharmaceutical
segment.
The
goodwill
is
not
deductible
for
tax
purposes.
The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach through
which fair value is estimated based on market participant expectations of each asset’s discounted projected net cash flows. The Company’s estimates of projected
net cash flows considered historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry
and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the extent and timing of potential new product
introductions by the Company’s competitors; and the life of
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each asset’s underlying patent. The net cash flows were then probability-adjusted where appropriate to consider the uncertainties associated with the underlying
assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product were then
discounted to present value utilizing a discount rate of 8% . Actual cash flows are likely to be different than those assumed.
The Company recorded the fair value of incomplete research project surotomycin (MK-4261) which, at the time of acquisition, had not reached
technological feasibility and had no alternative future use. During the second quarter of 2015, the Company received unfavorable efficacy data from a clinical trial
for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the
program and an IPR&D impairment charge (see Note 7).
In connection with the Cubist acquisition, liabilities were recorded for potential future consideration that is contingent upon the achievement of future
sales-based milestones. The fair value of contingent consideration liabilities was determined at the acquisition date using unobservable inputs. These inputs include
the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and a risk-adjusted discount rate of 8%
used to present value the probability-weighted cash flows. Changes in the inputs could result in a different fair value measurement.
This transaction closed on January 21, 2015; accordingly, the results of operations of the acquired business have been included in the Company’s results
of operations beginning after that date. During 2015, the Company incurred $324 million of transaction costs directly related to the acquisition of Cubist including
share-based compensation costs, severance costs, and legal and advisory fees which are reflected in Marketing
and
administrative
expenses.
The following unaudited supplemental pro forma data presents consolidated information as if the acquisition of Cubist had been completed on January
1, 2014:
Years
Ended
December
31
Sales
Net income attributable to Merck & Co., Inc.
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
2015
2014
$
39,584 $
4,640
1.65
1.63
43,437
10,887
3.76
3.72
The unaudited supplemental pro forma data reflects the historical information of Merck and Cubist adjusted to include additional amortization expense
based on the fair value of assets acquired, additional interest expense that would have been incurred on borrowings used to fund the acquisition, transaction costs
associated with the acquisition, and the related tax effects of these adjustments. The pro forma data should not be considered indicative of the results that would
have occurred if the acquisition had been consummated on January 1, 2014, nor are they indicative of future results.
2014
Transactions
In December 2014, Merck acquired OncoEthix, a privately held biotechnology company specializing in oncology drug development. Total purchase
consideration in the transaction included an upfront cash payment of $110 million and future additional milestone payments of up to $265 million that were
contingent upon certain clinical and regulatory milestones being achieved. The transaction was accounted for as an acquisition of a business. Merck recognized an
intangible asset for IPR&D of $143 million related to MK-8628 (formerly OTX015), an investigational, novel oral BET (bromodomain) inhibitor, as well as a
liability for contingent consideration of $43 million and other net assets of $10 million . During 2016, as a result of unfavorable efficacy data, the Company
determined that it would discontinue the development of MK-8628. Accordingly, the Company recorded an IPR&D impairment charge of $143 million related to
MK-8628 and reversed the related liability for contingent consideration, which had a fair value of $40 million at the time of program discontinuation. Both the
IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in Research
and
development
expenses in 2016.
On October 1, 2014, the Company completed the sale of its Merck Consumer Care (MCC) business to Bayer AG (Bayer) for $14.2 billion ( $14.0
billion net of cash divested), less customary closing adjustments as well as certain contingent amounts held back that were payable upon the manufacturing site
transfer in Canada and regulatory approval
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in Korea. Under the terms of the agreement, Bayer acquired Merck’s existing over-the-counter business, including the global trademark and prescription rights for
Claritin and Afrin. The Company recognized a pretax gain from the sale of MCC of $11.2 billion recorded in Other
(income)
expense,
net
in 2014.
Also on October 1, 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop
soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat), which is approved to treat pulmonary arterial hypertension and chronic
thromboembolic pulmonary hypertension. The two companies will equally share costs and profits from the collaboration and implement a joint development and
commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as
well as opt-in rights for other early-stage sGC compounds in development at Bayer. Merck in turn made available its early-stage sGC compounds under similar
terms. In return for these broad collaboration rights, Merck made an upfront payment to Bayer of $1.0 billion with the potential for additional milestone payments
of up to $1.1 billion upon the achievement of agreed-upon sales goals. Under the agreement, Bayer will lead commercialization of Adempas in the Americas, while
Merck will lead commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead in the rest of world and Merck will
lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have
the right to co-promote in territories where they are not the lead. The Company determined that Merck’s payment to access Bayer’s compounds constituted an
acquisition of an asset. Of the $1.0 billion consideration paid by Merck, $915 million of fair value related to Adempas and was capitalized as an intangible asset
subject to amortization over its estimated useful life of 12 years , and the remaining $85 million of fair value related to the vericiguat compound in clinical
development and was expensed within Research
and
development
expenses. The fair values of Adempas and vericiguat were determined using an income
approach. The probability-adjusted future net cash flows were then discounted to present value using a discount rate of 10.0% for Adempas and 10.5% for
vericiguat. During the second quarter of 2016, the Company determined it was probable that, in 2017, Adempas sales would exceed the threshold triggering a $350
million milestone payment from Merck to Bayer. Accordingly, in the second quarter of 2016, the Company recorded a $350 million liability and a corresponding
intangible asset and also recognized $50 million of cumulative amortization expense within Materials
and
production
costs. The remaining intangible asset at June
30, 2016 of $300 million is being amortized over its then-remaining estimated useful life of 10.5 years as supported by projected future cash flows, subject to
impairment testing. The remaining potential future milestone payments of $775 million have not yet been accrued as they are not deemed by the Company to be
probable at this time.
In August 2014, Merck completed the acquisition of Idenix Pharmaceuticals, Inc. (Idenix) for approximately $3.9 billion in cash ( $3.7 billion net of
cash acquired). Idenix was a biopharmaceutical company engaged in the discovery and development of medicines for the treatment of human viral diseases, whose
primary focus was on the development of next-generation oral antiviral therapeutics to treat hepatitis C virus (HCV) infection. The transaction was accounted for as
an acquisition of a business. Merck recognized an intangible asset for IPR&D of $3.2 billion related to MK-3682 (formerly IDX21437), uprifosbuvir, as well as net
deferred tax liabilities of $951 million and other net liabilities of $12 million . Uprifosbuvir is a nucleotide prodrug in clinical development being evaluated for the
treatment of HCV infection. The excess of the consideration transferred over the fair value of net assets acquired of $1.5 billion was recorded as goodwill that was
allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined
using an income approach. The asset’s probability-adjusted future net cash flows were then discounted to present value using a discount rate of 11.5% . During
2016, the Company recorded a $ 2.9 billion IPR&D impairment charge related to uprifosbuvir that resulted from recent changes to the product profile taken
together with changes to the Company’s expectations for pricing and the market opportunity (see Note 7).
In May 2014, Merck entered into an agreement to sell certain ophthalmic products to Santen Pharmaceutical Co., Ltd. (Santen) in Japan and markets in
Europe and Asia Pacific. The agreement provided for upfront payments from Santen and additional payments based on defined sales milestones. Santen will also
purchase supply of ophthalmology products covered by the agreement for a two - to five -year period. The transaction closed in most markets on July 1, 2014 and
in the remaining markets on October 1, 2014. The Company received $565 million of upfront payments from Santen, net of certain adjustments, and recognized
gains of $480 million on the transactions in 2014 included in Other
(income)
expense,
net
.
83
Table of Contents
In March 2014, Merck sold its Sirna Therapeutics, Inc. (Sirna) subsidiary to Alnylam Pharmaceuticals, Inc. (Alnylam) for consideration of $25 million
and 2,520,044 shares of Alnylam common stock. Merck is eligible to receive future payments associated with the achievement of certain regulatory and
commercial milestones, as well as royalties on future sales. Merck recorded a gain of $204 million in Other
(income)
expense,
net
in 2014 related to this
transaction. The excess of Merck’s tax basis in its investment in Sirna over the value received resulted in an approximate $300 million tax benefit recorded in 2014.
In January 2014, Merck sold the U.S. marketing rights to Saphris
, an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder
in adults to Forest Laboratories, Inc. (Forest). Under the terms of the agreement, Forest made upfront payments of $232 million , which were recorded in Sales
in
2014, and will make additional payments to Merck based on defined sales milestones. In addition, as part of this transaction, Merck agreed to supply product to
Forest (subsequently acquired by Allergan) until patent expiry.
Remicade/Simponi
In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (Centocor), a Johnson & Johnson (J&J)
company, to market Remicade,
which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its
contract with Centocor for license rights to develop and commercialize Simponi
, a fully human monoclonal antibody. The Company has marketing rights to both
products throughout Europe, Russia and Turkey. Remicade
lost market exclusivity in major European markets in February 2015 and the Company no longer has
market exclusivity in any of its marketing territories . The Company continues to have market exclusivity for Simponi
in all of its marketing territories. All profits
derived from Merck’s distribution of the two products in these countries are equally divided between Merck and J&J.
4. Restructuring
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in
connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed
to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as
well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to
reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these
programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations.
The Company recorded total pretax costs of $1.1 billion in 2016 , $1.1 billion in 2015 and $2.0 billion in 2014 related to restructuring program
activities. Since inception of the programs through December 31, 2016 , Merck has recorded total pretax accumulated costs of approximately $12.6 billion and
eliminated approximately 40,900 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company
expects to substantially complete the remaining actions under these programs by the end of 2017 and incur approximately $700 million of additional pretax costs.
The Company estimates that approximately two-thirds of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense.
Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
For segment reporting, restructuring charges are unallocated expenses.
84
Table of Contents
The following table summarizes the charges related to restructuring program activities by type of cost:
Separation
Costs
Accelerated
Depreciation
Other
Total
Year
Ended
December
31,
2016
Materials and production
Marketing and administrative
Research and development
Restructuring costs
Year
Ended
December
31,
2015
Materials and production
Marketing and administrative
Research and development
Restructuring costs
Year
Ended
December
31,
2014
Materials and production
Marketing and administrative
Research and development
Restructuring costs
$
$
$
$
$
$
— $
—
—
216
216 $
— $
—
—
208
208
$
— $
—
—
674
674
$
77 $
8
142
—
227 $
78 $
59
37
—
174
$
429 $
198
273
—
900
$
104 $
87
—
435
626 $
283 $
19
15
411
728
$
53 $
2
10
339
404
$
181
95
142
651
1,069
361
78
52
619
1,110
482
200
283
1,013
1,978
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably
estimated. Positions eliminated under restructuring program activities were approximately 2,625 in 2016 , 3,770 in 2015 and 6,085 in 2014 . These position
eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the
programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based
upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to
the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were
sufficient to recover the respective book values, Merck recorded accelerated depreciation of the site assets. Anticipated site closure dates, particularly related to
manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2016 , 2015 and 2014 includes $409 million , $550 million and $240 million , respectively, of asset abandonment, shut-down and other
related costs. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 13) and
share-based compensation. Other activity also reflects net pretax losses resulting from sales of facilities and related assets of $151 million in 2016 , $117 million in
2015 and $133 million in 2014 .
85
Table of Contents
The following table summarizes the charges and spending relating to restructuring program activities:
Restructuring reserves January 1, 2015
$
1,031 $
— $
20 $
Separation
Costs
Accelerated
Depreciation
Other
Total
Expenses
(Payments) receipts, net
Non-cash activity
Restructuring reserves December 31, 2015
Expenses
(Payments) receipts, net
Non-cash activity
208
(647)
—
592
216
(413)
—
174
—
(174)
—
227
—
(227)
728
(435)
(260)
53
626
(347)
(186)
Restructuring reserves December 31, 2016 (1)
$
395 $
— $
146 $
(1)
The
remaining
cash
outlays
are
expected
to
be
substantially
completed
by
the
end
of
2017.
1,051
1,110
(1,082)
(434)
645
1,069
(760)
(413)
541
5. Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets
and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and
accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.
Foreign
Currency
Risk
Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of
future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar
value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will
hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur
over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales
hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales. The portion of forecasted sales hedged is based on assessments
of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The
Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts, and purchased collar options.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance
Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or OCI
, depending on whether the derivative is
designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the effective portion of
the unrealized gains or losses on these contracts is recorded in AOCI
and reclassified into Sales
when the hedged anticipated revenue is recognized. The hedge
relationship is highly effective and hedge ineffectiveness has been de
minimis
. For those derivatives which are not designated as cash flow hedges, but serve as
economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales
each period. The cash flows from both designated and non-designated
contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative
purposes.
86
Table of Contents
The Company manages operating activities and net asset positions at the local level in order to mitigate the effect of exchange on monetary assets and
liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency
other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange
contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in
developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical
to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument.
The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect
on the balance sheet date with the effects of changes in spot rates reported in Other
(income)
expense,
net
. The forward contracts are not designated as hedges and
are marked to market through Other
(income)
expense,
net
. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the
remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences
are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.
The Company may also use forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The
forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its
foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates that are recorded in Other
(income)
expense,
net
. The effective
portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within OCI
, and remains in AOCI
until either the
sale or complete or substantially complete liquidation of the subsidiary. The cash flows from these contracts are reported as investing activities in the Consolidated
Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been
designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to
spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI
. Included in the cumulative
translation adjustment are pretax gains of $193 million in 2016 , $304 million in 2015 and $294 million in 2014 from the euro-denominated notes.
Interest
Rate
Risk
Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes
and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that
would put principal capital at risk.
In May 2016, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0
billion , 0.70% fixed-rate notes due 2016 to variable rate debt. At December 31, 2016 , the Company was a party to 26 pay-floating, receive-fixed interest rate swap
contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table
below.
Debt Instrument
1.30% notes due 2018
5.00% notes due 2019
1.85% notes due 2020
3.875% notes due 2021
2.40% notes due 2022
2.35% notes due 2022
Par Value of Debt
Number of Interest Rate
Swaps Held
Total Swap Notional
Amount
2016
1,000
1,250
1,250
1,150
1,000
1,250
4
3
5
5
4
5
1,000
550
1,250
1,150
1,000
1,250
87
Table of Contents
The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank
Offered Rate (LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense and offset by
the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging
instruments and those that are not designated as hedging instruments as of December 31:
Balance Sheet Caption
Asset
Liability
2016
Fair Value of
Derivative
2015
Fair Value of
Derivative
Asset
Liability
U.S. Dollar
Notional
U.S. Dollar
Notional
Derivatives
Designated
as
Hedging
Instruments
Interest rate swap contracts
Other assets
Interest rate swap contracts
Accrued and other current liabilities
Interest rate swap contracts
Other noncurrent liabilities
Foreign exchange contracts
Other current assets
Foreign exchange contracts
Other assets
Foreign exchange contracts
Accrued and other current liabilities
Foreign exchange contracts
Other noncurrent liabilities
Derivatives
Not
Designated
as
Hedging
Instruments
Foreign exchange contracts
Other current assets
Foreign exchange contracts
Other assets
Foreign exchange contracts
Accrued and other current liabilities
Foreign exchange contracts
Other noncurrent liabilities
$
$
$
$
$
20 $
—
—
616
129
—
—
765
$
230 $
—
—
—
230 $
995 $
88
— $
—
29
—
—
1
1
31
$
— $
—
103
—
103 $
134 $
2,700 $
—
3,500
6,063
2,075
48
12
42 $
—
—
579
386
—
—
14,398
$
1,007
$
8,210 $
—
2,931
—
11,141 $
25,539 $
212 $
18
—
—
230 $
1,237 $
— $
1
23
—
—
1
—
25
$
— $
—
37
1
38 $
63 $
2,700
1,000
3,500
4,171
4,136
77
—
15,584
8,783
179
2,508
6
11,476
27,060
Table of Contents
As noted above, the Company records its derivatives on a gross basis in the Consolidated Balance Sheet. The Company has master netting agreements
with several of its financial institution counterparties (see Concentrations
of
Credit
Risk
below). The following table provides information on the Company’s
derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash
collateral exchanged per the master agreements and related credit support annexes at December 31:
Gross amounts recognized in the consolidated balance sheet
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet
Cash collateral (received) posted
Net amounts
2016
2015
Asset
Liability
Asset
Liability
$
$
995 $
134 $
1,237 $
(131)
(529)
335 $
(131)
—
3
$
(59)
(862)
316 $
63
(59)
—
4
The table below provides information on the location and pretax gain or loss amounts for derivatives that are: (i) designated in a fair value hedging
relationship, (ii) designated in a foreign currency cash flow hedging relationship, (iii) designated in a foreign currency net investment hedging relationship and
(iv) not designated in a hedging relationship:
Years
Ended
December
31
Derivatives
designated
in
a
fair
value
hedging
relationship
Interest rate swap contracts
Amount of loss (gain) recognized in Other
(income)
expense,
net
on derivatives (1)
Amount of (gain) loss recognized in Other
(income)
expense,
net
on hedged item (1)
Derivatives
designated
in
foreign
currency
cash
flow
hedging
relationships
Foreign exchange contracts
Amount of gain reclassified from AOCI
to Sales
Amount of gain recognized in OCI
on derivatives
Derivatives
designated
in
foreign
currency
net
investment
hedging
relationships
Foreign exchange contracts
Amount of gain recognized in Other
(income)
expense,
net
on derivatives (2)
Amount of loss (gain) recognized in OCI
on derivatives
Derivatives
not
designated
in
a
hedging
relationship
Foreign exchange contracts
Amount of loss (gain) recognized in Other
(income)
expense,
net
on derivatives (3)
Amount of (gain) loss recognized in Sales
2016
2015
2014
$
28 $
(29)
(14) $
7
(17)
14
(311)
(210)
(724)
(526)
(1)
2
(4)
(10)
132
—
(461)
(1)
(143)
(775)
(6)
(192)
(516)
15
(1)
There
was
$1
million
, $7
million
and
$3
million
of
ineffectiveness
on
the
hedge
during
2016
,
2015
and
2014
,
respectively.
(2)
There
was
no
ineffectiveness
on
the
hedge.
Represents
the
amount
excluded
from
hedge
effectiveness
testing.
(3)
These
derivative
contracts
mitigate
changes
in
the
value
of
remeasured
foreign
currency
denominated
monetary
assets
and
liabilities
attributable
to
changes
in
foreign
currency
exchange
rates.
At December 31, 2016 , the Company estimates $462 million of pretax net unrealized gains on derivatives maturing within the next 12 months that
hedge foreign currency denominated sales over that same period will be reclassified from AOCI
to Sales
. The amount ultimately reclassified to Sales
may differ as
foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.
89
Table of Contents
Investments in Debt and Equity Securities
Information on investments in debt and equity securities at December 31 is as follows:
Corporate notes and bonds
Commercial paper
U.S. government and agency securities
Asset-backed securities
Mortgage-backed securities
Foreign government bonds
Equity securities
2016
2015
Fair
Value
Amortized
Cost
Gross Unrealized
Gains
Losses
Fair
Value
Amortized
Cost
Gross Unrealized
Gains
Losses
$
$
10,577 $
4,330
2,232
1,376
796
519
349
20,179 $
10,601 $
4,330
2,244
1,380
801
521
281
20,158 $
15 $
—
1
1
1
—
71
89 $
$
(39)
—
(13)
(5)
(6)
(2)
(3)
(68)
$
10,259 $
2,977
1,761
1,284
694
607
534
18,116 $
10,299 $
2,977
1,767
1,290
697
586
409
18,025 $
7 $
—
—
—
1
22
125
155 $
(47)
—
(6)
(6)
(4)
(1)
—
(64)
Available-for-sale debt securities included in Short-term
investments
totaled $7.8 billion at December 31, 2016 . Of the remaining debt securities, $10.2
billion mature within five years. At December 31, 2016 and 2015 , there were no debt securities pledged as collateral.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value
hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs
used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level
1
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2
— Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3
— Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined
using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which
the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest
level input that is significant to the fair value measurement of the instrument.
90
Table of Contents
Financial
Assets
and
Liabilities
Measured
at
Fair
Value
on
a
Recurring
Basis
Financial assets and liabilities measured at fair value on a recurring basis at December 31 are summarized below:
Fair Value Measurements Using
Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2016
Significant
Unobservable
Inputs
(Level 3)
Total
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2015
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Investments
Corporate notes and bonds
Commercial paper
$
U.S. government and agency securities
Asset-backed securities (1)
Mortgage-backed securities (1)
Foreign government bonds
Equity securities
Other
assets
(2)
U.S. government and agency securities
Corporate notes and bonds
Mortgage-backed securities (1)
Asset-backed securities (1)
Foreign government bonds
Equity securities
Derivative
assets
(3)
Purchased currency options
Forward exchange contracts
Interest rate swaps
Total assets
Liabilities
Other
liabilities
Contingent consideration
Derivative
liabilities
(2)
Forward exchange contracts
Interest rate swaps
Written currency options
Total liabilities
$
$
$
— $
—
29
—
—
—
201
230
—
—
—
—
—
148
148
—
—
—
—
10,389
$
4,330
1,890
1,257
628
518
—
19,012
313
188
168
119
1
—
789
644
331
20
995
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,389
$
4,330
1,919
1,257
628
518
201
19,242
313
188
168
119
1
148
937
644
331
20
995
— $
—
—
—
—
—
360
360
—
—
—
—
—
155
155
—
—
—
—
10,259
$
2,977
1,761
1,284
694
607
—
17,582
—
—
—
—
—
19
19
1,041
154
42
1,237
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,259
2,977
1,761
1,284
694
607
360
17,942
—
—
—
—
—
174
174
1,041
154
42
1,237
378
$
20,796
$
— $
21,174
$
515
$
18,838
$
—
$
19,353
— $
— $
891
$
891
$
— $
— $
590
$
—
—
—
—
— $
93
29
12
134
134
—
—
—
—
93
29
12
134
$
891
$
1,025
$
—
—
—
—
— $
38
24
1
63
63
—
—
—
—
$
590
$
590
38
24
1
63
653
(1)
(2)
(3)
Primarily
all
of
the
asset-backed
securities
are
highly-rated
(Standard
&
Poor’s
rating
of
AAA
and
Moody’s
Investors
Service
rating
of
Aaa),
secured
primarily
by
auto
loan,
credit
card
and
student
loan
receivables,
with
weighted-average
lives
of
primarily
5
years
or
less.
Mortgage-backed
securities
represent
AAA-rated
securities
issued
or
unconditionally
guaranteed
as
to
payment
of
principal
and
interest
by
U.S.
government
agencies.
The
increase
in
investments
included
in
Other assets reflects
certain
assets
previously
restricted
for
retiree
benefits
that
became
available
to
fund
certain
other
health
and
welfare
benefits
during
2016
(see
Note
13).
The
fair
value
determination
of
derivatives
includes
the
impact
of
the
credit
risk
of
counterparties
to
the
derivatives
and
the
Company’s
own
credit
risk,
the
effects
of
which
were
not
significant.
There were no transfers between Level 1 and Level 2 during 2016 . As of December 31, 2016 , Cash
and
cash
equivalents
of $6.5 billion included $5.4
billion of cash equivalents (considered Level 2 in the fair value hierarchy).
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Contingent
Consideration
Summarized information about the changes in liabilities for contingent consideration is as follows:
Fair value January 1
Changes in fair value (1)
Additions
Payments
Fair value December 31
2016
2015
$
$
590 $
(407)
733
(25)
891 $
428
(16)
228
(50)
590
(1)
Recorded
in
Research and development expenses
and
Materials and production costs.
The changes in fair value in 2016 were largely attributable to the reversal of liabilities related to programs obtained in connection with the acquisitions
of cCAM, OncoEthix and SmartCells (see Note 7). The additions to contingent consideration in 2016 relate to the termination of the SPMSD joint venture (see
Note 8) and the acquisitions of IOmet and Afferent (see Note 3). The additions to contingent consideration in 2015 relate to the acquisitions of Cubist and cCAM
(see Note 3). The payments of contingent consideration in 2016 relate to the first commercial sale of Zerbaxa
in the European Union and in 2015 relate to the first
commercial sale of Zerbaxa
in the United States.
Other
Fair
Value
Measurements
Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying
value, which approximates fair value due to their short-term nature.
The estimated fair value of loans payable and long-term debt (including current portion) at December 31, 2016 , was $25.7 billion compared with a
carrying value of $24.8 billion and at December 31, 2015 , was $27.0 billion compared with a carrying value of $26.4 billion . Fair value was estimated using
recent observable market prices and would be considered Level 2 in the fair value hierarchy.
Concentrations of Credit Risk
On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial
institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and
investments are placed in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.
The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug
wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial
performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to
monitor economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its
business, taking into consideration global economic conditions and the ongoing sovereign debt issues in certain European countries. As of December 31, 2016 , the
Company’s total net accounts receivable outstanding for more than one year were approximately $140 million . The Company does not expect to have write-offs or
adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.
The Company’s customers with the largest accounts receivable balances are: McKesson Corporation, AmerisourceBergen Corporation, Cardinal
Health, Inc., Zuellig Pharma Ltd. (Asia Pacific), and AAH Pharmaceuticals Ltd (UK) which represented, in aggregate, approximately 40% of total accounts
receivable at December 31, 2016 . The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business.
Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with
several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be
exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. As
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Table of Contents
of December 31, 2016 and 2015 , the Company had received cash collateral of $529 million and $862 million , respectively, from various counterparties and the
obligation to return such collateral is recorded in Accrued
and
other
current
liabilities
. The Company had not advanced any cash collateral to counterparties as of
December 31, 2016 or 2015 .
6. Inventories
Inventories at December 31 consisted of:
Finished goods
Raw materials and work in process
Supplies
Total (approximates current cost)
Increase to LIFO costs
Recognized as:
Inventories
Other assets
2016
2015
$
1,304 $
4,222
155
5,681
302
5,983 $
4,866 $
1,117
$
$
1,343
4,374
168
5,885
384
6,269
4,700
1,569
Inventories valued under the LIFO method comprised approximately $2.3 billion and $2.4 billion of inventories at December 31, 2016 and 2015 ,
respectively. Amounts recognized as Other
assets
are comprised almost entirely of raw materials and work in process inventories. At December 31, 2016 and 2015
, these amounts included $1.0 billion and $1.5 billion , respectively, of inventories not expected to be sold within one year. In addition, these amounts included $80
million and $63 million at December 31, 2016 and 2015 , respectively, of inventories produced in preparation for product launches.
7. Goodwill and Other Intangibles
The following table summarizes goodwill activity by segment:
Balance January 1, 2015
$
Acquisitions
Divestitures
Impairments
Other (1)
Balance December 31, 2015 (2)
Acquisitions
Impairments
Other (1)
Pharmaceutical
All Other
11,108 $
4,684
(18)
—
88
15,862
207
—
6
1,884 $
29
—
(47)
(5)
1,861
275
(47)
(2)
Total
12,992
4,713
(18)
(47)
83
17,723
482
(47)
4
Balance December 31, 2016 (2)
$
16,075 $
2,087 $
18,162
(1)
Other
includes
cumulative
translation
adjustments
on
goodwill
balances
and
certain
other
adjustments.
(2)
Accumulated
goodwill
impairment
losses
at
December
31,
2016
and
2015
were
$187
million
and
$140
million
,
respectively.
In 2016, the additions to goodwill in the Pharmaceutical segment resulted primarily from the acquisitions of Afferent and IOmet (see Note 3), as well as
from the termination of the SPMSD joint venture, which was treated as a step-acquisition for accounting purposes (see Note 8). The addition to goodwill within
other non-reportable segments in 2016 relates to the acquisition of StayWell, which is part of the Healthcare Services segment (see Note 3). In 2015, the additions
to goodwill in the Pharmaceutical segment resulted primarily from the acquisition of Cubist and the reductions resulted from the divestiture of the Company’s
remaining ophthalmics business in international markets (see Note 3). The impairments of goodwill within other non-reportable segments in 2016 and 2015 relate
to certain businesses within the Healthcare Services segment.
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Table of Contents
Other intangibles at December 31 consisted of:
2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
2015
Accumulated
Amortization
Products and product rights
$
46,269 $
31,919 $
14,350 $
45,949 $
28,514 $
IPR&D
Tradenames
Other
1,653
215
1,947
—
89
771
1,653
126
1,176
4,226
198
1,418
—
79
596
Net
17,435
4,226
119
822
$
50,084 $
32,779 $
17,305 $
51,791 $
29,189 $
22,602
Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an estimated useful life,
and are amortized primarily on a straight-line basis over their estimated useful lives. The increase in intangible assets for products and product rights in 2016
primarily relates to the recognition of intangible assets in connection with the termination of the SPMSD joint venture (see Note 8). Some of the Company’s more
significant acquired intangibles related to marketed products (included in product and product rights above) at December 31, 2016 include Zerbaxa
, $3.3 billion ;
Zetia
, $1.5 billion ; Sivextro
, $955 million ; Vytorin
, $938 million ; Implanon/Nexplanon
$587 million ; Dificid
, $561 million ; Gardasil/Gardasil
9, $468
million ;
NuvaRing
, $319 million ; and Nasonex
, $308 million . The Company recognized an intangible asset related to Adempas as a result of the formation of a
collaboration with Bayer in 2014 (see Note 3) that had a carrying value of $872 million at December 31, 2016 reflected in “Other” in the table above.
During 2016 , 2015 and 2014 , the Company recorded impairment charges related to marketed products and other intangibles of $347 million , $45
million and $1.1 billion , respectively, within Material
and
production
costs. In 2016, the Company lowered its cash flow projections for Zontivity,
a product for
the reduction of thrombotic cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease, following several business
decisions that reduced sales expectations for Zontivity
in the United States and Europe. The Company utilized market participant assumptions and considered
several different scenarios to determine the fair value of the intangible asset related to Zontivity
that, when compared with its related carrying value, resulted in an
impairment charge of $252 million . Also during 2016, the Company wrote-off $95 million that had been capitalized in connection with in-licensed products
Grastek
and Ragwitek
, allergy immunotherapy tablets that, for business reasons, the Company has determined it will return to the licensor. The charges in 2015
primarily relate to the impairment of customer relationship and tradename intangibles for certain businesses within in the Healthcare Services segment. Of the
amount recorded in 2014, $793 million related to PegIntron,
$244 million related to Victrelis
and $35 million related to Rebetol
, all of which are products for the
treatment of chronic HCV infection. During 2014, developments in the competitive HCV treatment market led to market share losses that were greater than the
Company had predicted causing changes in cash flow projections for PegIntron
, Victrelis
and Rebetol
that indicated the intangible asset values were not
recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair values of the
intangible assets related to PegIntron
, Victrelis
and Rebetol
that, when compared with their related carrying values, resulted in the impairment charges noted
above.
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time
of acquisition, have not reached technological feasibility. Amounts capitalized as IPR&D are accounted for as indefinite-lived intangible assets, subject to
impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a separate determination
as to the then useful life of the asset and begin amortization. During 2016 , 2015 and 2014 , $8 million , $280 million and $654 million , respectively, of IPR&D
was reclassified to products and product rights upon receipt of marketing approval in a major market.
During 2016, the Company recorded $3.6 billion of IPR&D impairment charges within Research
and
development
expenses. Of this amount, $2.9
billion relates to the clinical development program for uprifosbuvir, a nucleotide prodrug in clinical development being evaluated for the treatment of HCV. The
Company determined that recent changes to the product profile, as well as changes to Merck’s expectations for pricing and the market opportunity, taken together
constituted a triggering event that required the Company to evaluate the uprifosbuvir intangible asset for impairment. Utilizing market participant assumptions, and
considering different scenarios, the Company concluded
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that its best estimate of the current fair value of the intangible asset related to uprifosbuvir was $240 million , resulting in the recognition of the pretax impairment
charge noted above. The IPR&D impairment charges in 2016 also include charges of $180 million and $143 million related to the discontinuation of programs
obtained in connection with the acquisitions of cCAM and OncoEthix, respectively, resulting from unfavorable efficacy data. An additional $72 million relates to
programs obtained in connection with the SmartCells acquisition following a decision to terminate the lead compound due to a lack of efficacy and to pursue a
back-up compound which reduced projected future cash flows. The IPR&D impairment charges in 2016 also include $112 million related to an in-licensed program
for house dust mite allergies that, for business reasons, will be returned to the licensor. The remaining IPR&D impairment charges for 2016 primarily relate to
deprioritized pipeline programs that were deemed to have no alternative use during the period, including a $79 million impairment charge for an investigational
candidate for contraception. The discontinuation or delay of certain of these clinical development programs resulted in a reduction of the related liabilities for
contingent consideration (see Note 3).
During 2015, the Company recorded $63 million of IPR&D impairment charges, of which $50 million related to the surotomycin clinical development
program. During 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an
assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above.
During 2014, the Company recorded $49 million of IPR&D impairment charges primarily as a result of changes in cash flow assumptions for certain
compounds obtained in connection with the Company’s joint venture with Supera Farma Laboratorios S.A. (Supera), as well as for the discontinuation of certain
Animal Health programs.
All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the
Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates.
The Company may recognize additional non-cash impairment charges in the future related to other marketed products or pipeline programs and such
charges could be material.
Aggregate amortization expense primarily recorded within Materials
and
production
costs was $3.8 billion in 2016 , $4.8 billion in 2015 and $4.2
billion in 2014 . The estimated aggregate amortization expense for each of the next five years is as follows: 2017 , $3.2 billion ; 2018 , $2.8 billion ; 2019 , $1.4
billion ; 2020 , $1.2 billion ; 2021 , $1.1 billion .
8. Joint Ventures and Other Equity Method Affiliates
Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates including SPMSD (until
termination on December 31, 2016), certain investment funds, as well as AZLP (until the termination of the Company’s relationship with AZLP on June 30, 2014).
Equity income from affiliates was $86 million in 2016 , $205 million in 2015 and $257 million in 2014 and is included in Other
(income)
expense,
net
(see Note
14).
Investments in affiliates accounted for using the equity method totaled $715 million at December 31, 2016 and $702 million at December 31, 2015 .
These amounts are reported in Other
assets
. Amounts due from the above joint ventures included in Other
current
assets
were $1 million at December 31, 2016
and $34 million at December 31, 2015 .
Sanofi
Pasteur
MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture (SPMSD) to market vaccines in
Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.0 billion for 2016 , $923
million for 2015 and $1.1 billion for 2014 .
On December 31, 2016, Merck and Sanofi Pasteur (Sanofi) terminated SPMSD and ended their joint vaccines operations in Europe. Under the terms of
the termination, Merck acquired Sanofi’s 50% interest in SPMSD in exchange for consideration of $657 million comprised of cash, as well as future royalties of
11.5% on net sales of all Merck products through December 31, 2024, which the Company determined had a fair value of $416 million on the date of
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Table of Contents
termination. The Company accounted for this transaction as a step acquisition, which required that Merck remeasure its ownership interest (previously accounted
for as an equity method investment) to fair value at the acquisition date. Merck in turn sold to Sanofi its intellectual property rights held by SPMSD in exchange for
consideration of $596 million comprised of cash and future royalties of 11.5% on net sales of all Sanofi products through December 31, 2024, which the Company
determined had a fair value of $302 million on the date of termination. Excluded from this arrangement are potential future sales of Vaxelis
(a jointly developed
investigational pediatric hexavalent combination vaccine that was approved by the European Commission in February 2016). The European marketing rights for
Vaxelis
were transferred to a separate equally-owned joint venture between Sanofi and Merck (MCM).
The net impact of the termination of the SPMSD joint venture is as follows:
Products and product rights (8 year useful life)
Accounts receivable
Income taxes payable
Deferred income tax liabilities
Other, net
Goodwill
(1)
Net assets acquired
Consideration payable to Sanofi, net
Derecognition of Merck’s previously held equity investment in SPMSD
Increase in net assets
Merck’s share of restructuring costs related to the termination
Net gain on termination of SPMSD joint venture (2)
(1)
The
goodwill
was
allocated
to
the
Pharmaceutical
segment
and
is
not
deductible
for
tax
purposes.
(2)
Recorded
in
Other (income) expense, net .
$
$
936
133
(221)
(175)
34
20
727
(378)
(183)
166
(77)
89
The estimated fair values of identifiable intangible assets related to products and product rights were determined using an income approach through
which fair value is estimated based on market participant expectations of each asset’s projected net cash flows. The projected net cash flows were then discounted
to present value utilizing a discount rate of 11.5% . Actual cash flows are likely to be different than those assumed. Of the amount recorded for products and
product rights, $468 million relates to Gardasil/Gardasil
9.
The fair value of liabilities for contingent consideration related to Merck’s future royalty payments to Sanofi of $416 million (reflected in the
consideration payable to Sanofi, net, in the table above) was determined at the acquisition date using unobservable inputs. These inputs include the estimated
amount and timing of projected cash flows and a risk-adjusted discount rate of 8% used to present value the cash flows. Changes in the inputs could result in a
different fair value measurement.
Based on an existing accounting policy election, Merck has not recorded the $302 million estimated fair value of contingent future royalties to be
received from Sanofi on the sale of Sanofi products, but rather will recognize such amounts in future periods as sales occur and the royalties are earned.
The Company incurred $24 million of transaction costs related to the termination of SPMSD included in Marketing
and
administrative
expenses in
2016.
Pro forma financial information for this transaction has not been presented as the results are not significant when compared with the Company’s
financial results.
AstraZeneca
LP
In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra products under a royalty-bearing license. In 1993,
Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc.
(AMI), in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra’s new prescription
medicines in the United States. In 1998, Merck and Astra completed a restructuring of the ownership and operations of the joint venture whereby Merck acquired
Astra’s interest in AMI, renamed KBI Inc. (KBI), and contributed KBI’s
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operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the Partnership), in exchange for a 1% limited partner interest. Astra contributed the
net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed
AstraZeneca LP (AZLP) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights. In
connection with the 1998 restructuring of AMI, Merck assumed $2.4 billion par value preferred stock with a dividend rate of 5% per annum, which was carried by
KBI and included in Noncontrolling
interests
.
Merck earned revenue based on sales of KBI products and such revenue was $463 million in 2014 primarily relating to sales of Nexium, as well as
Prilosec. In addition, Merck earned certain Partnership returns from AZLP of $192 million in 2014, which were recorded in equity income from affiliates.
On June 30, 2014, AstraZeneca exercised its option to purchase Merck’s interest in KBI for $419 million in cash. Of this amount, $327 million reflected
an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price, which is subject to a true-up in 2018 based on actual
sales from closing in 2014 to June 2018, was deferred and recognized as income of $5 million , $182 million and $140 million , during 2016, 2015 and 2014,
respectively, in Other
(income)
expense,
net
as the contingency was eliminated as sales occurred. Once the deferred income amount was fully amortized, in the first
quarter of 2016, the Company began recognizing income and a corresponding receivable for amounts that will be due to Merck from AstraZeneca based on the
sales performance of Nexium and Prilosec subject to the true-up in June 2018. The Company recognized $93 million of such income in 2016 included in Other
(income)
expense,
net
.
The remaining exercise price of $91 million primarily represents a multiple of ten times Merck’s average 1% annual profit allocation in the partnership
for the three years prior to exercise. Merck recognized the $91 million as a gain in 2014 within Other
(income)
expense,
net
. As a result of AstraZeneca’s option
exercise, the Company’s remaining interest in AZLP was redeemed. Accordingly, the Company also recognized a non-cash gain of approximately $650 million in
2014 within Other
(income)
expense,
net
resulting from the retirement of the $2.4 billion of KBI preferred stock, the elimination of the Company’s $1.4 billion
investment in AZLP and a $340 million reduction of goodwill. This transaction resulted in a net tax benefit of $517 million in 2014 primarily reflecting the reversal
of deferred taxes on the AZLP investment balance.
As a result of AstraZeneca exercising its option, as of July 1, 2014, the Company no longer records equity income from AZLP and supply sales to
AZLP have terminated.
Summarized financial information for AZLP is as follows:
Year
Ended
December
31
Sales
Materials and production costs
Other expense, net
Income before taxes (2)
$
2014 (1)
2,205
1,044
604
557
(1)
Includes
results
through
the
June
30,
2014
termination
date.
(2)
Merck’s
partnership
returns
from
AZLP
were
generally
contractually
determined
as
noted
above
and
were
not
based
on
a
percentage
of
income
from
AZLP,
other
than
with
respect
to
Merck’s
1%
limited
partnership
interest.
9. Loans Payable, Long-Term Debt and Other Commitments
Loans payable at December 31, 2016 included $300 million of notes due in 2017 and $267 million of long-dated notes that are subject to repayment at
the option of the holder. Loans payable at December 31, 2015 included $2.3 billion of notes due in 2016 , $10 million of short-term foreign borrowings and $225
million of long-dated notes that are subject to repayment at the option of the holders. The weighted-average interest rate of commercial paper borrowings was
0.40% and 0.07% for the years ended December 31, 2016 and 2015 , respectively.
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Long-term debt at December 31 consisted of:
2.75% notes due 2025
3.70% notes due 2045
2.80% notes due 2023
5.00% notes due 2019
1.85% notes due 2020
4.15% notes due 2043
2.35% notes due 2022
3.875% notes due 2021
1.125% euro-denominated notes due 2021
1.875% euro-denominated notes due 2026
2.40% notes due 2022
Floating-rate borrowing due 2018
1.10% notes due 2018
1.30% notes due 2018
6.50% notes due 2033
Floating-rate notes due 2020
6.55% notes due 2037
0.50% euro-denominated notes due 2024
1.375% euro-denominated notes due 2036
2.50% euro-denominated notes due 2034
3.60% notes due 2042
5.85% notes due 2039
5.75% notes due 2036
5.95% debentures due 2028
6.40% debentures due 2028
6.30% debentures due 2026
Floating-rate notes due 2017
Other
2016
2015
$
2,487 $
1,972
1,743
1,273
1,238
1,236
1,228
1,152
1,035
1,028
1,003
999
999
985
806
698
594
516
512
511
489
415
369
355
325
152
—
154
2,485
1,971
1,742
1,283
1,239
1,236
1,233
1,158
1,091
1,084
1,011
998
998
985
809
698
596
—
—
538
489
415
369
354
325
152
300
270
$
24,274 $
23,829
Other (as presented in the table above) included $147 million and $223 million at December 31, 2016 and 2015 , respectively, of borrowings at variable
rates that resulted in effective interest rates of 0.89% and zero for 2016 and 2015 , respectively. Other also included foreign borrowings of $43 million at
December 31, 2015 at varying rates up to 4.75% .
With the exception of the 6.30% debentures due 2026, the notes listed in the table above are redeemable in whole or in part, at Merck’s option at any
time, at varying redemption prices.
In November 2016, the Company issued €1.0 billion principal amount of senior unsecured notes consisting of €500 million principal amount of 0.50%
notes due 2024 and €500 million principal amount of 1.375% notes due 2036. The Company intends to use the net proceeds of the offering of $1.1 billion for
general corporate purposes, including without limitation, the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming
maturities.
In October 2014, the Company issued €2.5 billion principal amount of senior unsecured notes. The net proceeds of the offering of $3.1 billion were
used in part to repay debt that was validly tendered in connection with tender offers launched by the Company for certain outstanding notes and debentures. The
Company paid $2.5 billion in aggregate consideration (applicable purchase price together with accrued interest) to redeem $1.8 billion principal
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amount of debt. In November 2014, Merck redeemed an additional $2.0 billion principal amount of senior unsecured notes. The Company recorded a pretax loss of
$628 million in 2014 in connection with these transactions.
Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp &
Dohme Corp. (MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for
payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.
Certain of the Company’s borrowings require that Merck comply with financial covenants including a requirement that the Total Debt to Capitalization
Ratio (as defined in the applicable agreements) not exceed 60% . At December 31, 2016 , the Company was in compliance with these covenants.
The aggregate maturities of long-term debt for each of the next five years are as follows: 2017 , $301 million ; 2018 , $3.0 billion ; 2019 , $1.3 billion ;
2020 , $1.9 billion ; 2021 , $2.2 billion .
In June 2016, the Company terminated its existing credit facility and entered into a new $6.0 billion , five -year credit facility that matures in June 2021.
The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has
not drawn funding from this facility.
Rental expense under operating leases, net of sublease income, was $292 million in 2016 , $303 million in 2015 and $350 million in 2014 . The
minimum aggregate rental commitments under noncancellable leases are as follows: 2017 , $200 million ; 2018 , $141 million ; 2019 , $122 million ; 2020 , $88
million ; 2021 , $63 million and thereafter, $140 million . The Company has no significant capital leases.
10. Contingencies and Environmental Liabilities
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 certain additional matters including environmental matters. In the opinion of the Company, it is unlikely that the
resolution of these matters will be material to the Company’s financial position, results of operations or cash flows.
Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a
possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion
practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the
discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect
on the litigation.
The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated.
These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall
accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported.
Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a
loss contingency are accrued when probable and reasonably estimable.
The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such
decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of
the coverage that is available and, as such, has no insurance for most product liabilities effective August 1, 2004.
Vioxx Litigation
Product
Liability
Lawsuits
As previously disclosed, Merck was a defendant in a number of putative class action lawsuits alleging economic injury as a result of the purchase of
Vioxx
, all but one of which have been settled. Under the settlement, Merck agreed to pay up to $23 million to resolve all properly documented claims submitted by
class members, approved attorneys’ fees and expenses, and approved settlement notice costs and certain other administrative expenses. The claims
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review process has been completed with the Company paying approximately $700,000 . The amount of attorneys’ fees to be paid is yet to be determined.
Merck is also a defendant in a lawsuit (together with the above-referenced lawsuits, the Vioxx
Product Liability Lawsuits) brought by the Attorney
General of Utah. The lawsuit is pending in Utah state court. Utah alleges that Merck misrepresented the safety of Vioxx
and seeks damages and penalties under the
Utah False Claims Act. No trial date has been set. Merck recently reached agreements with the Attorneys General in Alaska and Montana to settle their state
consumer protection act cases against the Company for $15.25 million and $16.7 million , respectively. As a result, Alaska’s action was dismissed with prejudice
on September 30, 2016, and Montana’s action was dismissed with prejudice on October 6, 2016.
Shareholder
Lawsuits
As previously disclosed, in addition to the Vioxx
Product Liability Lawsuits, various putative class actions and individual lawsuits were filed against
Merck and certain former employees alleging that the defendants violated federal securities laws by making alleged material misstatements and omissions with
respect to the cardiovascular safety of Vioxx
( Vioxx
Securities Lawsuits). The Vioxx
Securities Lawsuits were coordinated in a multidistrict litigation in the U.S.
District Court for the District of New Jersey before Judge Stanley R. Chesler. As previously disclosed, Merck reached a resolution of the Vioxx
securities class
action for which a reserve was recorded in 2015 and under which Merck created a settlement fund in 2016 of $830 million (the Settlement Class Fund) and agreed
to pay an additional amount for approved attorneys’ fees and expenses up to $232 million (the Fee/Expense Fund). On June 28, 2016, the court approved the
settlement and awarded attorneys’ fees and expenses in the amount of $222 million ; the remaining amount of the Fee/Expense Fund will be added to the
Settlement Class Fund. The Company paid the total settlement amount into escrow in April 2016. After available funds under certain insurance policies, Merck’s
net cash payment for the settlement and fees was approximately $680 million . The settlement covers all claims relating to Vioxx
by settlement class members who
purchased Merck securities between May 21, 1999, and October 29, 2004. The settlement is not an admission of wrongdoing and, as part of the settlement
agreement, defendants continue to deny the allegations.
In addition, Merck reached a resolution of the above referenced individual securities lawsuits filed by foreign and domestic institutional investors,
which were also consolidated with the Vioxx
Securities Lawsuits.
Insurance
As a result of the previously disclosed insurance arbitration, the Company’s insurers paid insurance proceeds of approximately $380 million in
connection with the settlement of the class action. The Company also has Directors and Officers insurance coverage applicable to the Vioxx
Securities Lawsuits
with remaining stated upper limits of approximately $145 million , which the Company has not received. There are disputes with the insurers about the availability
of the Company’s Directors and Officers insurance coverage for these claims. The amounts actually recovered under the Directors and Officers policies discussed
in this paragraph may be less than the stated upper limits.
International
Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, Merck has been named as a defendant in litigation relating to Vioxx
in Brazil and
Europe (collectively, the Vioxx
International Lawsuits). The litigation in these jurisdictions is generally in procedural stages and Merck expects that the litigation
may continue for a number of years.
Reserves
The Company has an immaterial reserve with respect to certain Vioxx
Product Liability Lawsuits. The Company has established no other liability
reserves for, and believes that it has meritorious defenses to, the remaining Vioxx
Product Liability Lawsuits and Vioxx
International Lawsuits and will defend
against them.
Other Product Liability Litigation
Fosamax
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Fosamax
( Fosamax
Litigation). As of
December 31, 2016 , approximately 4,230 cases are filed and pending against
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Merck in either federal or state court. In approximately 20 of these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw
(ONJ), generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use of
Fosamax
. In addition, plaintiffs in approximately 4,210 of these actions generally allege that they sustained femur fractures and/or other bone injuries (Femur
Fractures) in association with the use of Fosamax
.
Cases
Alleging
ONJ
and/or
Other
Jaw
Related
Injuries
In August 2006, the Judicial Panel on Multidistrict Litigation (JPML) ordered that certain Fosamax
product liability cases pending in federal courts
nationwide should be transferred and consolidated into one multidistrict litigation ( Fosamax
ONJ MDL) for coordinated pre-trial proceedings.
In December 2013, Merck reached an agreement in principle with the Plaintiffs’ Steering Committee (PSC) in the Fosamax
ONJ MDL to resolve
pending ONJ cases not on appeal in the Fosamax
ONJ MDL and in the state courts for an aggregate amount of $27.7 million . Merck and the PSC subsequently
formalized the terms of this agreement in a Master Settlement Agreement (ONJ Master Settlement Agreement) that was executed in April 2014 and included over
1,200 plaintiffs. In July 2014, Merck elected to proceed with the ONJ Master Settlement Agreement at a reduced funding level of $27.3 million since the
participation level was approximately 95% . Merck has fully funded the ONJ Master Settlement Agreement and the escrow agent under the agreement has been
making settlement payments to qualifying plaintiffs. The ONJ Master Settlement Agreement has no effect on the cases alleging Femur Fractures discussed below.
Discovery is currently ongoing in some of the approximately 20 remaining ONJ cases that are pending in various federal and state courts and the
Company intends to defend against these lawsuits.
Cases
Alleging
Femur
Fractures
In March 2011, Merck submitted a Motion to Transfer to the JPML seeking to have all federal cases alleging Femur Fractures consolidated into one
multidistrict litigation for coordinated pre-trial proceedings. The Motion to Transfer was granted in May 2011, and all federal cases involving allegations of Femur
Fracture have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL). In the only bellwether case tried to date
in the Femur Fracture MDL, Glynn
v.
Merck
, the jury returned a verdict in Merck’s favor. In addition, in June 2013, the Femur Fracture MDL court granted
Merck’s motion for judgment as a matter of law in the Glynn
case and held that the plaintiff’s failure to warn claim was preempted by federal law.
In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases
asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the
Glynn
case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption
grounds. Plaintiffs in approximately 515 of those cases are appealing that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). The Femur
Fracture MDL court has since dismissed without prejudice another approximately 540 cases pending plaintiffs’ appeal of the preemption ruling to the Third
Circuit. On June 30, 2016, the Third Circuit heard oral argument on plaintiffs’ appeal of the preemption ruling and the parties are awaiting the decision.
In addition, in June 2014, the Femur Fracture MDL court granted Merck summary judgment in the Gaynor
v.
Merck
case and found that Merck’s
updates in January 2011 to the Fosamax
label regarding atypical femur fractures were adequate as a matter of law and that Merck adequately communicated those
changes. The plaintiffs in Gaynor
have appealed the court’s decision to the Third Circuit. In August 2014, Merck filed a motion requesting that the court enter a
further order requiring all plaintiffs in the Femur Fracture MDL who claim that the 2011 Fosamax
label is inadequate and the proximate cause of their alleged
injuries to show cause why their cases should not be dismissed based on the court’s preemption decision and its ruling in the Gaynor
case. In November 2014, the
court granted Merck’s motion and entered the requested show cause order.
As of December 31, 2016 , seven cases were pending in the Femur Fracture MDL, excluding the 515 cases dismissed with prejudice on preemption
grounds that are pending appeal and the 540 cases dismissed without prejudice that are also pending the aforementioned appeal.
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As of December 31, 2016 , approximately 2,860 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge
Jessica Mayer in Middlesex County. The parties selected an initial group of 30 cases to be reviewed through fact discovery. Two additional groups of 50 cases each
to be reviewed through fact discovery were selected in November 2013 and March 2014, respectively. A further group of 25 cases to be reviewed through fact
discovery was selected by Merck in July 2015, and Merck has continued to select additional cases to be reviewed through fact discovery during 2016.
As of December 31, 2016 , approximately 280 cases alleging Femur Fractures have been filed and are pending in California state court. A petition was
filed seeking to coordinate all Femur Fracture cases filed in California state court before a single judge in Orange County, California. The petition was granted and
Judge Thierry Colaw is currently presiding over the coordinated proceedings. In March 2014, the court directed that a group of 10 discovery pool cases be
reviewed through fact discovery and subsequently scheduled the Galper
v.
Merck
case, which plaintiffs selected, as the first trial. The Galper
trial began in
February 2015 and the jury returned a verdict in Merck’s favor in April 2015, and plaintiff has appealed that verdict to the California appellate court. Oral
argument on plaintiff’s appeal in Galper
was held on November 17, 2016 and the parties are awaiting a decision. The next Femur Fracture trial in California that
was scheduled to begin in April 2016 was stayed at plaintiffs’ request and a new trial date has not been set.
Additionally, there are five Femur Fracture cases pending in other state courts.
Discovery is ongoing in the Femur Fracture MDL and in state courts where Femur Fracture cases are pending and the Company intends to defend
against these lawsuits.
Januvia/Janumet
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Januvia
and/or Janumet
. As of December 31,
2016 , approximately 1,195 product user claims have been served on Merck alleging generally that use of Januvia
and/or Janumet
caused the development of
pancreatic cancer and other injuries. These complaints were filed in several different state and federal courts.
Most of the claims were filed in a consolidated multidistrict litigation proceeding in the U.S. District Court for the Southern District of California called
“In re Incretin-Based Therapies Products Liability Litigation” (MDL). The MDL includes federal lawsuits alleging pancreatic cancer due to use of the following
medicines: Januvia,
Janumet
, Byetta and Victoza, the latter two of which are products manufactured by other pharmaceutical companies. The majority of claims
not filed in the MDL were filed in the Superior Court of California, County of Los Angeles (California State Court). As of December 31, 2016, eight product users
have claims pending against Merck in state courts other than the California State Court.
In November 2015, the MDL and California State Court - in separate opinions - granted summary judgment to defendants on grounds of preemption. Of
the approximately 1,195 served product user claims, these rulings resulted in the dismissal of approximately 1,100 product user claims.
Plaintiffs are appealing the MDL and California State Court preemption rulings.
In addition to the claims noted above, the Company has agreed, as of December 31, 2016 , to toll the statute of limitations for approximately 50
additional claims. The Company intends to continue defending against these lawsuits.
Propecia/Proscar
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Propecia
and/or Proscar
. As of December 31,
2016 , approximately 1,330 lawsuits have been filed by plaintiffs who allege that they have experienced persistent sexual side effects following cessation of
treatment with Propecia
and/or Proscar
. Approximately 50 of the plaintiffs also allege that Propecia
or Proscar
has caused or can cause prostate cancer, testicular
cancer or male breast cancer. The lawsuits have been filed in various federal courts and in state court in New Jersey. The federal lawsuits have been consolidated
for pretrial purposes in a federal multidistrict litigation before Judge Brian Cogan of the Eastern District of New York. The matters pending in state court in New
Jersey have been consolidated before Judge Jessica Mayer in Middlesex County. In addition, there is one matter pending in state court in California, one matter
pending in state court in New York, and one matter pending in state court in Ohio. The Company intends to defend against these lawsuits.
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Governmental Proceedings
As previously disclosed, the Company has received a civil investigative demand from the U.S. Attorney’s Office for the Southern District of New York
that requests information relating to the Company’s contracts with, services from and payments to pharmacy benefit managers with respect to Maxalt
and Levitra
from January 1, 2006 to the present. The Company is cooperating with the investigation.
As previously disclosed, the Company has received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human
Services on behalf of the U.S. Attorney’s Office for the District of Maryland and the Civil Division of the U.S. Department of Justice (DOJ) that requests
information relating to the Company’s marketing of Singulair
and Dulera
Inhalation Aerosol and certain of its other marketing activities from January 1, 2006 to
the present. The Company is cooperating with the investigation.
As previously disclosed, the Company had received a civil investigative demand from the U.S. Attorney’s Office, Eastern District of Pennsylvania that
requested information relating to the Company’s contracting and pricing of Dulera
Inhalation Aerosol with certain pharmacy benefit managers and Medicare Part
D plans. The Company cooperated with the investigation and, in August 2016, the Company learned that the underlying qui
tam
complaint had been unsealed and
voluntarily dismissed with prejudice as to the relator and without prejudice as to the government. The DOJ informed the Company that the matter is inactive and
that there is no current investigation.
As previously disclosed, the Company has received letters from the DOJ and the SEC that seek information about activities in a number of countries
and reference the Foreign Corrupt Practices Act. The Company has cooperated with the agencies in their requests and believes that this inquiry is part of a broader
review of pharmaceutical industry practices in foreign countries. As previously disclosed, the Company has been advised by the DOJ that, based on the information
that it has received, it has closed its inquiry into this matter as it relates to the Company. The Company has also recently been advised by the SEC that it has closed
its inquiry into this matter as it relates to the Company.
As previously disclosed, the Company’s subsidiaries in China have received and may continue to receive inquiries regarding their operations from
various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as
Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.
From time to time, the Company receives inquiries and is the subject of preliminary investigation activities from Competition Authorities in various
markets outside the United States. Certain of these inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be
determined adversely to the Company, monetary fines and/or remedial undertakings may be required.
Commercial and Other Litigation
K-DUR
Antitrust
Litigation
As previously disclosed, in June 1997 and January 1998, Schering-Plough Corporation (Schering-Plough) settled patent litigation with Upsher-Smith,
Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle), respectively, relating to generic versions of Schering-Plough’s long-acting potassium chloride product
supplement used by cardiac patients, for which Lederle and Upsher-Smith had filed Abbreviated New Drug Applications (ANDAs). Following the commencement
of an administrative proceeding by the U.S. Federal Trade Commission in 2001 alleging anti-competitive effects from those settlements (which was resolved in
Schering-Plough’s favor), putative class and non-class action suits were filed on behalf of direct and indirect purchasers of K-DUR against Schering-Plough,
Upsher-Smith and Lederle and were consolidated in a multidistrict litigation in the U.S. District Court for the District of New Jersey. These suits claimed violations
of federal and state antitrust laws, as well as other state statutory and common law causes of action, and sought unspecified damages. In April 2008, the indirect
purchasers voluntarily dismissed their case. In February 2016, the District Court denied the Company’s motion for summary judgment relating to all of the direct
purchasers’ claims concerning the settlement with Upsher-Smith and granted the Company’s motion for summary judgment relating to all of the direct purchasers’
claims concerning the settlement with Lederle. In anticipation of trial, the parties filed motions to exclude certain expert opinions and other evidence, and
defendants filed a motion for summary judgment.
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In February 2017, Merck and Upsher-Smith reached a settlement in principle with the class of direct purchasers and the opt-outs to the class. Merck will
contribute approximately $80 million in the aggregate towards the overall settlement. Formal settlement agreements with the class and the opt-outs have yet to be
executed and the settlement with the class is subject to approval by the District Court.
Sales
Force
Litigation
As previously disclosed, in May 2013, Ms. Kelli Smith filed a complaint against the Company in the U.S. District Court for the District of New Jersey
on behalf of herself and a putative class of female sales representatives and a putative sub-class of female sales representatives with children, claiming (a)
discriminatory policies and practices in selection, promotion and advancement, (b) disparate pay, (c) differential treatment, (d) hostile work environment and
(e) retaliation under federal and state discrimination laws. Plaintiffs sought and were granted leave to file an amended complaint. In January 2014, plaintiffs filed
an amended complaint adding four additional named plaintiffs. In October 2014, the court denied the Company’s motion to dismiss or strike the class claims as
premature. In September 2015, plaintiffs filed additional motions, including a motion for conditional certification under the Equal Pay Act; a motion to amend the
pleadings seeking to add ERISA and constructive discharge claims and a Company subsidiary as a named defendant; and a motion for equitable relief. Merck filed
papers in opposition to the motions. On April 27, 2016, the court granted plaintiff’s motion for conditional certification but denied plaintiffs’ motions to extend the
liability period for their Equal Pay Act claims back to June 2009. As a result, the liability period will date back to April 2012, at the earliest. On April 29, 2016, the
Magistrate Judge granted plaintiffs’ request to amend the complaint to add the following: (i) a Company subsidiary as a corporate defendant; (ii) an ERISA claim
and (iii) an individual constructive discharge claim for one of the named plaintiffs. Approximately 700 individuals have opted-in to this action; the opt-in period
has closed.
Qui
Tam
Litigation
As previously disclosed, on June 21, 2012, the U.S. District Court for the Eastern District of Pennsylvania unsealed a complaint that has been filed
against the Company under the federal False Claims Act by two former employees alleging, among other things, that the Company defrauded the U.S. government
by falsifying data in connection with a clinical study conducted on the mumps component of the Company’s M-M-R
II vaccine. The complaint alleges the fraud
took place between 1999 and 2001. The U.S. government had the right to participate in and take over the prosecution of this lawsuit, but notified the court that it
declined to exercise that right. The two former employees are pursuing the lawsuit without the involvement of the U.S. government. In addition, as previously
disclosed, two putative class action lawsuits on behalf of direct purchasers of the M‑M‑R
II vaccine, which charge that the Company misrepresented the efficacy
of the M-M-R
II vaccine in violation of federal antitrust laws and various state consumer protection laws, are pending in the Eastern District of Pennsylvania. In
September 2014, the court denied Merck’s motion to dismiss the False Claims Act suit and granted in part and denied in part its motion to dismiss the then-pending
antitrust suit. As a result, both the False Claims Act suit and the antitrust suits have proceeded into discovery. The Company intends to defend against these
lawsuits.
Merck
KGaA
Litigation
In January 2016, to protect its long-established brand rights in the United States, the Company filed a lawsuit against Merck KGaA, Darmstadt,
Germany (KGaA), operating as the EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit
against the Company in France, the United Kingdom (UK), Germany, Switzerland, Mexico, and India alleging breach of the parties’ co-existence agreement, unfair
competition and/or trademark infringement. In December 2015, the Paris Court of First Instance issued a judgment finding that certain activities by the Company
directed towards France did not constitute trademark infringement and unfair competition while other activities were found to infringe. The Company and KGaA
have both appealed the decision, and the appeal is scheduled to be heard in May 2017. In January 2016, the UK High Court issued a judgment finding that the
Company had breached the co-existence agreement and infringed KGaA’s trademark rights as a result of certain activities directed towards the UK based on use of
the word MERCK on promotional and information activity. As noted in the UK decision, this finding was not based on the Company’s use of the sign MERCK in
connection with the sale of products or any material pharmaceutical business transacted in the UK. The Company and KGaA have both appealed this decision, and
the appeal is scheduled to be heard in June 2017.
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Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file ANDAs with the U.S. Food and Drug Administration (FDA) seeking to
market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may
file patent infringement lawsuits against such generic companies. Certain products of the Company (or products marketed via agreements with other companies)
currently involved in such patent infringement litigation in the United States include: Cancidas
, Invanz
, Nasonex
, Noxafil
, and NuvaRing
. Similar lawsuits
defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against
infringement by companies attempting to market products prior to the expiration 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 and, with respect to products acquired through acquisitions,
potentially significant intangible asset impairment charges.
Cancidas
— In February 2014, a patent infringement lawsuit was filed in the United States against Xellia Pharmaceuticals ApS (Xellia) with respect to
Xellia’s application to the FDA seeking pre-patent expiry approval to market a generic version of Cancidas
. In June 2015, the district court found that Xellia
infringed the Company’s patent and ordered that Xellia’s application not be approved until the patent expires in September 2017 (including pediatric exclusivity).
Xellia appealed this decision, and the appeal was heard in March 2016. In May 2016, the parties reached a settlement whereby Xellia can launch its generic version
in August 2017, or earlier under certain conditions. In August 2014, a patent infringement lawsuit was filed in the United States against Fresenius Kabi USA, LLC
(Fresenius) in respect of Fresenius’s application to the FDA seeking pre-patent expiry approval to market a generic version of Cancidas
. In December 2016, the
parties reached a settlement whereby Fresenius can launch its generic version in August 2017, or earlier under certain conditions.
Invanz
— In July 2014, a patent infringement lawsuit was filed in the United States against Hospira in respect of Hospira’s application to the FDA
seeking pre-patent expiry approval to market a generic version of Invanz
. The trial in this matter was held in April 2016 and, in October 2016, the district court
ruled that the patent is valid and infringed. In August 2015, a patent infringement lawsuit was filed in the United States against Savior Lifetec Corporation (Savior)
in respect of Savior’s application to the FDA seeking pre-patent expiry approval to market a generic version of Invanz
. The lawsuit automatically stays FDA
approval of Savior’s application until November 2017 or until an adverse court decision, if any, whichever may occur earlier.
Nasonex
— In July 2014, a patent infringement lawsuit was filed in the United States against Teva Pharmaceuticals USA, Inc. (Teva Pharma) in respect
of Teva Pharma’s application to the FDA seeking pre-patent expiry approval to market a generic version of Nasonex
. The trial in this matter was held in June
2016. In November 2016, the district court ruled that the patent was valid but not infringed. The Company has appealed this decision. In March 2015, a patent
infringement lawsuit was filed in the United States against Amneal Pharmaceuticals LLC (Amneal) in respect of Amneal’s application to the FDA seeking pre-
patent expiry approval to market a generic version of Nasonex
. The trial in this matter was held in June 2016. In January 2017, the district court ruled that the
patent was valid but not infringed. The Company has appealed this decision.
A previous decision, issued in June 2013, held that the Merck patent in the Teva Pharma and Amneal lawsuits covering mometasone furoate
monohydrate was valid, but that it was not infringed by Apotex Corp.’s proposed product. In April 2015, a patent infringement lawsuit was filed against Apotex
Inc. and Apotex Corp. (Apotex) in respect of Apotex’s now-launched product that the Company believes differs from the generic version in the previous lawsuit.
Noxafil
— In August 2015, the Company filed a lawsuit against Actavis Laboratories Fl, Inc. (Actavis) in the United States in respect of that company’s
application to the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil
. The lawsuit automatically stays FDA approval of Actavis’s
application until December 2017 or until an adverse court decision, if any, whichever may occur earlier. The trial in this matter is currently scheduled to begin in
July 2017. In March 2016, the Company filed a lawsuit against Roxane Laboratories, Inc. (Roxane) in the United States in respect of that company’s application to
the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil
. The lawsuit automatically stays FDA approval of Roxane’s application until
August 2018 or until an adverse court decision, if any, whichever may occur earlier. In February 2016, the Company filed a lawsuit against Par Sterile Products
LLC, Par Pharmaceutical, Inc., Par Pharmaceutical Companies, Inc. and Par Pharmaceutical Holdings, Inc. (collectively, Par) in the United States in respect of that
company’s application to the FDA seeking pre-
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patent expiry approval to sell a generic version of Noxafil
. In October 2016, the parties reached a settlement whereby Par can launch its generic version in January
2023, or earlier under certain conditions.
NuvaRing
— In December 2013, the Company filed a lawsuit against a subsidiary of Allergan plc in the United States in respect of that company’s
application to the FDA seeking pre-patent expiry approval to sell a generic version of NuvaRing
. The trial in this matter was held in January 2016. In August 2016,
the district court ruled that the patent was invalid and the Company has appealed this decision. In September 2015, the Company filed a lawsuit against Teva
Pharma in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of NuvaRing
. Based
on its ruling in the Allergan plc matter, the district court dismissed the Company’s lawsuit in December 2016. The Company has appealed this decision.
The Company had been involved in ongoing litigation in Canada with Apotex concerning the Company’s patents related to lovastatin, alendronate, and
norfloxacin. All of the litigation has now been either settled or concluded. As a consequence of the conclusion of all of this litigation, in 2016, the Company
recorded a net gain of $117 million included in Other
(income)
expense,
net
(see Note 14).
Anti-PD-1 Antibody Patent Oppositions and Litigation
As previously disclosed, Ono Pharmaceutical Co. (Ono) has a European patent (EP 1 537 878) (’878) that broadly claims the use of an anti-PD-1
antibody, such as the Company’s immunotherapy, Keytruda
, for the treatment of cancer. Ono has previously licensed its commercial rights to an anti-PD-1
antibody to Bristol-Myers Squibb (BMS) in certain markets. BMS and Ono also own European Patent EP 2 161 336 (’336) that, as granted, broadly claimed anti-
PD-1 antibodies that could include Keytruda
.
As previously disclosed, the Company and BMS and Ono were engaged in worldwide litigation, including in the United States, over the validity and
infringement of the ‘878 patent, the ‘336 patent and their equivalents.
In January 2017, the Company announced that it had entered into a settlement and license agreement with BMS and Ono resolving the worldwide
patent infringement litigation related to the use of an anti-PD-1 antibody for the treatment of cancer, such as Keytruda
. Under the settlement and license
agreement, the Company made a one-time payment of $625 million (which was recorded as an expense in the Company’s 2016 financial results) to BMS and will
pay royalties on the worldwide sales of Keytruda
for a non-exclusive license to market Keytruda
in any market in which it is approved. For global net sales of
Keytruda
, the Company will pay royalties as follows:
•
•
6.5% of net sales occurring from January 1, 2017 through and including December 31, 2023; and
2.5% of net sales occurring from January 1, 2024 through and including December 31, 2026.
The parties also agreed to dismiss all claims worldwide in the relevant legal proceedings.
In October 2015, PDL Biopharma (PDL) filed a lawsuit in the United States against the Company alleging that the manufacture of Keytruda
infringed
US Patent No. 5,693,761 (’761 patent), which expired in December 2014. This patent claims platform technology used in the creation and manufacture of
recombinant antibodies and PDL is seeking damages for pre-expiry infringement of the ’761 patent.
In July 2016, the Company filed a declaratory judgment action in the United States against Genentech and City of Hope seeking a ruling that US Patent
No. 7,923,221 (the Cabilly III patent), which claims platform technology used in the creation and manufacture of recombinant antibodies, is invalid and that
Keytruda
and bezlotoxumab do not infringe the Cabilly III patent. In July 2016, the Company also filed a petition in the USPTO for Inter
Partes
Review (IPR) of
certain claims of US Patent No. 6,331,415 (the Cabilly II patent), which claims platform technology used in the creation and manufacture of recombinant
antibodies and is also owned by Genentech and City of Hope, as being invalid. In December 2016, the USPTO denied the petition but allowed the Company to join
an IPR filed previously by another party.
Gilead Patent Litigation and Opposition
In August 2013, Gilead Sciences, Inc. (Gilead) filed a lawsuit in the U.S. District Court for the Northern District of California seeking a declaration that
two Company patents were invalid and not infringed by the sale of their two sofosbuvir containing products, Solvadi and Harvoni. The Company filed a
counterclaim that the sale of these
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products did infringe these two patents and sought a reasonable royalty for the past, present and future sales of these products. In March 2016, at the conclusion of
a jury trial, the patents were found to be not invalid and infringed. The jury awarded the Company $200 million as a royalty for sales of these products up to
December 2015. After the conclusion of the jury trial, the court held a bench trial on the equitable defenses raised by Gilead. In June 2016, the court found for
Gilead and determined that Merck could not collect the jury award and that the patents were unenforceable with respect to Gilead. The Company has appealed the
court’s decision. Gilead has also asked the court to overturn the jury’s decision on validity. The court held a hearing on Gilead’s motion in August 2016, and the
court subsequently rejected Gilead’s request. The Company will pay 20% , net of legal fees, of damages or royalties, if any, that it receives to Ionis
Pharmaceuticals, Inc.
The Company, through its Idenix Pharmaceuticals, Inc. subsidiary, has pending litigation against Gilead in the United States, the UK, Norway, Canada,
Germany, France, and Australia based on different patent estates that would also be infringed by Gilead’s sales of these two products. Gilead has opposed the
European patent at the EPO. Trial in the United States was held in December 2016 and the jury returned a verdict for the Company, awarding damages of $2.54
billion . The Company is currently briefing post-trial motions, including on the issues of enhanced damages and future royalties. Gilead is briefing post-trial
motions for judgment as a matter of law. In the UK, Australia and Canada, the Company was initially unsuccessful and those cases are currently under appeal. In
Norway, the patent was held invalid and no further appeal was filed. The EPO opposition division revoked the European patent, and the Company has appealed this
decision. The cases in France and Germany have been stayed pending the final decision of the EPO.
Other Litigation
There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not
feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss
associated with the resolution of such proceedings is not expected to be material to the Company’s financial position, results of operations or cash flows either
individually or in the aggregate.
Legal Defense Reserves
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the
significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the
Company’s legal defense strategy and structure in light of the scope of its 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
associated litigation. The amount of legal defense reserves as of December 31, 2016 and December 31, 2015 of approximately $185 million and $245 million ,
respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however,
events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred
by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase
the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
Environmental Matters
As previously disclosed, Merck’s facilities in Oss, the Netherlands, were inspected by the Province of Brabant (the Province) pursuant to the Dutch
Hazards of Major Accidents Decree and the sites’ environmental permits. The Province issued penalties for alleged violations of regulations governing preventing
and managing accidents with hazardous substances, and the government also issued a fine for alleged environmental violations at one of the Oss facilities, which
together totaled $235 thousand . The Company was subsequently advised that a criminal investigation had been initiated based upon certain of the issues that
formed the basis of the administrative enforcement action by the Province. The Company intends to defend itself against any enforcement action that may result
from this investigation.
In May 2015, the Environmental Protection Agency conducted an air compliance evaluation of the Company’s pharmaceutical manufacturing facility in
Elkton, Virginia. As a result of the investigation, the Company
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was recently issued a Notice of Noncompliance and Show Cause Notification relating to certain federally enforceable requirements applicable to the Elkton
facility. The Company is attempting to resolve these alleged violations by way of settlement but will defend itself if settlement cannot be reached.
The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation
and Liability Act, commonly known as Superfund, and other federal and state equivalents. These proceedings seek to require the operators of hazardous waste
disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government
for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government
alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently
resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company’s
potential liability varies greatly from site to site. For some sites the potential liability is de
minimis
and for others the final costs of cleanup have not yet been
determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of
the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial position, results of
operations, liquidity or capital resources of the Company. The Company has taken an active role in identifying and accruing for these costs and such amounts do
not include any reduction for anticipated recoveries of cleanup costs from former site owners or operators or other recalcitrant potentially responsible parties.
In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83
million and $109 million at December 31, 2016 and 2015 , respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties
and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not
possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible
expenditures that may be incurred in excess of the liabilities accrued should exceed $64 million in the aggregate. Management also does not believe that these
expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
11. Equity
The Merck certificate of incorporation authorizes 6,500,000,000 shares of common stock and 20,000,000 shares of preferred stock.
Capital
Stock
A summary of common stock and treasury stock transactions (shares in millions) is as follows:
Balance January 1
Purchases of treasury stock
Issuances (1)
Balance December 31
2016
2015
2014
Common
Stock
Treasury
Stock
Common
Stock
Treasury
Stock
Common
Stock
Treasury
Stock
3,577
—
—
3,577
796
60
(28)
828
3,577
—
—
3,577
739
75
(18)
796
3,577
—
—
3,577
650
134
(45)
739
(1)
Issuances
primarily
reflect
activity
under
share-based
compensation
plans.
12. Share-Based Compensation Plans
The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs)
to certain management level employees. The Company also issues RSUs to employees of certain of the Company’s equity method investees. In addition,
employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. These
plans were approved by the Company’s shareholders.
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Table of Contents
At December 31, 2016 , 125 million shares collectively were authorized for future grants under the Company’s share-based compensation plans. These
awards are settled primarily with treasury shares.
Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. These awards generally vest one-
third each year over a three -year period, with a contractual term of 7 - 10 years. RSUs are stock awards that are granted to employees and entitle the holder to
shares of common stock as the awards vest. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s
stock price. PSUs are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against a pre-set objective or set
of objectives. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. For RSUs and PSUs, dividends declared during
the vesting period are payable to the employees only upon vesting. Over the PSU performance period, the number of shares of stock that are expected to be issued
will be adjusted based on the probability of achievement of a performance target and final compensation expense will be recognized based on the ultimate number
of shares issued. RSU and PSU distributions will be in shares of Company stock after the end of the vesting or performance period, generally three years, subject to
the terms applicable to such awards.
Total pretax share-based compensation cost recorded in 2016 , 2015 and 2014 was $300 million , $299 million and $278 million , respectively, with
related income tax benefits of $92 million , $93 million and $86 million , respectively.
The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. In applying this model, the Company uses
both historical data and current market data to estimate the fair value of its options. The Black-Scholes model requires several assumptions including expected
dividend yield, risk-free interest rate, volatility, and term of the options. The expected dividend yield is based on historical patterns of dividend payments. The risk-
free rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated
using a blend of historical and implied volatility. The historical component is based on historical monthly price changes. The implied volatility is obtained from
market data on the Company’s traded options. The expected life represents the amount of time that options granted are expected to be outstanding, based on
historical and forecasted exercise behavior.
The weighted average exercise price of options granted in 2016 , 2015 and 2014 was $54.63 , $59.73 and $58.14 per option, respectively. The weighted
average fair value of options granted in 2016 , 2015 and 2014 was $5.89 , $6.46 and $6.79 per option, respectively, and were determined using the following
assumptions:
Years
Ended
December
31
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life (years)
2016
2015
2014
3.8%
1.4%
19.6%
6.2
4.1%
1.7%
19.9%
6.2
4.3%
2.0%
22.0%
6.4
Summarized information relative to stock option plan activity (options in thousands) is as follows:
Outstanding January 1, 2016
Granted
Exercised
Forfeited
Outstanding December 31, 2016
Exercisable December 31, 2016
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Number
of Options
64,668 $
6,220
(23,846)
(1,951)
45,091 $
41.64
54.63
39.39
45.14
44.47
34,311 $
40.87
4.42 $
3.12 $
654
619
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Table of Contents
Additional information pertaining to stock option plans is provided in the table below:
Years
Ended
December
31
Total intrinsic value of stock options exercised
Fair value of stock options vested
Cash received from the exercise of stock options
A summary of nonvested RSU and PSU activity (shares in thousands) is as follows:
2016
2015
2014
$
444 $
332 $
626
35
1,560
28
939
30
485
PSUs
Nonvested January 1, 2016
Granted
Vested
Forfeited
Nonvested December 31, 2016
RSUs
Weighted
Average
Grant Date
Fair Value
Number
of Shares
13,400 $
5,617
(4,956)
(795)
13,266 $
53.73
54.67
45.06
56.65
57.19
Number
of Shares
1,884 $
733
(786)
(87)
1,744 $
Weighted
Average
Grant Date
Fair Value
55.33
57.38
48.18
58.82
59.24
At December 31, 2016 , there was $443 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU
awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.
13. 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. In
addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The
Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans.
Net
Periodic
Benefit
Cost
The net periodic benefit cost for pension and other postretirement benefit plans consisted of the following components:
Years
Ended
December
31
2016
Service cost
Interest cost
Expected return on plan assets
Net amortization
Termination benefits
Curtailments
Settlements
$
$
282
456
(831)
64
23
5
—
Net periodic benefit (credit) cost
$
(1)
$
Pension Benefits
$
U.S.
2015
307
434
(819)
158
22
(12)
1
91
$
International
Other Postretirement Benefits
2014
2016
2015
2014
2016
2015
2014
300 $
425
(782)
74
53
(69)
11
12 $
238 $
204
(382)
76
4
(1)
6
145 $
251 $
206
(379)
104
1
(9)
12
186 $
266 $
269
(416)
59
11
(4)
6
191 $
54 $
82
(107)
(103)
4
(18)
—
(88) $
80 $
110
(143)
(59)
7
(19)
—
(24) $
78
115
(139)
(71)
22
(39)
—
(34)
The changes in net periodic benefit (credit) cost year over year for pension plans are largely attributable to changes in the discount rate affecting net
amortization. The decrease in net periodic benefit cost for other postretirement benefit plans in 2016 as compared with 2015 is largely attributable to changes in
retiree medical benefits approved by the Company in December 2015.
In connection with restructuring actions (see Note 4), termination charges were recorded in 2016 , 2015 and 2014 on pension and other postretirement
benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments were recorded
on pension and other
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Table of Contents
postretirement benefit plans and settlements were recorded on certain U.S. and international pension plans as reflected in the table above.
Obligations
and
Funded
Status
Summarized information about the changes in plan assets and benefit obligations, the funded status and the amounts recorded at December 31 is as
follows:
Fair value of plan assets January 1
Actual return on plan assets
Company contributions
Effects of exchange rate changes
Benefits paid
Settlements
Assets no longer restricted to the payment of postretirement benefits (1)
Other
Fair value of plan assets December 31
Benefit obligation January 1
Service cost
Interest cost
Actuarial losses (gains) (2)
Benefits paid
Effects of exchange rate changes
Plan amendments (3)
Curtailments
Termination benefits
Settlements
Other
Benefit obligation December 31
Funded status December 31
Recognized as:
Other assets
Accrued and other current liabilities
Other noncurrent liabilities
Pension Benefits
U.S.
International
Other
Postretirement
Benefits
2016
2015
2016
2015
2016
2015
$
9,266 $
9,984 $
7,204 $
7,724 $
1,913 $
1,984
941
63
—
(504)
—
—
—
(226)
66
—
(523)
(35)
—
—
898
424
(546)
(193)
(21)
—
28
138
163
(568)
(196)
(66)
—
9
138
68
—
(108)
—
(992)
—
9,766 $
9,266 $
7,794 $
7,204 $
1,019 $
9,723 $
10,632 $
7,733 $
8,331 $
1,810 $
282
456
854
(504)
—
—
15
23
—
—
307
434
(1,102)
(523)
—
—
(14)
22
(35)
2
238
204
938
(193)
(576)
—
(15)
4
(21)
60
251
206
(127)
(196)
(647)
(1)
(15)
1
(66)
(4)
54
82
77
(108)
2
—
1
4
—
—
10,849 $
9,723 $
8,372 $
7,733 $
1,922 $
(1,083) $
(457) $
(578) $
(529) $
(903) $
— $
(50)
(1,033)
179 $
451 $
(7)
567 $
(7)
(1,022)
(1,089)
(48)
(588)
— $
(11)
(892)
$
$
$
$
$
(34)
63
(1)
(99)
—
—
—
1,913
2,638
80
110
(384)
(99)
(11)
(531)
(3)
7
—
3
1,810
103
359
(10)
(246)
(1)
As
a
result
of
certain
allowable
administrative
actions
that
occurred
in
June
2016,
$992
million
of
plan
assets
previously
restricted
for
the
payment
of
other
postretirement
benefits
became
available
to
fund
certain
other
health
and
welfare
benefits.
(2)
Actuarial
losses
in
2016
and
actuarial
gains
in
2015
primarily
reflect
changes
in
discount
rates.
(3)
The
decline
in
other
postretirement
benefit
obligations
in
2015
resulting
from
plan
amendments
primarily
reflects
changes
to
Merck’s
retiree
medical
benefits
approved
by
the
Company
in
December
2015.
The
changes
provide
that,
beginning
in
2017,
Merck
will
provide
access
to
retiree
health
insurance
coverage
that
supplements
government-sponsored
Medicare
through
a
private
insurance
marketplace.
At December 31, 2016 and 2015 , the accumulated benefit obligation was $18.4 billion and $16.7 billion , respectively, for all pension plans, of which
$10.5 billion and $9.4 billion , respectively, related to U.S. pension plans.
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Table of Contents
Information related to the funded status of selected pension plans at December 31 is as follows:
Pension plans with a projected benefit obligation in excess of plan assets
Projected benefit obligation
Fair value of plan assets
Pension plans with an accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation
Fair value of plan assets
Plan
Assets
U.S.
International
2016
2015
2016
2015
$
10,849 $
1,310 $
5,486 $
9,766
674
4,457
$
9,807 $
611 $
2,692 $
9,057
—
1,898
5,093
3,996
4,812
3,964
Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when
measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level
1
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2
— Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
Level
3
— Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing
models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of
fair value requires significant judgment or estimation. At December 31, 2016 and 2015 , $435 million and $423 million , respectively, or approximately 2%
and 3% , respectively, of the Company’s pension investments were categorized as Level 3 assets.
If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input
that is significant to the fair value measurement of the instrument.
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Table of Contents
The fair values of the Company’s pension plan assets at December 31 by asset category are as follows:
Fair Value Measurements Using
Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2016
Significant
Unobservable
Inputs
(Level 3)
Total
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2015
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
U.S. Pension Plans
Assets
Cash and cash equivalents
Investment
funds
Developed markets equities
Emerging markets equities
Equity
securities
Developed markets
Fixed
income
securities
Government and agency obligations
Corporate obligations
Mortgage and asset-backed securities
Other investments
Net assets in fair value hierarchy
Investments measured at NAV practical
expedient (1)
Plan assets at fair value
International Pension Plans
Assets
Cash and cash equivalents
Investment
funds
Developed markets equities
Emerging markets equities
Government and agency obligations
Corporate obligations
Fixed income obligations
Real estate (2)
Equity
securities
Developed markets
Fixed
income
securities
Government and agency obligations
Corporate obligations
Mortgage and asset-backed securities
Other
investments
Insurance contracts (3)
Other
$
2
$
2
— $
$
4
— $
— $
— $
521
104
2,521
—
—
—
—
—
—
—
475
660
239
—
3,148
$
1,376
$
—
—
521
104
—
2,521
—
—
—
18
18
475
660
239
18
5,224
9,766
$
566
87
2,444
—
—
—
—
—
—
—
391
679
236
—
$
4,542
$
3,097
$
1,306
$
42
$
11
$
— $
53
$
63
$
$
4
— $
67
187
24
123
2
6
—
565
2
—
—
—
1
2,846
148
1,904
282
3
3
—
235
92
50
59
4
—
—
—
—
—
4
—
—
—
—
412
1
3,033
172
2,027
284
9
7
565
237
92
50
471
6
184
21
305
173
8
—
496
2
—
—
—
—
2,738
137
1,115
103
3
3
—
465
161
68
57
3
—
566
87
—
—
—
2,444
—
—
—
23
23
391
679
236
23
$
4,426
4,840
9,266
$
—
—
—
—
—
5
—
—
—
—
393
2
400
$
$
2,922
158
1,420
276
11
8
496
467
161
68
450
5
6,509
695
7,204
Net assets in fair value hierarchy
$
952
$
5,637
$
417
$
7,006
$
1,252
$
4,857
$
Investments measured at NAV practical
expedient (1)
Plan assets at fair value
788
7,794
$
(1)
Certain
investments
that
were
measured
at
net
asset
value
(NAV)
per
share
or
its
equivalent
have
not
been
classified
in
the
fair
value
hierarchy.
The
fair
value
amounts
presented
in
this
table
are
intended
to
permit
reconciliation
of
the
fair
value
hierarchy
to
the
fair
value
of
plan
assets
at
December
31,
2016
and
2015.
(2)
The
plans’
Level
3
investments
in
real
estate
funds
are
generally
valued
by
market
appraisals
of
the
underlying
investments
in
the
funds.
(3)
The
plans’
Level
3
investments
in
insurance
contracts
are
generally
valued
using
a
crediting
rate
that
approximates
market
returns
and
invest
in
underlying
securities
whose
market
values
are
unobservable
and
determined
using
pricing
models,
discounted
cash
flow
methodologies,
or
similar
techniques.
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Table of Contents
The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using
significant unobservable inputs (Level 3) for the Company’s pension plan assets:
U.S. Pension Plans
Balance January 1
Actual return on plan assets:
Relating to assets still held at December 31
Relating to assets sold during the year
Purchases and sales, net
Balance December 31
International Pension Plans
Balance January 1
Actual return on plan assets:
Relating to assets still held at December 31
Purchases and sales, net
Transfers into Level 3
Balance December 31
$
$
$
$
2016
2015
Insurance
Contracts
Real
Estate
Other
Total
Insurance
Contracts
Real
Estate
Other
Total
— $
— $
23
$
23 $
— $
— $
28 $
—
—
—
— $
393
$
(9)
2
26
412
$
5
1
(2)
—
4
$
—
—
—
— $
(3)
4
(6)
18
$
(3)
4
(6)
18
$
—
—
—
— $
—
—
—
— $
(3)
5
(7)
23
$
$
2
$
400 $
394
$
23 $
2 $
419
—
(1)
—
1
$
(8)
(1)
26
417
(28)
2
25
$
393
$
(2)
(16)
—
5
$
—
—
—
2
$
(30)
(14)
25
400
The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows:
Fair Value Measurements Using
Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2016
Significant
Unobservable
Inputs
(Level 3)
Total
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2015
Significant
Unobservable
Inputs
(Level 3)
Total
$
125
$
— $
— $
125
$
65
$
— $
— $
48
10
1
231
—
—
—
—
—
—
—
43
60
22
—
—
—
—
—
—
—
— $
48
10
1
231
43
60
22
53
29
2
229
—
—
—
540
$
378
$
479
1,019
$
—
—
—
—
339
311
218
868
$
—
—
—
—
—
—
—
— $
$
Net assets in fair value hierarchy
$
415
$
125
$
Investments measured at NAV
practical expedient (1)
Plan assets at fair value
(1)
Certain
investments
that
were
measured
at
net
asset
value
(NAV)
per
share
or
its
equivalent
have
not
been
classified
in
the
fair
value
hierarchy.
The
fair
value
amounts
presented
in
this
table
are
intended
to
permit
reconciliation
of
the
fair
value
hierarchy
to
the
fair
value
of
plan
assets
at
December
31,
2016
and
2015.
The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to
deliver a rate of return sufficient to meet the long-term obligation of each
114
Assets
Cash and cash equivalents
Investment
funds
Developed markets equities
Emerging markets equities
Government and agency
obligations
Equity
securities
Developed markets
Fixed
income
securities
Government and agency
obligations
Corporate obligations
Mortgage and asset-backed
securities
28
(3)
5
(7)
23
65
53
29
2
229
339
311
218
1,246
667
1,913
Table of Contents
plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated 40% to
60% in U.S. equities, 20% to 40% in international equities, 15% to 25% in fixed-income investments, and up to 5% in cash and other investments. The portfolio’s
equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio,
which approximates 13% , reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For
international pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations.
Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within
management guidelines.
Expected
Contributions
Expected contributions during 2017 are approximately $50 million for U.S. pension plans, approximately $160 million for international pension plans
and approximately $25 million for other postretirement benefit plans.
Expected
Benefit
Payments
Expected benefit payments are as follows:
2017
2018
2019
2020
2021
2022 — 2026
U.S. Pension Benefits
International Pension
Benefits
$
561 $
186 $
Other
Postretirement
Benefits
588
629
638
655
3,596
179
195
202
201
1,168
101
104
106
111
115
641
Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.
Amounts
Recognized
in
Other
Comprehensive
Income
Net loss amounts reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the
effects of changes in actuarial assumptions. Net loss amounts in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining
service life of employees. The following amounts were reflected as components of OCI
:
Years
Ended
December
31
2016
U.S.
2015
Pension Plans
International
Other Postretirement
Benefit Plans
2014
2016
2015
2014
2016
2015
2014
Net (loss) gain arising during the period
Prior service (cost) credit arising during the period
Net loss amortization included in benefit cost
Prior service (credit) cost amortization included in
benefit cost
$
$
$
$
(743)
$
73
$
(2,085)
$
(380)
$
(66)
$
$
$
(10)
(753)
119
(55)
$
$
(13)
60
214
(56)
(59)
(2,144)
135
(61)
$
$
$
$
(2)
(382)
87
(11)
$
$
(4)
(70)
118
(14)
64
$
158
$
74
$
76
$
104
$
(779) $
(8)
(787) $
74 $
(15)
59 $
(45) $
(19)
(64) $
3 $
(106)
(103) $
209 $
511
720 $
5 $
(64)
(59) $
(223)
(42)
(265)
1
(72)
(71)
The estimated net loss (gain) and prior service cost (credit) amounts that will be amortized from AOCI
into net periodic benefit cost during 2017 are
$270 million and $(64) million , respectively, for pension plans (of which $178 million and $(53) million , respectively, relates to U.S. pension plans) and $1
million and $(99) million , respectively, for other postretirement benefit plans.
115
Table of Contents
Actuarial
Assumptions
The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining U.S. pension and other
postretirement benefit plan and international pension plan information are as follows:
December
31
Net periodic benefit cost
Discount rate
Expected rate of return on plan assets
Salary growth rate
Benefit obligation
Discount rate
Salary growth rate
U.S. Pension and Other
Postretirement Benefit Plans
International Pension Plans
2016
2015
2014
2016
2015
2014
4.70%
8.60%
4.30%
4.30%
4.30%
4.20%
8.50%
4.40%
4.80%
4.30%
4.90%
8.50%
4.50%
4.20%
4.40%
2.80%
5.60%
2.90%
2.20%
2.90%
2.70%
5.70%
2.90%
2.80%
2.90%
3.80%
6.00%
3.10%
2.70%
2.90%
For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing
market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit
obligation as they come due. The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be
earned on plan assets over the period the benefits included in the benefit obligation are to be paid and is determined on a plan basis. In developing the expected rate
of return within each plan, long-term historical returns data are considered as well as actual returns on the plan assets and other capital markets experience. Using
this reference information, the long-term return expectations for each asset category and a weighted average expected return for each plan’s target portfolio is
developed, according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as
appropriate. For 2017 , the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from 8.00% to 8.75% , as
compared to a range of 7.30% to 8.75% in 2016 .
The health care cost trend rate assumptions for other postretirement benefit plans are as follows:
December
31
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
Year that the trend rate reaches the ultimate trend rate
A one percentage point change in the health care cost trend rate would have had the following effects:
Effect on total service and interest cost components
Effect on benefit obligation
Savings
Plans
2016
2015
7.4%
4.5%
2032
6.8%
4.5%
2027
One Percentage Point
Increase
Decrease
$
12 $
138
(12)
(114)
The Company also maintains defined contribution savings plans in the United States. The Company matches a percentage of each employee’s
contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in 2016 , 2015 and 2014
were $126 million , $125 million and $124 million , respectively.
116
Table of Contents
14. Other (Income) Expense, Net
Other (income) expense, net, consisted of:
Years
Ended
December
31
Interest income
Interest expense
Exchange losses
Equity income from affiliates
Other, net
2016
2015
2014
$
(328) $
(289) $
(266)
693
174
(86)
267
672
1,277
(205)
732
180
(257)
72
(12,002)
$
720 $
1,527 $
(11,613)
The higher exchange losses in 2015 as compared with 2016 and 2014 were related primarily to the Venezuelan Bolívar. During the second quarter of
2015, upon evaluation of evolving economic conditions in Venezuela and volatility in the country, combined with a decline in transactions that were settled at the
then official (CENCOEX) rate of 6.30 VEF (Bolívar Fuertes) per U.S. dollar, the Company determined it was unlikely that all outstanding net monetary assets
would be settled at the CENCOEX rate. Accordingly, during the second quarter of 2015, the Company recorded a charge of $715 million to devalue its net
monetary assets in Venezuela to an amount that represented the Company’s estimate of the U.S. dollar amount that would ultimately be collected. During the third
quarter of 2015, the Company recorded additional exchange losses of $138 million in the aggregate reflecting the ongoing effect of translating transactions and net
monetary assets consistent with the second quarter. In the fourth quarter of 2015, as a result of the further deterioration of economic conditions in Venezuela, and
continued declines in transactions which were settled at the official rate, the Company began using the SIMADI rate to report its Venezuelan operations. The
Company also revalued its remaining net monetary assets at the SIMADI rate (subsequently replaced with the DICOM rate), which resulted in an additional charge
in the fourth quarter of 2015 of $161 million . Since January 2010, Venezuela has been designated hyperinflationary and, as a result, local foreign operations are
remeasured in U.S. dollars with the impact recorded in results of operations.
The decline in equity income from affiliates in 2016 as compared with 2015 was driven primarily by lower equity income from certain research
investment funds.
Other, net (as presented in the table above) in 2016 includes a charge of $625 million to settle worldwide patent litigation related to Keytruda
(see Note
10), a gain of $117 million related to the settlement of other patent litigation (see Note 10), gains of $100 million resulting from the receipt of milestone payments
for out-licensed migraine clinical development programs (see Note 3) and $98 million of income related to AstraZeneca’s option exercise (see Note 8).
Other, net in 2015 includes a $680 million net charge related to the settlement of Vioxx
shareholder class action litigation (see Note 10) and an expense
of $78 million for a contribution of investments in equity securities to the Merck Foundation, partially offset by a $250 million gain on the sale of certain migraine
clinical development programs (see Note 3), a $147 million gain on the divestiture of Merck’s remaining ophthalmics business in international markets (see Note
3), and the recognition of $182 million of deferred income related to AstraZeneca’s option exercise.
Other, net in 2014 includes an $11.2 billion gain on the divestiture of MCC (see Note 3), a gain of $741 million related to AstraZeneca’s option
exercise, a $480 million gain on the divestiture of certain ophthalmic products in several international markets (see Note 3), a gain of $204 million related to the
sale of Sirna (see Note 3) and the recognition of $140 million of deferred income related to AstraZeneca’s option exercise, partially offset by a $628 million loss on
extinguishment of debt (see Note 9) and a $93 million goodwill impairment charge related to the Company’s joint venture with Supera.
Interest paid was $686 million in 2016 , $653 million in 2015 and $852 million in 2014 .
117
Table of Contents
15. Taxes on Income
A reconciliation between the effective tax rate and the U.S. statutory rate is as follows:
U.S. statutory rate applied to income before taxes
$
1,631
35.0 % $
1,890
35.0 % $
6,049
35.0 %
2016
2015
2014
Amount
Tax Rate
Amount
Tax Rate
Amount
Tax Rate
Differential arising from:
Foreign earnings
Unremitted foreign earnings
Tax settlements
AstraZeneca option exercise
Sale of Sirna Therapeutics, Inc.
Impact of purchase accounting adjustments, including
amortization
Foreign currency devaluation related to Venezuela
State taxes
Restructuring
U.S. health care reform legislation
Divestiture of Merck Consumer Care
Other (1)
(1,593)
(30)
—
—
—
623
—
173
145
68
—
(299)
718
$
(34.2)
(0.6)
—
—
—
13.4
—
3.7
3.1
1.4
—
(6.4)
15.4 % $
(2,105)
260
(417)
—
—
797
321
159
167
66
—
(196)
942
(39.0)
4.8
(7.7)
—
—
14.8
5.9
2.9
3.1
1.2
—
(3.6)
(1,367)
(209)
(89)
(774)
(357)
1,013
—
7
289
134
440
213
(7.9)
(1.2)
(0.5)
(4.5)
(2.1)
5.9
—
—
1.7
0.8
2.5
1.2
17.4 % $
5,349
30.9 %
(1)
Other
includes
the
tax
effect
of
contingency
reserves,
research
credits,
and
miscellaneous
items.
The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different
tax rates than the United States, particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants, where the
earnings have been indefinitely reinvested, thereby yielding a favorable impact on the effective tax rate as compared with the 35.0% U.S. statutory rate. The foreign
earnings tax rate differentials do not include the impact of intangible asset impairment charges, amortization of purchase accounting adjustments or restructuring
costs. These items are presented separately as they each represent a significant, separately disclosed pretax cost or charge, and a substantial portion of each of these
items relates to jurisdictions with lower tax rates than the United States. Therefore, the impact of recording these expense items in lower tax rate jurisdictions is an
unfavorable impact on the effective tax rate as compared to the 35.0% U.S. statutory rate.
The Company’s 2015 effective tax rate reflects the impact of the Protecting Americans From Tax Hikes Act, which was signed into law on December
18, 2015, extending the research credit permanently and the controlled foreign corporation look-through provisions for five years. The Company’s 2014 effective
tax rate reflects the impact of the Tax Increase Prevention Act, which was signed into law on December 19, 2014, extending the research credit and the controlled
foreign corporation look-through provisions for one year only.
Income before taxes consisted of:
Years
Ended
December
31
Domestic
Foreign
2016
2015
2014
$
$
518 $
2,247 $
15,730
4,141
3,154
1,553
4,659 $
5,401 $
17,283
118
Table of Contents
Taxes on income consisted of:
Years
Ended
December
31
Current
provision
Federal
Foreign
State
Deferred
provision
Federal
Foreign
State
2016
2015
2014
$
1,166 $
732 $
7,136
916
157
844
130
438
375
2,239
1,706
7,949
(1,255)
(225)
(41)
(1,521)
(552)
(163)
(49)
(764)
(2,162)
(201)
(237)
(2,600)
$
718 $
942 $
5,349
Deferred income taxes at December 31 consisted of:
Intangibles
Inventory related
Accelerated depreciation
Unremitted foreign earnings
Pensions and other postretirement benefits
Compensation related
Unrecognized tax benefits
Net operating losses and other tax credit carryforwards
Other
Subtotal
Valuation allowance
Total deferred taxes
Net deferred income taxes
Recognized as:
Other assets
Deferred income taxes
2016
2015
Assets
Liabilities
Assets
Liabilities
$
86 $
3,734 $
— $
30
28
—
727
438
383
437
1,128
3,257
(268)
2,989 $
$
546
$
660
927
2,044
109
—
—
—
46
7,520
7,520 $
4,531
$
5,077
49
43
—
435
535
412
565
1,217
3,256
(304)
2,952 $
$
608
$
$
$
4,962
752
910
2,124
131
—
—
—
—
8,879
8,879
5,927
6,535
The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of December 31, 2016 , $243 million of deferred taxes on NOL
carryforwards relate to foreign jurisdictions, none of which are individually significant. Valuation allowances of $268 million have been established on these
foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has $194 million of deferred tax assets relating to various U.S. tax
credit carryforwards and NOL carryforwards, all of which are expected to be fully utilized prior to expiry.
Income taxes paid in 2016 , 2015 and 2014 were $1.8 billion , $1.8 billion and $7.9 billion , respectively. Income taxes paid in 2014 reflects
approximately $5.0 billion of taxes paid on the divestiture of MCC. Tax benefits relating to stock option exercises were $147 million in 2016 , $109 million in
2015 and $202 million in 2014 .
119
Table of Contents
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance January 1
Additions related to current year positions
Additions related to prior year positions
Reductions for tax positions of prior years (1)
Settlements
(1)
Lapse of statute of limitations
Balance December 31
(1)
Amounts
reflect
the
settlements
with
the
IRS
as
discussed
below.
2016
2015
2014
$
3,448 $
3,534 $
3,503
196
75
(90)
(92)
(43)
198
53
(59)
(184)
(94)
389
23
(156)
(161)
(64)
$
3,494 $
3,448 $
3,534
If the Company were to recognize the unrecognized tax benefits of $3.5 billion at December 31, 2016 , the income tax provision would reflect a
favorable net impact of $3.3 billion .
The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible
that the total amount of unrecognized tax benefits as of December 31, 2016 could decrease by up to $1.7 billion in the next 12 months as a result of various audit
closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s examinations with relevant taxing authorities can
include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The
Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures. However, there is one item that is currently under
discussion with the Internal Revenue Service (IRS) relating to the 2006 through 2008 examination. The Company has concluded that its position should be
sustained upon audit. However, if this item were to result in an unfavorable outcome or settlement, it could have a material adverse impact on the Company’s
financial position, liquidity and results of operations.
Expenses for interest and penalties associated with uncertain tax positions amounted to $134 million in 2016 , $102 million in 2015 and $9 million in
2014 . These amounts reflect the beneficial impacts of various tax settlements, including those discussed below. Liabilities for accrued interest and penalties were
$886 million and $766 million as of December 31, 2016 and 2015 , respectively.
The IRS is currently conducting examinations of the Company’s tax returns for the years 2006 through 2008, as well as 2010 and 2011. Although the
IRS’s examination of the Company’s 2002-2005 federal tax returns was concluded prior to 2015, one issue relating to a refund claim remained open. During 2015,
this issue was resolved and the Company received a refund of approximately $715 million , which exceeded the receivable previously recorded by the Company,
resulting in a tax benefit of $410 million .
In addition, various state and foreign tax examinations are in progress. For most of its other significant tax jurisdictions (both U.S. state and foreign),
the Company’s income tax returns are open for examination for the period 2003 through 2016.
At December 31, 2016 , foreign earnings of $63.1 billion have been retained indefinitely by subsidiary companies for reinvestment; therefore, no
provision has been made for income taxes that would be payable upon the distribution of such earnings and it would not be practicable to determine the amount of
the related unrecognized deferred income tax liability. In addition, the Company has subsidiaries operating in Puerto Rico and Singapore under tax incentive grants
that begin to expire in 2022.
120
Table of Contents
16. Earnings per Share
The calculations of earnings per share (shares in millions) are as follows:
Years
Ended
December
31
Net income attributable to Merck & Co., Inc.
Average common shares outstanding
Common shares issuable (1)
Average common shares outstanding assuming dilution
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
(1)
Issuable
primarily
under
share-based
compensation
plans.
2016
2015
2014
$
3,920 $
4,442 $
11,920
2,766
21
2,787
2,816
25
2,841
$
$
1.42 $
1.41 $
1.58 $
1.56 $
2,894
34
2,928
4.12
4.07
In 2016 , 2015 and 2014 , 13 million , 9 million and 4 million , respectively, of common shares issuable under share-based compensation plans were
excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.
17. Other Comprehensive Income (Loss)
Changes in AOCI
by component are as follows:
Balance January 1, 2014, net of taxes
$
Other comprehensive income (loss) before reclassification
adjustments, pretax
Tax
Other comprehensive income (loss) before reclassification
adjustments, net of taxes
Reclassification adjustments, pretax
Tax
Reclassification adjustments, net of taxes
Other comprehensive income (loss), net of taxes
Balance December 31, 2014, net of taxes
Other comprehensive income (loss) before reclassification
adjustments, pretax
Tax
Other comprehensive income (loss) before reclassification
adjustments, net of taxes
Reclassification adjustments, pretax
Tax
Reclassification adjustments, net of taxes
Other comprehensive income (loss), net of taxes
Balance December 31, 2015, net of taxes
Other comprehensive income (loss) before reclassification
adjustments, pretax
Tax
Other comprehensive income (loss) before reclassification
adjustments, net of taxes
Reclassification adjustments, pretax
Tax
Reclassification adjustments, net of taxes
Other comprehensive income (loss), net of taxes
Balance December 31, 2016, net of taxes
$
Derivatives
Investments
Employee
Benefit
Plans
Cumulative
Translation
Adjustment
Accumulated Other
Comprehensive
Income (Loss)
$
132
778
(285)
493
(146)
(1)
51
(95)
398
530
526
(177)
349
(731)
(1)
256
(475)
(126)
404
210
(72)
138
(314)
(1)
110
(204)
(66)
338
$
54
48
(17)
31
43
(17)
26
57
111
(9)
(13)
(22)
(73)
25
(48)
(70)
41
(38)
16
(22)
(31)
9
(22)
(44)
(3)
(2)
(2)
(2)
$
(909)
$
(1,474)
$
(3,196)
1,067
(2,129)
62 (3)
(10)
52
(2,077)
(2,986)
710
(272)
438
203 (3)
(62)
141
579
(2,407) (4)
(1,199)
363
(836)
37 (3)
—
37
(799)
$
(3,206) (4)
$
(412)
(92)
(504)
—
—
—
(504)
(1,978)
(158)
(28)
(186)
(22)
—
(22)
(208)
(2,186)
(150)
(19)
(169)
—
—
—
(169)
(2,355)
$
(2,197)
(2,782)
673
(2,109)
(41)
24
(17)
(2,126)
(4,323)
1,069
(490)
579
(623)
219
(404)
175
(4,148)
(1,177)
288
(889)
(308)
119
(189)
(1,078)
(5,226)
(1)
Relates
to
foreign
currency
cash
flow
hedges
that
were
reclassified
from
AOCI to
Sales .
(2)
Represents
net
realized
(gains)
losses
on
the
sales
of
available-for-sale
investments
that
were
reclassified
from
AOCI to
Other (income) expense, net .
(3)
Includes
net
amortization
of
prior
service
cost
and
actuarial
gains
and
losses
included
in
net
periodic
benefit
cost
(see
Note
13).
(4)
Includes
pension
plan
net
loss
of
$
3.9
billion
and
$3.3
billion
at
December
31,
2016
and
2015
,
respectively,
and
other
postretirement
benefit
plan
net
loss
of
$115
million
and
$86
million
at
December
31,
2016
and
in
2015
,
respectively,
as
well
as
pension
plan
prior
service
credit
of
$361
million
and
$414
million
at
December
31,
2016
and
2015
,
respectively,
and
other
postretirement
benefit
plan
prior
service
credit
of
$466
million
and
$547
million
at
December
31,
2016
and
2015
,
respectively.
121
Table of Contents
18. Segment Reporting
The Company’s operations are principally managed on a products basis and are comprised of four operating segments – Pharmaceutical, Animal
Health, Healthcare Services and Alliances. The Animal Health, Healthcare Services and Alliances segments are not material for separate reporting.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic
and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company 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, pharmacy
benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician
offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. A large component of
pediatric and adolescent vaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the
U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. Sales of vaccines in most major
European markets were marketed through the Company’s SPMSD joint venture until its termination on December 31, 2016 (see Note 8).
The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the
Company sells to veterinarians, distributors and animal producers. During 2016, the Company made changes to the composition of the Animal Health segment that
resulted in the inclusion of certain revenues and costs that were previously included in non-segment revenues and profits. Prior periods have been recast to reflect
these changes on a comparable basis. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and
clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with
AZLP until the termination of that relationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company divested its Consumer Care segment that
developed, manufactured and marketed over-the-counter, foot care and sun care products (see Note 3).
122
Table of Contents
Sales of the Company’s products were as follows:
Years
Ended
December
31
Primary Care and Women’s Health
Cardiovascular
Zetia
Vytorin
Diabetes
Januvia
Janumet
General Medicine and Women’s Health
NuvaRing
Implanon/Nexplanon
Dulera
Follistim
AQ
Hospital and Specialty
Hepatitis
Zepatier
HIV
Isentress
Hospital Acute Care
Cubicin
(1)
Noxafil
Invanz
Cancidas
Bridion
Primaxin
Immunology
Remicade
Simponi
Oncology
Keytruda
Emend
Temodar
Diversified Brands
Respiratory
Singulair
Nasonex
Other
Cozaar/Hyzaar
Arcoxia
Fosamax
Zocor
Vaccines (2)
Gardasil/Gardasil
9
ProQuad/M-M-R
II/Varivax
Zostavax
RotaTeq
Pneumovax
23
Other pharmaceutical (3)
Total Pharmaceutical segment sales
Other segment sales (4)
Total segment sales
Other (5)
$
2016
2015
2014
$
2,560
1,141
3,908
2,201
777
606
436
355
555
1,387
1,087
595
561
558
482
297
1,268
766
1,402
549
283
915
537
511
450
284
186
2,173
1,640
685
652
641
4,703
35,151
3,862
39,013
794
$
2,526
1,251
3,863
2,151
732
588
536
383
—
1,511
1,127
487
569
573
353
313
1,794
690
566
535
312
931
858
667
471
359
217
1,908
1,505
749
610
542
5,105
34,782
3,667
38,449
1,049
2,650
1,516
3,931
2,071
723
502
460
412
—
1,673
25
402
529
681
340
329
2,372
689
55
553
350
1,092
1,099
806
519
470
258
1,738
1,394
765
659
746
6,233
36,042
5,758
41,800
437
(1)
Sales
of
Cubicin in
2015
represent
sales
subsequent
to
the
Cubist
acquisition
date.
Sales
of
Cubicin in
2014
reflect
sales
in
Japan
pursuant
to
a
previously
existing
licensing
agreement.
(2)
These
amounts
do
not
reflect
sales
of
vaccines
sold
in
most
major
European
markets
through
the
Company’s
joint
venture,
SPMSD,
the
results
of
which
are
reflected
in
equity
income
from
affiliates
which
is
included
in
Other (income) expense, net .
These
amounts
do,
however,
reflect
supply
sales
to
SPMSD.
On
December
31,
2016,
Merck
and
Sanofi
terminated
the
SPMSD
joint
venture
(see
Note
8).
(3)
Other
pharmaceutical
primarily
reflects
sales
of
other
human
health
pharmaceutical
products,
including
products
within
the
franchises
not
listed
separately.
(4)
Represents
the
non-reportable
segments
of
Animal
Health,
Healthcare
Services
and
Alliances,
as
well
as
Consumer
Care
until
its
divestiture
on
October
1,
2014
(see
Note
3).
The
Alliances
segment
includes
revenue
from
the
Company’s
relationship
with
AZLP
until
termination
on
June
30,
2014
(see
Note
8).
(5)
Other
is
primarily
comprised
of
miscellaneous
corporate
revenues,
including
revenue
hedging
activities,
as
well
as
third-party
manufacturing
sales.
Other
in
2016
and
2014
also
includes
approximately
$170
million
and
$232
million
,
respectively,
in
connection
with
the
sale
of
the
marketing
rights
to
certain
products.
$
39,807
$
39,498
$
42,237
123
Table of Contents
Consolidated revenues by geographic area where derived are as follows:
Years
Ended
December
31
United States
Europe, Middle East and Africa
Asia Pacific
Japan
Latin America
Other
A reconciliation of total segment profits to consolidated Income
before
taxes
is as follows:
Years
Ended
December
31
Segment profits:
Pharmaceutical segment
Other segments
Total segment profits
Other profits
Unallocated:
Interest income
Interest expense
Equity income from affiliates
Depreciation and amortization
Research and development
Amortization of purchase accounting adjustments
Restructuring costs
Gain on sale of certain migraine clinical development programs
Charge related to the settlement of worldwide Keytruda
patent litigation
Gain on divestiture of certain ophthalmic products
Foreign currency devaluation related to Venezuela
Net charge related to the settlement of Vioxx
shareholder class action litigation
Gain on divestiture of Merck Consumer Care
Gain on AstraZeneca option exercise
Loss on extinguishment of debt
Other unallocated, net
2016
2015
2014
$
18,478 $
17,519 $
10,953
10,677
3,918
2,846
2,155
1,457
3,825
2,673
2,825
1,979
17,071
13,174
3,952
3,471
3,151
1,418
$
39,807 $
39,498 $
42,237
2016
2015
2014
$
22,180 $
21,658 $
22,164
1,507
1,573
23,687
23,231
481
810
328
(693)
(19)
(1,585)
(9,084)
(3,692)
(651)
100
(625)
—
—
—
—
—
—
289
(672)
135
(1,573)
(5,871)
(4,816)
(619)
250
—
147
(876)
(680)
—
—
—
2,386
24,550
627
266
(732)
59
(2,452)
(5,823)
(4,182)
(1,013)
—
—
480
—
—
11,209
741
(628)
(3,588)
(4,354)
(5,819)
$
4,659 $
5,401 $
17,283
Segment profits are comprised of segment sales less standard costs and certain operating expenses directly incurred by the segments. For internal
management reporting presented to the chief operating decision maker, Merck does not allocate materials and production costs, other than standard costs, the
majority of research and development expenses or general and administrative expenses, nor 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. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to
segments.
Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing sales.
Other unallocated, net includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains
or losses on sales of businesses, expense or income related to changes in the estimated fair value of contingent consideration, and other miscellaneous income or
expense items.
124
Table of Contents
Equity income from affiliates and depreciation and amortization included in segment profits is as follows:
Pharmaceutical
All Other
Total
Year Ended December 31, 2016
Included in segment profits:
Equity income from affiliates
Depreciation and amortization
Year
Ended
December
31,
2015
Included in segment profits:
Equity income from affiliates
Depreciation and amortization
Year
Ended
December
31,
2014
Included in segment profits:
Equity income from affiliates
Depreciation and amortization
Property, plant and equipment, net by geographic area where located is as follows:
December
31
United States
Europe, Middle East and Africa
Asia Pacific
Latin America
Japan
Other
$
$
$
105
$
(160)
— $
(23)
70
$
(82)
— $
(18)
90
$
(39)
108 $
(18)
105
(183)
70
(100)
198
(57)
2016
2015
2014
$
8,114 $
8,467 $
2,732
2,844
775
234
164
7
842
182
164
8
8,727
3,120
897
207
172
13
$
12,026 $
12,507 $
13,136
The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not
presented.
125
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Merck & Co., Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, equity and cash flows
present fairly, in all material respects, the financial position of Merck & Co., Inc. and its subsidiaries at December 31, 2016 and December 31, 2015, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016 , based on criteria established in Internal
Control
-
Integrated
Framework
(2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report under Item 9a. Our
responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 28, 2017
126
Table of Contents
(b)
Supplementary Data
Selected quarterly financial data for 2016 and 2015 are contained in the Condensed Interim Financial Data table below.
Condensed Interim Financial Data (Unaudited)
($
in
millions
except
per
share
amounts)
2016 (4)
Sales
Materials and production
Marketing and administrative
Research and development
Restructuring costs
Other (income) expense, net
(Loss) income before taxes
Net (loss) income attributable to Merck & Co., Inc.
Basic (loss) earnings per common share attributable to Merck & Co., Inc. common
shareholders
(Loss) earnings per common share assuming dilution attributable to Merck & Co., Inc.
common shareholders
2015 (4)
Sales
Materials and production
Marketing and administrative
Research and development
Restructuring costs
Other (income) expense, net
Income before taxes
Net income attributable to Merck & Co., Inc.
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common
shareholders
4th Q (1)
3rd Q (2)
2nd Q (3)
1st Q
$
10,115 $
10,536 $
9,844 $
3,332
2,593
4,650
265
631
(1,356)
(594)
3,409
2,393
1,664
161
22
2,887
2,184
3,578
2,458
2,151
134
19
1,504
1,205
9,312
3,572
2,318
1,659
91
48
1,624
1,125
$
$
$
$
$
(0.22) $
0.79 $
0.44 $
0.41
(0.22) $
0.78 $
0.43 $
0.40
10,215 $
10,073 $
9,785 $
3,850
2,615
1,797
233
905
815
976
3,761
2,472
1,500
113
(170)
2,397
1,826
3,754
2,624
1,670
191
739
807
687
0.35 $
0.65 $
0.24 $
9,425
3,569
2,601
1,737
82
55
1,381
953
0.34
0.35 $
0.64 $
0.24 $
0.33
(1)
Amounts
for
2016
include
a
charge
to
settle
worldwide
patent
litigation
related
to
Keytruda
(see
Note
10).
Amounts
for
2015
reflect
a
net
charge
related
to
the
settlement
of
Vioxx shareholder
class
action
litigation
(see
Note
10),
foreign
exchange
losses
related
to
Venezuela
(see
Note
14)
and
a
gain
on
the
sale
of
the
Company’s
remaining
ophthalmics
business
in
international
markets
(see
Note
3).
(2)
Amounts
for
2015
include
a
gain
on
the
sale
of
certain
migraine
clinical
development
programs
(see
Note
3).
(3)
Amounts
for
2015
include
foreign
exchange
losses
related
to
the
devaluation
of
the
Company’s
net
monetary
assets
in
Venezuela
(see
Note
14).
(4)
Amounts
for
2016
and
2015
reflect
acquisition
and
divestiture-related
costs
(see
Note
7)
and
the
impact
of
restructuring
actions
(see
Note
4).
127
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures. Based on their evaluation, as of the end of the period covered by this Form 10-K, the Company’s Chief Executive
Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Act)) are effective.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)
of the Act. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal
Control
—
Integrated
Framework
issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that internal control over financial reporting was effective as of December 31, 2016 . PricewaterhouseCoopers LLP, an independent
registered public accounting firm, has performed its own assessment of the effectiveness of the Company’s internal control over financial reporting and its
attestation report is included in this Form 10-K filing.
Management’s Report
Management’s Responsibility for Financial Statements
Responsibility for the integrity and objectivity of the Company’s financial statements rests with management. The financial statements report on
management’s stewardship of Company assets. These statements are prepared in conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management’s best estimates and judgments. Nonfinancial information included in the Annual Report on Form 10-K has also
been prepared by management and is consistent with the financial statements.
To assure that financial information is reliable and assets are safeguarded, management maintains an effective system of internal controls and
procedures, important elements of which include: careful selection, training and development of operating and financial managers; an organization that provides
appropriate division of responsibility; and communications aimed at assuring that Company policies and procedures are understood throughout the organization. A
staff of internal auditors regularly monitors the adequacy and application of internal controls on a worldwide basis.
To ensure that personnel continue to understand the system of internal controls and procedures, and policies concerning good and prudent business
practices, annually all employees of the Company are required to complete Code of Conduct training, which includes financial stewardship. This training reinforces
the importance and understanding of internal controls by reviewing key corporate policies, procedures and systems. In addition, the Company has compliance
programs, including an ethical business practices program to reinforce the Company’s long-standing commitment to high ethical standards in the conduct of its
business.
The financial statements and other financial information included in the Annual Report on Form 10-K fairly present, in all material respects, the
Company’s financial condition, results of operations and cash flows. Our formal certification to the Securities and Exchange Commission is included in this
Form 10-K filing.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the
United States of America. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal
Control
—
Integrated
Framework
issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that internal control over financial reporting was effective as of December 31, 2016 .
128
Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 , has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Kenneth C. Frazier
Chairman,
President
and
Chief
Executive
Officer
Item 9B. Other Information.
None.
Robert M. Davis
Executive
Vice
President,
Global
Services
and
Chief
Financial
Officer
129
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The required information on directors and nominees is incorporated by reference from the discussion under Proposal 1. Election of Directors of the
Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 2017. Information on executive officers is set forth in Part I of this
document on page 29.
The required information on compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the discussion
under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be
held May 23, 2017.
principal
accounting officer
The Company has a Code of Conduct — Our
Values
and
Standards
applicable to all employees, including the principal executive officer, principal
financial
at
Code
officer,
www.merck.com/about/code_of_conduct.pdf
. The Company intends to disclose future amendments to certain provisions of the Code of Conduct, and waivers of
the Code of Conduct granted to executive officers and directors, if any, on the website within four business days following the date of any amendment or waiver.
Every Merck employee is responsible for adhering to business practices that are in accordance with the law and with ethical principles that reflect the highest
standards of corporate and individual behavior. A printed copy will be sent, without charge, to any shareholder who requests it by writing to the Chief Ethics and
Compliance Officer of Merck & Co., Inc., 2000 Galloping Hill Road, Kenilworth, NJ 07033.
and Controller.
Company’s
available
on the
Conduct
website
The
of
is
The required information on the identification of the audit committee and the audit committee financial expert is incorporated by reference from the
discussion under the heading “Board Meetings and Committees” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23,
2017.
Item 11. Executive Compensation.
The information required on executive compensation is incorporated by reference from the discussion under the headings “Compensation Discussion
and Analysis”, “Summary Compensation Table”, “All Other Compensation” table, “Grants of Plan-Based Awards” table, “Outstanding Equity Awards” table,
“Option Exercises and Stock Vested” table, “Pension Benefits” table, “Nonqualified Deferred Compensation” table, Potential Payments Upon Termination or a
Change in Control, including the discussion under the subheadings “Separation” and “Change in Control”, as well as all footnote information to the various tables,
of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 2017.
The required information on director compensation is incorporated by reference from the discussion under the heading “Director Compensation” and
related “Director Compensation” table and “Schedule of Director Fees” table of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held
May 23, 2017.
The required information under the headings “Compensation and Benefits Committee Interlocks and Insider Participation” and “Compensation and
Benefits Committee Report” is incorporated by reference from the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 2017.
130
Table of Contents
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the
heading “Stock Ownership Information” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 2017.
Equity Compensation Plan Information
The following table summarizes information about the options, warrants and rights and other equity compensation under the Company’s equity
compensation plans as of the close of business on December 31, 2016. The table does not include information about tax qualified plans such as the Merck U.S.
Savings Plan.
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding
securities
reflected in column (a))
(c)
45,050,279 (2)
$
—
45,050,279 $
44.47
—
44.47
124,902,265
—
124,902,265
Plan Category
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
Total
(1)
Includes
options
to
purchase
shares
of
Company
Common
Stock
and
other
rights
under
the
following
shareholder-approved
plans:
the
Merck
Sharp
&
Dohme
2004,
2007
and
2010
Incentive
Stock
Plans,
the
Merck
&
Co.,
Inc.
2006
and
2010
Non-Employee
Directors
Stock
Option
Plans,
and
the
Merck
&
Co.,
Inc.
Schering-Plough
2002
and
2006
Stock
Incentive
Plans.
(2)
Excludes
approximately
13,265,959
shares
of
restricted
stock
units
and
1,743,587
performance
share
units
(assuming
maximum
payouts)
under
the
Merck
Sharp
&
Dohme
2004,
2007
and
2010
Incentive
Stock
Plans.
Also
excludes
244,119
shares
of
phantom
stock
deferred
under
the
MSD
Employee
Deferral
Program
and
561,846
shares
of
phantom
stock
deferred
under
the
Merck
&
Co.,
Inc.
Plan
for
Deferred
Payment
of
Directors’
Compensation.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The required information on transactions with related persons is incorporated by reference from the discussion under the heading “Related Person
Transactions” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 2017.
The required information on director independence is incorporated by reference from the discussion under the heading “Independence of Directors” of
the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 2017.
Item 14. Principal Accountant Fees and Services.
The information required for this item is incorporated by reference from the discussion under Proposal 4. Ratification of Appointment of Independent
Registered Public Accounting Firm for 2017 beginning with the caption “Pre-Approval Policy for Services of Independent Registered Public Accounting Firm”
through “Fees for Services Provided by Independent Registered Public Accounting Firm” of the Company’s Proxy Statement for the Annual Meeting of
Shareholders to be held May 23, 2017.
131
Table of Contents
Item 15.
Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Form 10-K
1. Financial Statements
PART IV
Consolidated statement of income for the years ended December 31, 2016 , 2015 and 2014
Consolidated statement of comprehensive income for the years ended December 31, 2016 , 2015 and 2014
Consolidated balance sheet as of December 31, 2016 and 2015
Consolidated statement of equity for the years ended December 31, 2016 , 2015 and 2014
Consolidated statement of cash flows for the years ended December 31, 2016 , 2015 and 2014
Notes to consolidated financial statements
Report of PricewaterhouseCoopers LLP, independent registered public accounting firm
2. Financial Statement Schedules
Schedules are omitted because they are either not required or not applicable.
Financial statements of affiliates carried on the equity basis have been omitted because, considered individually or in the aggregate, such affiliates do
not constitute a significant subsidiary.
3. Exhibits
Exhibit
Number
Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
—
—
—
—
—
—
—
—
—
Restated Certificate of Incorporation of Merck & Co., Inc. (November 3, 2009) — Incorporated by reference to Merck & Co., Inc.’s
Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
By-Laws of Merck & Co., Inc. (effective July 22, 2015) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8-K
filed July 28, 2015 (No. 1-6571)
Indenture, dated as of April 1, 1991, between Merck Sharp & Dohme Corp. (f/k/a Schering Corporation) and U.S. Bank Trust National
Association (as successor to Morgan Guaranty Trust Company of New York), as Trustee (the 1991 Indenture) — Incorporated by reference
to Exhibit 4 to MSD’s Registration Statement on Form S-3 (No. 33-39349)
First Supplemental Indenture to the 1991 Indenture, dated as of October 1, 1997 — Incorporated by reference to Exhibit 4(b) to MSD’s
Registration Statement on Form S-3 (No. 333-36383)
Second Supplemental Indenture to the 1991 Indenture, dated November 3, 2009 — Incorporated by reference to Exhibit 4.3 to Merck &
Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
Third Supplemental Indenture to the 1991 Indenture, dated May 1, 2012 —Incorporated by reference to Merck & Co., Inc.’s Form 10-Q
Quarterly Report for the quarter year ended March 31, 2012 (No. 1-6571)
Indenture, dated November 26, 2003, between Merck & Co., Inc. (f/k/a Schering-Plough Corporation) and The Bank of New York as
Trustee (the 2003 Indenture) — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8‑K filed
November 28, 2003 (No. 1-6571)
Second Supplemental Indenture to the 2003 Indenture (including Form of Note), dated November 26, 2003 —Incorporated by reference to
Exhibit 4.3 to Schering-Plough’s Current Report on Form 8‑K filed November 28, 2003 (No. 1-6571)
Third Supplemental Indenture to the 2003 Indenture (including Form of Note), dated September 17, 2007 — Incorporated by reference to
Exhibit 4.1 to Schering-Plough’s Current Report on Form 8‑K filed September 17, 2007 (No. 1-6571)
132
Table of Contents
Exhibit
Number
4.8
4.9
4.10
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
*10.14
Description
—
—
—
—
Fifth Supplemental Indenture to the 2003 Indenture, dated November 3, 2009 — Incorporated by reference to Exhibit 4.4 to Merck & Co.,
Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
Indenture, dated as of January 6, 2010, between Merck & Co., Inc. and U.S. Bank Trust National Association, as Trustee — Incorporated
by reference to Exhibit 4.1 to Merck & Co., Inc.’s Current Report on Form 8-K filed December 10, 2010 (No. 1-6571)
Long-term debt instruments under which the total amount of securities authorized does not exceed 10% of Merck & Co., Inc.’s total
consolidated assets are not filed as exhibits to this report. Merck & Co., Inc. will furnish a copy of these agreements to the Securities and
Exchange Commission on request.
Merck & Co., Inc. Executive Incentive Plan (as amended and restated effective June 1, 2015) — Incorporated by reference to Merck & Co.,
Inc.’s Schedule 14A filed April 13, 2015 (No. 1-6571)
— Merck & Co., Inc. Deferral Program Including the Base Salary Deferral Plan (Amended and Restated effective December 1, 2015)
—
—
—
—
—
—
—
—
—
—
—
—
Merck Sharp & Dohme Corp. 2004 Incentive Stock Plan (amended and restated as of November 3, 2009) — Incorporated by reference to
Exhibit 10.8 to Merck & Co., Inc.’s Current Report on Form 8‑K filed November 4, 2009 (No. 1-6571)
Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective as amended and restated as of November 3, 2009) — Incorporated by
reference to Exhibit 10.7 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
Amendment One to the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective February 15, 2010) — Incorporated by
reference to Exhibit 10.2 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 18, 2010 (No. 1-6571)
Merck & Co., Inc. 2010 Incentive Stock Plan (as amended and restated June 1, 2015) — Incorporated by reference to Merck & Co., Inc.’s
Schedule 14A filed April 13, 2015 (No. 1-6571)
Form of stock option terms for a non-qualified stock option under the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan and the
Schering-Plough 2006 Stock Incentive Plan — Incorporated by reference to Exhibit 10.3 to Merck & Co., Inc.’s Current Report on Form 8-
K filed February 15, 2010 (No. 1-6571)
Form of stock option terms for 2011 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10‑Q Quarterly Report for the period ended March 31, 2011 (No. 1-6571)
Form of performance share unit terms for 2012 grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference
to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended March 31, 2012 (No. 1-6571)
Form of stock option terms for 2013 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-
6571)
Form of restricted stock unit terms for 2013 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-
6571)
Form of performance share unit terms for 2013 grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference
to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
Form of stock option terms for 2014 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-
6571)
Form of restricted stock unit terms for 2014 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-
6571)
133
Table of Contents
Exhibit
Number
*10.15
*10.16
*10.17
*10.18
*10.19
Description
—
—
—
—
—
Form of performance share unit terms for 2014 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference
to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
Form of stock option terms for 2015 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-
6571)
Form of restricted stock unit terms for 2015 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-
6571)
Form of performance share unit terms for 2015 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference
to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
Form of stock option terms for 2016 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan
*10.20
— Form of restricted stock unit terms for 2016 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan
*10.21
— Form of performance share unit terms for 2016 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan
*10.22
*10.23
—
—
Merck & Co., Inc. Change in Control Separation Benefits Plan (Effective as Amended and Restated, as of January 1, 2013) — Incorporated
by reference to Merck & Co., Inc.’s Current Report on Form 8‑K dated November 29, 2012 (No. 1-6571)
Merck & Co., Inc. U.S. Separation Benefits Plan (amended and restated effective as of November 15, 2014) — Incorporated by reference to
Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.24
— Merck & Co., Inc. U.S. Separation Benefits Plan (amended and restated effective as of January 1, 2017)
*10.25
*10.26
*10.27
*10.28
10.29
10.30
10.31
—
—
—
—
—
—
—
Merck & Co., Inc. 2006 Non-Employee Directors Stock Option Plan (amended and restated as of November 3, 2009) — Incorporated by
reference to Exhibit 10.5 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
Merck & Co., Inc. 2010 Non-Employee Directors Stock Option Plan (amended and restated as of December 1, 2010) — Incorporated by
reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No. 1-6571)
Retirement Plan for the Directors of Merck & Co., Inc. (amended and restated June 21, 1996) —Incorporated by reference to MSD’s Form
10-Q Quarterly Report for the period ended June 30, 1996 (No. 1-3305)
Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation (effective as amended and restated as of December 1,
2010) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No. 1-
6571)
Distribution agreement between Schering-Plough and Centocor, Inc., dated April 3, 1998 — Incorporated by reference to Exhibit 10(u) to
Schering-Plough’s Amended 10-K for the year ended December 31, 2003, filed May 3, 2004 (No. 1-6571)†
Amendment Agreement to the Distribution Agreement between Centocor, Inc., CAN Development, LLC, and Schering-Plough (Ireland)
Company — Incorporated by reference to Exhibit 10.1 to Schering-Plough’s Current Report on Form 8-K filed December 21, 2007 (No. 1-
6571)†
Accelerated Share Purchase Agreement between Merck & Co., Inc. and Goldman, Sachs & Co., dated May 20, 2013 — Incorporated by
reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended June 30, 2013 (No. 1-6571)
134
Table of Contents
Exhibit
Number
Description
12
21
23
24.1
24.2
31.1
31.2
32.1
32.2
101
— Computation of Ratios of Earnings to Fixed Charges
— Subsidiaries of Merck & Co., Inc.
— Consent of Independent Registered Public Accounting Firm
— Power of Attorney
— Certified Resolution of Board of Directors
— Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
— Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
— Section 1350 Certification of Chief Executive Officer
— Section 1350 Certification of Chief Financial Officer
—
The following materials from Merck & Co., Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, formatted in
XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated Statement of
Comprehensive Income, (iii) the Consolidated Balance Sheet, (iv) the Consolidated Statement of Equity, (v) the Consolidated Statement of
Cash Flows, and (vi) Notes to Consolidated Financial Statements.
*
†
Management
contract
or
compensatory
plan
or
arrangement.
Certain
portions
of
the
exhibit
have
been
omitted
pursuant
to
a
request
for
confidential
treatment.
The
non-public
information
has
been
filed
separately
with
the
Securities
and
Exchange
Commission
pursuant
to
rule
24b-2
under
the
Securities
Exchange
Act
of
1934,
as
amended.
Item 16. Form 10-K Summary
Not applicable.
135
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
SIGNATURES
behalf by the undersigned, thereunto duly authorized.
Dated: February 28, 2017
MERCK & CO., INC.
By:
KENNETH C. FRAZIER
(Chairman, President and Chief Executive Officer)
By:
/S/ MICHAEL J. HOLSTON
Michael J. Holston
(Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
KENNETH C. FRAZIER
ROBERT M. DAVIS
Chairman, President and Chief Executive Officer;
Principal Executive Officer; Director
Executive Vice President, Global Services and
Chief Financial Officer; Principal Financial Officer
RITA A. KARACHUN
Senior Vice President Finance-Global Controller;
Principal Accounting Officer
LESLIE A. BRUN
THOMAS R. CECH
PAMELA J. CRAIG
THOMAS H. GLOCER
C. ROBERT KIDDER
ROCHELLE B. LAZARUS
CARLOS E. REPRESAS
PAUL B. ROTHMAN
PATRICIA F. RUSSO
CRAIG B. THOMPSON
WENDELL P. WEEKS
PETER C. WENDELL
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
Michael J. Holston, by signing his name hereto, does hereby sign this document pursuant to powers of attorney duly executed by the persons named,
filed with the Securities and Exchange Commission as an exhibit to this document, on behalf of such persons, all in the capacities and on the date stated, such
persons including a majority of the directors of the Company.
By:
/S/ MICHAEL J. HOLSTON
Michael J. Holston
(Attorney-in-Fact)
136
Table of Contents
Exhibit
Number
Description
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
*10.1
*10.2
*10.3
*10.4
*10.5
—
—
—
—
—
—
—
—
—
—
—
—
—
Restated Certificate of Incorporation of Merck & Co., Inc. (November 3, 2009) — Incorporated by reference to Merck & Co., Inc.’s
Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
By-Laws of Merck & Co., Inc. (effective July 22, 2015) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8-K
filed July 28, 2015 (No. 1-6571)
Indenture, dated as of April 1, 1991, between Merck Sharp & Dohme Corp. (f/k/a Schering Corporation) and U.S. Bank Trust National
Association (as successor to Morgan Guaranty Trust Company of New York), as Trustee (the 1991 Indenture) — Incorporated by reference
to Exhibit 4 to MSD’s Registration Statement on Form S-3 (No. 33-39349)
First Supplemental Indenture to the 1991 Indenture, dated as of October 1, 1997 — Incorporated by reference to Exhibit 4(b) to MSD’s
Registration Statement on Form S-3 (No. 333-36383)
Second Supplemental Indenture to the 1991 Indenture, dated November 3, 2009 — Incorporated by reference to Exhibit 4.3 to Merck &
Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
Third Supplemental Indenture to the 1991 Indenture, dated May 1, 2012 —Incorporated by reference to Merck & Co., Inc.’s Form 10-Q
Quarterly Report for the quarter year ended March 31, 2012 (No. 1-6571)
Indenture, dated November 26, 2003, between Merck & Co., Inc. (f/k/a Schering-Plough Corporation) and The Bank of New York as
Trustee (the 2003 Indenture) — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8‑K filed
November 28, 2003 (No. 1-6571)
Second Supplemental Indenture to the 2003 Indenture (including Form of Note), dated November 26, 2003 —Incorporated by reference to
Exhibit 4.3 to Schering-Plough’s Current Report on Form 8‑K filed November 28, 2003 (No. 1-6571)
Third Supplemental Indenture to the 2003 Indenture (including Form of Note), dated September 17, 2007 — Incorporated by reference to
Exhibit 4.1 to Schering-Plough’s Current Report on Form 8‑K filed September 17, 2007 (No. 1-6571)
Fifth Supplemental Indenture to the 2003 Indenture, dated November 3, 2009 — Incorporated by reference to Exhibit 4.4 to Merck & Co.,
Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
Indenture, dated as of January 6, 2010, between Merck & Co., Inc. and U.S. Bank Trust National Association, as Trustee — Incorporated
by reference to Exhibit 4.1 to Merck & Co., Inc.’s Current Report on Form 8-K filed December 10, 2010 (No. 1-6571)
Long-term debt instruments under which the total amount of securities authorized does not exceed 10% of Merck & Co., Inc.’s total
consolidated assets are not filed as exhibits to this report. Merck & Co., Inc. will furnish a copy of these agreements to the Securities and
Exchange Commission on request.
Merck & Co., Inc. Executive Incentive Plan (as amended and restated effective June 1, 2015) — Incorporated by reference to Merck & Co.,
Inc.’s Schedule 14A filed April 13, 2015 (No. 1-6571)
— Merck & Co., Inc. Deferral Program Including the Base Salary Deferral Plan (Amended and Restated effective December 1, 2015
—
—
—
Merck Sharp & Dohme Corp. 2004 Incentive Stock Plan (amended and restated as of November 3, 2009) — Incorporated by reference to
Exhibit 10.8 to Merck & Co., Inc.’s Current Report on Form 8‑K filed November 4, 2009 (No. 1-6571)
Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective as amended and restated as of November 3, 2009) — Incorporated by
reference to Exhibit 10.7 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
Amendment One to the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective February 15, 2010) — Incorporated by
reference to Exhibit 10.2 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 18, 2010 (No. 1-6571)
137
Table of Contents
Exhibit
Number
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
*10.14
*10.15
*10.16
*10.17
*10.18
*10.19
Description
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Merck & Co., Inc. 2010 Incentive Stock Plan (as amended and restated June 1, 2015) — Incorporated by reference to Merck & Co., Inc.’s
Schedule 14A filed April 13, 2015 (No. 1-6571)
Form of stock option terms for a non-qualified stock option under the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan and the
Schering-Plough 2006 Stock Incentive Plan — Incorporated by reference to Exhibit 10.3 to Merck & Co., Inc.’s Current Report on Form 8-
K filed February 15, 2010 (No. 1-6571)
Form of stock option terms for 2011 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10‑Q Quarterly Report for the period ended March 31, 2011 (No. 1-6571)
Form of stock option terms for 2012 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10‑K Annual Report for the fiscal year ended December 31, 2011 (No. 1-
6571)
Form of stock option terms for 2013 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-
6571)
Form of restricted stock unit terms for 2013 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-
6571)
Form of performance share unit terms for 2013 grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference
to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
Form of stock option terms for 2014 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-
6571)
Form of restricted stock unit terms for 2014 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-
6571)
Form of performance share unit terms for 2014 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference
to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
Form of stock option terms for 2015 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-
6571)
Form of restricted stock unit terms for 2015 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan
— Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
Form of performance share unit terms for 2015 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference
to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
Form of stock option terms for 2016 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock
Plan
*10.20
— Form of restricted stock unit terms for 2016 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan
*10.21
— Form of performance share unit terms for 2016 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan
*10.22
*10.23
—
—
Merck & Co., Inc. Change in Control Separation Benefits Plan (Effective as Amended and Restated, as of January 1, 2013) — Incorporated
by reference to Merck & Co., Inc.’s Current Report on Form 8‑K dated November 29, 2012 (No. 1-6571)
Merck & Co., Inc. U.S. Separation Benefits Plan (amended and restated effective as of November 15, 2014) — Incorporated by reference to
Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
138
Table of Contents
Exhibit
Number
*10.24
*10.25
*10.26
*10.27
*10.28
10.29
10.30
10.31
12
21
23
24.1
24.2
31.1
31.2
32.1
32.2
101
Description
Merck & Co., Inc. U.S. Separation Benefits Plan (amended and restated effective as of January 1, 2017)
—
—
—
—
—
—
—
Merck & Co., Inc. 2006 Non-Employee Directors Stock Option Plan (amended and restated as of November 3, 2009) — Incorporated by
reference to Exhibit 10.5 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
Merck & Co., Inc. 2010 Non-Employee Directors Stock Option Plan (amended and restated as of December 1, 2010) — Incorporated by
reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No. 1-6571)
Retirement Plan for the Directors of Merck & Co., Inc. (amended and restated June 21, 1996) —Incorporated by reference to MSD’s Form
10-Q Quarterly Report for the period ended June 30, 1996 (No. 1-3305)
Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation (effective as amended and restated as of December 1,
2010) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No. 1-
6571)
Distribution agreement between Schering-Plough and Centocor, Inc., dated April 3, 1998 — Incorporated by reference to Exhibit 10(u) to
Schering-Plough’s Amended 10-K for the year ended December 31, 2003, filed May 3, 2004 (No. 1-6571)†
Amendment Agreement to the Distribution Agreement between Centocor, Inc., CAN Development, LLC, and Schering-Plough (Ireland)
Company — Incorporated by reference to Exhibit 10.1 to Schering-Plough’s Current Report on Form 8-K filed December 21, 2007 (No. 1-
6571)†
Accelerated Share Purchase Agreement between Merck & Co., Inc. and Goldman, Sachs & Co., dated May 20, 2013 — Incorporated by
reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended June 30, 2013 (No. 1-6571)
— Computation of Ratios of Earnings to Fixed Charges
— Subsidiaries of Merck & Co., Inc.
— Consent of Independent Registered Public Accounting Firm
— Power of Attorney
— Certified Resolution of Board of Directors
— Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
— Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
— Section 1350 Certification of Chief Executive Officer
— Section 1350 Certification of Chief Financial Officer
—
The following materials from Merck & Co., Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, formatted in
XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated Statement of
Comprehensive Income, (iii) the Consolidated Balance Sheet, (iv) the Consolidated Statement of Equity, (v) the Consolidated Statement of
Cash Flows, and (vi) Notes to Consolidated Financial Statements.
*
†
Management
contract
or
compensatory
plan
or
arrangement.
Certain
portions
of
the
exhibit
have
been
omitted
pursuant
to
a
request
for
confidential
treatment.
The
non-public
information
has
been
filed
separately
with
the
Securities
and
Exchange
Commission
pursuant
to
rule
24b-2
under
the
Securities
Exchange
Act
of
1934,
as
amended.
139
EXHIBIT 10.2
MERCK & CO., INC.
DEFERRAL PROGRAM
Including the Base Salary Deferral Plan
( Amended and Restated effective December 1, 2015 )
TABLE OF CONTENTS
Article I
Article II
Administration
Eligibility
Article III
Contributions to a Deferred Compensation Account
Article IV
Valuation of Deferred Compensation Accounts
Article V
Redesignation within a Deferred Compensation Account
Article VI
Distribution of Deferred Compensation Accounts
Article VII
Deductions from Distributions
Article VIII
Beneficiary Designations
Article IX
Amendments
Article X
No Assignment, Alienation
Article XI
Claims and Appeal Procedures
Article XII
Domestic Relations Orders
Article XII
Effective Date
Schedule I
Deferral Program Investment Alternatives
Schedule II
Special Provisions Applicable to Medco Health Employees
Page
1
1
2
5
8
9
10
11
11
11
11
12
13
14
15
MERCK & CO. INC.
DEFERRAL PROGRAM
The Deferral Program (the “Program”) is an unfunded arrangement intended to permit a select group of management employees of
Merck & Co., Inc. (“Merck”) or its affiliate to defer income that would otherwise be immediately payable to them as annual base salary or
under various incentive plans of Merck or its affiliates.
The Program is a “nonqualified deferred compensation plan” within the meaning of Section 409A (“Section 409A”) of the Internal
Revenue Code of 1986, as amended (the “Code”).
Anything in the Program to the contrary notwithstanding, the Program shall be interpreted and operated in compliance with the
requirements, if any, of Section 409A of the Code (or any successor thereto) as in effect from time to time, including but not limited to
applicable regulations of the U.S. Department of the Treasury or Internal Revenue Service and Treas. Reg. Secs. 1.409A-1 through 1.409A-6
or any successor thereto. Any payment called for under the Program as of a designated date shall be made no later than a date within the same
tax year of a participant, or by March 15 of the following year, if later (or such other dates as specified in Treas. Reg. Sec. 1.409A 3(d) or any
successor thereto); provided further, that the participant is not permitted to change the taxable year of payment except in accordance with
Article VI, Section F and Section 409A of the Code. Where the Program’s obligation to pay is unclear Merck, including a dispute about who
is the proper beneficiary of a participant who dies, payment shall be made as soon as administratively feasible after the Program’s obligation
becomes clear and at a time permitted by Treas. Reg. Sec. 1.409A-3(g)(4) or any successor thereto.
I. ADMINISTRATION
The Program is administered by the Compensation and Benefits Committee (“Committee”) of the Merck Board of Directors. The
Committee is composed of non‑employee directors only. The Committee shall have responsibility for determining which investments will be
available under the Program, and those investments shall be listed on Schedule I hereto. The Committee shall make all decisions affecting the
timing, price or amount of any and all of the Deferred Compensation of Section 16 Officers, as defined below, other than rules of general
application to all Participants, but may otherwise delegate any of its authority under this Program.
II. ELIGIBILITY
A. Eligible Employees
1.
Eligible
Employees
in
General.
An employee of Merck or its controlled group (the “Company Group”) is eligible to participate in
the Program (an “Eligible Employee”) for a deferral of awards under the Annual Incentive Plan, Executive Incentive Plan or Sales
Incentive Plan or similar plans as approved from time to time by the Committee if (a) his or her annual base compensation is at least
$200,000 according to the Company payroll system applicable to him or her on November 1 of the year in which the election is made
(or, for a newly hired employee only, his or her annualized base compensation is at least $200,000 when employment begins) (b) he or
she is a regular full- or part-time employee of the Company or an affiliate who is eligible to make contributions to the Merck U.S.
Savings Plan and (c) he or she is based in the U.S. and subject to U.S. income taxes.
2.
Base
Salary
Deferral.
Eligible Employees who are Merck officers (“Section 16 Officers”) as defined in Rule 16(a)-1(f) of the
Securities Exchange Act of 1934 as amended
(the “Exchange Act”) are also eligible to defer under the Base Salary Deferral Plan. The Base Salary Deferred Plan as described below
is a component of the Deferral Program contained entirely herein and is intended to permit eligible Section 16 Officers to defer a
portion of their base salaries.
3.
Company
Contribution
Eligible
Employees.
An employee of the Company Group is eligible for Company Contribution Credits as
described in Section D of Article III if (a) he or she is a regular full- or part-time employee of the Company or an affiliate who is
eligible to make contributions to the Merck U.S. Savings Plan (b) he or she is based in the U.S. and subject to U.S. income taxes and
(c) the employee’s base and Annual Incentive Plan, Executive Incentive Plan or Sales Incentive Plan compensation exceeds the
applicable Code Section 401(a)(17) limit for that year (a “Company Contribution Eligible Employee”).
4.
Sign-On
Bonus
Employees.
Effective December 1, 2015, an employee newly hired into the Company Group in Band 700 or 800
may, within 30 days of the date employment commences,elect to defer a sign-on bonus for compensation paid for services performed
after such election.
5.
Discretion
Reserved.
Notwithstanding the foregoing, the Committee may permit, or refuse to permit, any member of a select group
of management or highly compensated employees to participate in this Program other than excluded individuals described in Section B
below.
B. Excluded Individuals. Anything in the Program to the contrary notwithstanding, the following are not eligible to make an election or
receive a Company Contribution Credit (as described below): any person who (1) is an independent contractor for the Company Group; (2)
agrees or has agreed that he or she is an independent contractor for the Company Group; (3) has an agreement or understanding with any
member of the Company Group that such person is not an employee, even if that person previously has been an employee; or (4) is employed
by a temporary or other employment agency, regardless of the amount of control, supervision or training provided by the Company Group.
The foregoing exclusion applies even if a court, agency or other authority rules that the person happens to be a common law employee of the
Company Group. Also excluded are individuals who are included in a unit of employees covered by a collective bargaining agreement
between employee representatives and one or more employers; provided, however, that such an employee may be an eligible employee
during the period he or she is not covered by a collective bargaining agreement and during which he or she otherwise is eligible to participate
according to Article II, Section A.
C. Participation Continues. An eligible person who has made an election into the Program pursuant to Section A above or who is eligible
for Company Contribution Credits pursuant to Section D of Article III shall be a Participant for so long as he or she has an account balance.
No such person can make an election to defer unless he or she is then eligible pursuant to Article II, Section A. If a person has made an
election to defer but thereafter becomes ineligible to defer (for example, employment transfers to a position that is ineligible to participate in
the Merck U.S. Savings Plan), the election nonetheless will be given effect.
III. CONTRIBUTIONS TO DEFERRED COMPENSATION ACCOUNTS
Amounts contributed or deferred pursuant to this Article III are known as “Deferred Compensation” and will be credited to the
participant's “Deferred Compensation Account.”
2
Deferred Compensation shall be accounted for in one account regardless of the plan (e.g., Base Salary Deferral or incentive plan) under which
it was deferred, but a separate election to defer applies for each year for base salary, annual incentive, or grant of RSUs or PSUs, and records
shall show each separate election. Further, for purposes of modifications to a distribution schedule, each separate election is eligible for such
a modification. Only amounts described above may be deferred; stock option gains may not be deferred.
A. Initial Election to Defer
To make an election to defer Base Salary, Annual Incentive Plans or Restricted Stock Units (“RSUs”) and Performance Share Units
(“PSUs”), an Eligible Employee must irrevocably elect to defer under the Program by the earlier of the time specified in Treas. Reg. Sec.
1.409A-2 or any successor thereto or:
1
.
Base
Salary
Deferral
Plan
, prior to the end of the year preceding the year during which annual base salary exclusive of any
bonus or any other compensation or allowance paid by the Company Group (“Annual Base Salary”) will be earned. The amount that
may be deferred is
(a) Not less than 5 percent of Annual Base Salary and
(b) Not more than the lesser of
(1) 50 percent of Annual Base Salary or
(2) The portion of the Participant’s Annual Base Salary that exceeds the amount determined under Section 401(a)(17) of
the Code
provided,
however,
that amounts may be expressed in relation to amounts that may be deducted by the Company Group under Section
162(m) of the Code.
2.
Annual
Incentive
Plans
(such as the Annual Incentive Plan and the Executive Incentive Plan), prior to the commencement of the
calendar year coincident with the performance year during which the bonus monies to be deferred will be earned (if the performance
year is not the calendar year, the election must be made prior to the first calendar year that includes any part of the performance year to
the extent required by Section 409A), provided
:
(a) A participant who is hired by the Company Group during a performance year may make an election, no later than the 30th
day from the participant’s date of hire, to defer bonus monies to be earned during such performance year, and
(b) The minimum that may be deferred in any year under this Section IV.A.2. is $3,000; provided, however, this minimum does
not apply for elections made during or after 2010.
3.
Annual
Grants
of
RSUs
and
PSUs
may be deferred prior to the commencement of the last year of the award period during which
they will be earned. Other RSUs and PSUs may not be deferred. After 2008, RSUs and PSUs for which the deferral election is made
after grant must be deferred in compliance with the rules applicable to re-deferral (as opposed to initial elections) under Section 409A
as described in Article VI, Section F. Deferrals of
3
RSUs and PSUs must be made initially into the Merck Common Stock fund and may not thereafter be reallocated into any other
investment alternative provided pursuant to Schedule I (a “Mutual Fund”). Effective November 1, 2010, no further elections of RSUs
or PSUs will be permitted, but elections made prior to that date will be given effect.
4.
Sign-on
Bonus
amounts for Sign-on Bonus Employees, no later than the 30th day from the participant’s first day of employment,
with respect to services performed after such election.
Notwithstanding the foregoing, a participant’s Deferral Election will be cancelled if he or she receives a hardship distribution from any
qualified savings plan with a 401(k) feature maintained by the Company Group if and only if such cancellation is required by applicable
regulation of the Internal Revenue Service. If a participant terminates employment or transfers to a class of employees that is ineligible to
make a deferral election after having made a deferral election, the election will nevertheless be effected. If the Company Group pays an
amount that it reasonably believes is or may be held to be a “substitute payment,” within the meaning of Treas. Reg. Sec. 1.409A-1(b)(9), for
an amount that would have been deferred pursuant to the foregoing, that substitute payment also will be deferred according to the
participant’s election.
B. Initial Election of Distribution Schedule
1.
Timing
of
Election
The Eligible Employee must elect an initial distribution schedule when making the initial election pursuant to III.A., above.
2.
Distribution
Schedule
An Eligible Employee may elect to have payments begin (a) in a particular year (whether or not employment has then ended);
provided, however, this provision does not apply to Company Contributions or (b) in the year following the participant's “Separation
from Service” as defined below, or (c) up to 15 years subsequent to the participant’s Separation from Service. Separation from Service
means Separation from Service as defined in Treas. Reg. Sec. 1.409A-1(h) or any successor thereto and includes but is not limited to:
retirement; separation due to lack of work; voluntary resignation; or involuntary termination of employment. It does not include
termination of service due to death, transfer to another member of the Company Group or commencement of employment with a joint
venture (as described below). A participant may elect a lump sum or a schedule of annual installments, up to a maximum of 15 annual
installments.
3.
Manner
of
Elections
All elections under the Program shall be made with the Program’s designated record keeper (the “Record Keeper”) in the manner
and in accordance with the process approved by the Company’s head of Human Resources Department from time to time.
4.
Default
Designation
Where a Participant’s initial election of a distribution schedule is for any reason unclear to the Company (including but not
limited to where a Participant failed to elect when amounts will be distributed), the Participant shall be deemed to have elected to
4
receive distribution in a lump sum in the year following the year in which his or her Separation from Service occurs.
C. Election of Investment Alternatives
The participant shall designate, in accordance with procedures established by the Company for such designation, the portion (in
multiples of 1 percent) of the Deferred Compensation to be allocated to any investment alternative available under this Program.
D. Company Contribution Credits .
With respect to each Plan Year after 2012, for a Company Contribution Eligible Employee the Company shall make contribution
credits (“Company Contribution Credits”) to an account (the “Company Contribution Account”). The amount of the Company Contribution
Credits shall be equal to 4.5 percent of such Eligible Employee’s Compensation for the Plan Year that exceeds the limit set forth in Section
401(a)(17) of the Code for that year; provided, however, that for a Company Contribution Eligible Employee who is eligible for the
Transition Provisions of the Retirement Program as described in the Merck U.S. Savings Plan Summary Plan Description and apply to certain
legacy Schering Plough employees, the Company Contribution Credit shall be 5.0 percent for the period during which that Company
Contribution Eligible Employee is subject to the Transition Provisions (generally, the earlier of through 2019 or until employment
terminates). Company Contribution Credits shall be credited to the Participant’s Account on the same date on which the related employer
contributions are made to the tax-qualified savings plan in which the Company Contribution Eligible Employee participates or such other date
as the Committee shall determine.
IV. VALUATION OF DEFERRED COMPENSATION ACCOUNTS
The Deferral Program shall offer as investment alternatives (a) a fund of Merck Common Stock and (b) Mutual Funds.
A. Merck Common Stock
1.
Initial
Crediting
The amount allocated to Merck Common Stock shall be used to determine the number of full and partial shares of Merck
Common Stock which such amount would purchase at the closing price of Merck Common Stock on the New York Stock Exchange
(“NYSE”) on the date cash payments of base salary, for amounts deferred under the Base Salary Deferral Plan, or incentive awards, for
amounts deferred under the various incentive plans, would otherwise be paid to the participant (the “Deferral Date”). The Company
shall credit the participant's Deferred Compensation Account with the number of full and partial shares of Merck Common Stock so
determined. However, at no time prior to the delivery of such shares shall any actual shares be purchased or earmarked for such
Account and the participant shall not have any of the rights of a shareholder with respect to shares credited to his/her Deferred
Compensation Account.
2.
Dividends
The Company shall credit the Participant's Deferred Compensation Account with the number of full and partial shares of Merck
Common Stock purchasable at the closing price
5
of Merck Common Stock on the NYSE as of the date each dividend is paid on the Common Stock, with the dividends that would have
been paid on the number of shares credited to such Account (including pro rata dividends on any partial share) had the shares so
credited then been issued and outstanding.
3.
Redesignations
The value of Merck Common Stock for purposes of redesignation shall be the closing price of Merck Common Stock on the
NYSE on the first day the NYSE is open after the request is received by the Record Keeper.
4.
Distributions
Distributions of Merck Common Stock will be valued at the closing price of Merck Common Stock on the NYSE on the
Distribution Date.
5.
Source
of
Shares
Shares of Merck Common Stock to be delivered under the provisions of this Program may be delivered by the Company from its
authorized but unissued shares of Common Stock or from Common Stock held in the treasury. The Company also may, in its sole and
nonreviewable discretion, purchase shares on public markets in order to make distributions under the Program.
6.
Adjustments
In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights
offering or any other change in the corporate structure or shares of the Company, the number and kind of shares of Merck Common
Stock available under this Program or credited to participants’ Deferred Compensation Accounts shall be adjusted accordingly.
7.
Fair
Market
Value
of
Merck
Common
Stock
For purposes of valuation of Merck Common Stock, if Merck Common Stock is no longer traded on the NYSE, but is publicly
traded on any other exchange, references to NYSE shall mean such other exchange. If Merck Common Stock is not publicly traded and
if the Committee determines that a measurement of Merck Common Stock on any applicable date would not constitute fair market
value, then the Committee shall decide on the date and method to determine fair market value, which shall be in accord with any
requirements set forth under Section 409A or any successor thereto.
8.
Limits
on
Amount
of
Merck
Common
Stock
Beginning January 1, 2013, participants cannot rebalance their account balance so that after the account rebalance, more than
20% of the value of their account is in the Merck Common Stock Fund. In addition, participants cannot elect an exchange into the
Merck Common Stock Fund that will cause the balance in the Merck Common Stock Fund to exceed 20% of the total Account
Balance. Participants will not be required to exchange out of the Merck Company Stock Fund if the fund balance exceeds 20% of their
Account Balance, either through prior investment elections or relative fund performance.
6
B. Mutual Funds
1.
Initial
Crediting
The amount allocated to each Mutual Fund shall be used to determine the number of full and partial Mutual Fund shares that such
amount would purchase at the closing net asset value of the Mutual Fund shares on the Deferral Date. The Company shall credit the
participant’s Deferred Compensation Account with the number of full and partial Mutual Fund shares so determined. However, no
actual Mutual Fund shares shall be purchased or earmarked for such Account, nor shall the participant have the rights of a shareholder
with respect to such Mutual Fund shares.
2.
Dividends
The Company shall credit the participant’s Deferred Compensation Account with the number of full and partial Mutual Fund
shares purchasable, at the closing net asset value of the Mutual Fund shares as of the date each dividend is paid on the Mutual Fund
shares, with the dividends that would have been paid on the number of shares credited to such Account (including pro rata dividends on
any partial share) had the shares then been owned by the participant for purposes of the above computation.
3.
Redesignations
The value of Mutual Fund shares for purposes of redesignation shall be the net asset value of such Mutual Fund at the close of
business on the first day the NYSE is open after the request is received by the Record Keeper.
4.
Distributions
Mutual Fund distributions will be valued based on the closing net asset value of the Mutual Fund shares on the Distribution Date
(as defined below).
5.
Adjustments
In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights
offering or any other change in the corporate structure or shares of a Mutual Fund, the number and kind of shares of that Mutual Fund
credited to participants’ Deferred Compensation Accounts shall be adjusted accordingly.
6.
Default
Designation
Where a Participant’s designation of investment alternatives is for any reason not clear (including but not limited to where a
Participant failed to make such an election), the Participant shall be deemed to have designated deferrals into the life cycle, target or
similar Mutual Fund with a target date closest to the date the Participant attains age 65.
V. REDESIGNATION WITHIN A DEFERRED COMPENSATION ACCOUNT
A. Basic Redesignation Rules
7
A participant, or the beneficiary or legal representative of a deceased participant, may redesignate amounts credited to a Deferred
Compensation Account among the investments available under this Program in accordance with the following rules:
1.
Eligible
Participants
– All Participants and beneficiaries may redesignate.
2.
Frequency
and
Timing
– Redesignation shall be effective as of 4:00 p.m. E.T. on the first day the NYSE is open after the request is
received by the Recordkeeper.
3. Amount
and
Extent
of
Redesignation
– Redesignation must be in 1% multiples of the investment from which redesignation is
being made.
4. Beneficiaries
or
Legal
Representatives
– The beneficiary or legal representative of a deceased participant may redesignate subject
to the same rules as participants.
B. Special Rules for Redesignation Into or Out of Merck Common Stock
1.
Frequency
and
Timing
For Section 16 Officers, redesignations may only be made into or out of Merck Common Stock during any window period
established by the Company from time-to-time. Redesignation out of Merck Common Stock is restricted to amounts held in Merck
Common Stock for longer than six months. Redesignation shall not be permitted to the extent the Company is aware of a transaction
that the Company reasonably believes may cause a violation under Section 16 of the Exchange Act.
2.
Material,
Nonpublic
Information
The Committee, in its sole discretion and with advice of counsel, at any time may rescind a redesignation into or out of Merck
Common Stock if such redesignation was made by a participant who, (a) at the time of the redesignation was in the possession of
material, nonpublic information with respect to the Company; and (b) in the Committee's estimation benefited from such information in
the timing of his/her redesignation. The Committee's determination shall be final and binding. In the event of such rescission, the
participant's Deferred Compensation Account shall be returned to a status as though such redesignation had not occurred.
Notwithstanding the above, the Committee shall not rescind a redesignation if the facts were reviewed by the participant with the
General Counsel of the Company or a designee prior to the redesignation and if the General Counsel or designee had concluded that
such participant was not in possession of adverse material, nonpublic information.
8
C. Conversion of Common Stock Accounts
The Committee may, in its sole discretion, convert all of the shares of Merck Common Stock allocated to a participant's Deferred
Compensation Account in the manner provided below where a position which a participant has taken or wishes to take is, in the opinion
of the Committee, such as would make uncertain the propriety of the participant's having a continued interest in Merck Common Stock.
The date of conversion shall be the date of commencement of such other employment or the date of the Committee's action, whichever
is later.
Conversion shall be from an expression of value in shares of Merck Common Stock in the participant's Deferred Compensation
Account to an expression of value in United States dollars in another available investment. The value of the Merck Common Stock
shall be based upon its closing price on the NYSE on the date of conversion or if no trading took place on such day, the next business
day on which trading took place. Any conversion under this Section shall be irrevocable and absolute.
VI. DISTRIBUTION OF DEFERRED COMPENSATION ACCOUNTS
Distribution of Deferred Compensation Accounts shall be made in accordance with the participant's distribution schedule pro rata by
investment. Distributions from Merck Common Stock will be made in shares, with cash payable for any partial share, subject to the
limitations set forth in Article IV, Section A.5. For Section 16 Officers, distribution of amounts in Merck Common Stock is also restricted to
amounts held in Merck Common Stock for longer than six months. Distributions from Mutual Funds will be in cash. Distributions will be
valued on the Distribution Date (i.e, the 15 th day of the distribution month or, if such day is not a business day, the next business day) and
paid as soon thereafter as practicable. Distribution months shall mean only January, April, July, and October.
A. Separation from Service
1.
Distribution
Commences
Upon a participant's Separation from Service, Deferred Compensation Accounts will commence in accordance with the
participant's previously elected schedule. If a participant incurs a Separation from Service and thereafter is rehired by the Company
Group, such rehire shall be ignored and distributions shall commence notwithstanding such rehire; provided, however, that if the
participant is eligible and elects to make additional deferrals, those additional deferrals may be payable in relation to the subsequent
Separation from Service.
2.
Specified
Employee
Anything in the Program to the contrary notwithstanding, to the extent required by Section 409A, distributions on account of
a Separation from Service to a “Specified Employee,” as such term is defined in Section 409A, may not be made before the date which
is 6 months after the date of Separation from Service (or, if earlier, the date of death of the employee). Where a payment would have
been made to a Specified Employee within such 6‑month period and such payment is one of a series of annual payments, the first
payment shall be delayed as necessary and the remaining payments
9
shall be made according to their elected schedule notwithstanding such delay, such that two otherwise annual payments may be made in
a single year.
B. Death
In the event of a participant's death, whether or not distributions have commenced pursuant to a Participant’s election, Deferred
Compensation Accounts under this Program will be distributed to the participant’s beneficiary or estate in a lump sum as soon as
administratively feasible and in any event by March 15 of the year following death (except as otherwise permitted by Treas. Reg. Sec.
1.409A-3(g)(4) or any successor thereto).
C. Automatic Distribution
Except as provided in Schedule II, if a participant incurs a Separation from Service and has a Deferred Compensation Account valued
at less than $125,000 on the first Distribution Date thereafter, the Deferred Compensation Account shall be distributed in a lump sum as soon
as administratively feasible following such termination and in any event by March 15 of the year following such termination (except as
otherwise permitted by Treas. Reg. Sec. 1.409A-3(g)(4) or any successor thereto).
D. Joint Venture Service
A participant’s termination of employment in order to take a position with a joint venture or other business entity in which the
Company shall directly or indirectly own 50 percent or more of the outstanding voting or other ownership interest shall not be considered a
Separation from Service.
E. Hardship Distributions
The Committee shall distribute a participant's Deferred Compensation Account, if and to the extent a participant applies to receive a
distribution due to an Unforeseeable Emergency as defined in Treas. Reg. Sec. 1.409A-3(i). A participant wishing a hardship distribution
must provide the Committee or its delegate with sufficient evidence to prove compliance with Treas. Reg. Sec. 1.409A-3(i).
F. Modifications to Distribution Schedule
After making an initial election, a participant may elect to change his or her distribution schedule from time to time, provided,
however, such changes shall not be permitted if it might reasonably be expected to cause a “plan failure” as such term is used in Section 409A
of the Code. For example, except as otherwise permitted by Section 409A, no election may permit an acceleration of a distribution, or may
become effective earlier than one year from the date it is made, or may permit an additional deferral after the initial election unless it results
in a deferral of at least five additional years from the previously schedule distribution date. For purposes of this provision, where a participant
has elected to receive a distribution as a series of payments, such series shall be considered a single distribution for purposes of Section 409A.
Any such elections shall be made with the Record Keeper in the manner and in accordance with the process approved by the Company’s’
head of Human Resources Department from time to time.
10
VII. DEDUCTIONS FROM DISTRIBUTIONS
The Company will deduct from each distribution amounts required to be withheld for income, Social Security and other tax purposes.
Such withholding will be done on a pro rata basis per investment. The Company may also deduct any amounts the participant owes the
Company Group for any reason.
VIII. BENEFICIARY DESIGNATIONS
A participant may designate a beneficiary to receive his/her Deferred Compensation Account upon the participant's death. If the
beneficiary predeceases the participant or if the participant does not name a beneficiary, the participant's Deferred Compensation Account
will be distributed to the participant's estate. Such designation shall be in the form designated by the Company’s head of Human Resources
Department from time to time, and it must be received by the Company’s Human Resources Department prior to such participant’s death to
be valid.
IX. AMENDMENTS
The Committee may amend or terminate this Program at any time. However, such amendment may not retroactively reduce a participant’s
Deferred Compensation Account.
For two years following a change in control of the Company (as such term is defined in the Change in Control Separation Benefits
Plan) the material terms of the Program (including terms relating to eligibility, benefit calculation, benefit accrual, cost to participants,
subsidies and rates of employee contributions) may not be modified in a manner that is materially adverse to individuals who participated
immediately before the change in control. The Company will pay the legal fees and expenses of any participant that prevails on his or her
claim for relief in an action regarding an impermissible amendment to the Program (other than ordinary claims for benefits) or, if applicable,
in an action regarding restrictive covenants applicable to the participant.
X. NO ASSIGNMENT, ALIENATION
Except as provided in Article XII, no benefit payable under this Program shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge the same shall be void, except as specifically provided in this Plan. No such benefit shall be in any manner liable for or subject to the
debts, contracts, liabilities, encroachments or torts of any participant or beneficiary.
A. Determination of Claim
XI. CLAIMS AND APPEALS PROCEDURE
An Employee or his/her authorized representative may present a claim for benefits to the Executive Director, Compensation and
Benefit Administration or the successor thereto (the “Director”) or such other person as the Committee may determine to handle claims and
appeals from the Program. The Director will make all determinations as to the Employee's claim for benefits under the Program. If the
Director grants a claim, benefits payable under the Program will be paid to the Employee as soon as feasible thereafter. If the Director denies
in whole or part
11
any claim for a benefit under the Program, he/she will furnish the claimant with notice of the decision not later than 90 days after receipt of
the claim. If special circumstances require an extension of time for processing the claim, the Director will provide a written notice of the
extension during the initial 90-day period, in which case a decision will be rendered not more than 180 days after receipt of the claim. The
written notice which the Director will provide to every claimant who is denied a claim for benefits will set forth in a manner calculated to be
understood by the claimant:
1.
the specific reason or reasons for the denial;
2.
specific reference to pertinent Program provisions on which the denial is based;
3.
a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
4.
appropriate information as to the steps to be taken if the claimant wishes to submit his/her claim for review.
B. Appeal of Denied Claim
A claimant or his/her authorized representative may request a review of the denied claim by the Committee. Such request will be
made in writing and will be presented to the Committee not more than 60 days after receipt by the claimant of written notification of the
denial of the claim. The Committee will render its decision on review not later than 60 days after receipt of the claimant's request for review,
unless special circumstances require an extension of time, in which case a decision will be rendered as soon as possible but not later than 120
days after receipt of the request for review. The decision on review will be in writing and will include specific reasons for the decision.
C. ERISA Section 503
It is intended that the claims procedure of the Program be administered in accordance with regulations of the Department of Labor
issued under ERISA Section 503.
D. Limitation of Action
No action at law or in equity (an “Action”) shall be maintained by a Participant, Beneficiary or other individual, entity or party
(including but not limited to a person determined to be other than a Participant or Beneficiary) (a “Claimant”) against the Program, the
Company Group, their affiliates, agents, fiduciaries, officers, directors, employees, successors, assigns or plans (collectively, the “Program
Group”) unless (a) the Claimant has presented every basis or argument in support of the Action (a “Claim”) in strict accordance with both
Sections A and B of this Article X which Claim is denied in whole or in part and (b) unless the Action is commenced no later than one year
after the date the Company Group provides notice of the adverse decision pursuant to Section B. Where the Company Group puts the
Claimant on notice of the Company Group’s or Program’s intention with respect to the basis or argument in support of the Action, the
Claimant must commence the process described in Section A of this Article X within one year of such notice. A “Claim” includes but is not
limited to a claim for benefits or for a purported or actual fiduciary breach by any member of the Program Group. The Limitation of Action
pursuant to this Article may only be tolled by a writing executed by the Director.
12
XII. DOMESTIC RELATIONS ORDERS
Notwithstanding any other provision of this Program to the contrary, the creation, assignment or recognition of a right to any benefit
payable with respect to a Participant pursuant to a “domestic relations order” (as hereinafter defined) is not prohibited. In the event a right to a
benefit hereunder is established pursuant to a domestic relations order, any benefit otherwise payable to the Participant or his/her beneficiary
hereunder shall be appropriately reduced to reflect the effect of the qualified domestic relations order. For purposes of the Program,
“Alternate Payee” means a person who would be an alternate payee under Section 414(p)(8) of the Code if the Program were subject to
Section 401(a) of the Code. A “domestic relations order” means any judgment, decree or order within the meaning of Section 414(p),
including the approval of a property settlement agreement, provided that:
1.
the order relates to the provision of child support, alimony or marital property rights and is made pursuant to state domestic
relations or community property laws;
2.
the order creates or recognizes the existence of an Alternate Payee's right to receive all or a portion of the Participant's Account
Balance;
3.
the order specifies the name and last known mailing address of the Participant and each Alternate Payee covered by the order;
4.
the order precisely and unambiguously specifies the amount or percentage of the Participant's Account Balance to be paid to each
Alternate Payee or the manner in which the amount or percentage is to be determined;
5.
the order clearly specifies that it applies to this Program;
6.
the order does not require this Program to provide any type of benefits or form of benefits not otherwise provided under this
Program; and
7.
the order provides that the Alternate Payee shall receive his or her interest in the Program in a lump sum as soon as
administratively feasible following determination by the Company’s legal department (or its delegate) that the order satisfies the requirements
of this Article.
This amendment and restatement of this Program shall be effective as of December 1, 2015.
XIII. EFFECTIVE DATE
13
IN WITNESS WHEREOF, the Merck Oversight Committee has caused this instrument to be executed by the Executive Director,
Legal, Global Benefits & Executive Compensation, as of the 1 st day of December, 2015.
MERCK & CO., INC.
By /s/ Bruce Ellis
Bruce W. Ellis
Executive Director, Legal
Global Benefits & Executive Compensation
14
SCHEDULE I
DEFERRAL PROGRAM INVESTMENT ALTERNATIVES
“ Mutual Funds” shall mean all of the same investment alternatives offered under the Merck U.S. Savings Plan as in effect from time
to time, excluding participant loans and Merck Common Stock.
The Merck Common Stock fund offered under the Deferral Program shall be measured as if it were invested 100% in Merck
Common Stock with dividends reinvested in additional shares of Merck Common Stock.
15
SCHEDULE II
SPECIAL PROVISIONS APPLICABLE TO
MEDCO HEALTH EMPLOYEES
(Approved July 23, 2002)
DEFINITIONS
Medco Health – Medco Health Solutions, Inc.
Medco Health Employee – A participant who is (i) employed by Medco Health prior to the Spin-Off or (ii) employed by Merck prior to the
Spin-Off and expected to be employed by Medco Health prior to or as of the Spin-Off.
Separated Medco Health Employee – A participant in the Deferral Program who is employed by Medco Health as of the date of the Spin-Off
and is considered to have terminated employment with the Company as a result of the Spin-Off.
Spin-Off – The distribution by Merck to its shareholders of the equity securities of Medco Health. The Spin-Off will be a divestiture for
purposes of the Deferral Program.
SPECIAL PROVISIONS
Notwithstanding anything to the contrary in Article VI, Section C of the Deferral Program, the Deferred Compensation Account of each
Separated Medco Health Employee shall be paid out in accordance with Article VI, Section D, without regard to the $125,000 threshold set
forth in Section C.
16
TERMS FOR
2016 NON-QUALIFIED STOCK OPTION (NQSO) GRANTS
UNDER THE MERCK & CO., INC. 2010 INCENTIVE STOCK PLAN
EXHIBIT 10.19
This is a summary of the terms applicable to the stock option specified in this document. Different terms may apply to any prior or future
stock option.
Grant Type:
Option Price:
Grant Date:
Expiration Date:
Vesting Date
May 10, 2017
May 10, 2018
May 10, 2019
NQSO - Annual
$54.68
May 10, 2016
May 9, 2026
Portion that Vests
First: 33.333%
Second: 33.333%
Balance
I. GENERAL INFORMATION
This stock option becomes exercisable in equal installments (subject to a
rounding process) on the Vesting Dates indicated in the accompanying box.
This stock option expires on its Expiration Date, which is the day before the
tenth anniversary of the Grant Date. If your employment with the Company is
terminated, your right to exercise this stock option will be determined
according to the terms in Section II.
Eligibility: Eligibility for grants is determined under the Merck & Co., Inc.
2010 Incentive Stock Plan for employees of the Company, its subsidiaries,
its affiliates or its joint ventures if designated by the Compensation and
Benefits Committee of Merck’s Board of Directors, or its delegate (the
“Committee”).
Subject to Recoupment : For employees in Band 600 and above, this
Stock Option Award will be subject to recoupment in the event of certain
violations of Company policy in accordance with the Company’s policy for
Recoupment of Compensation for Compliance Violations, as set forth in
Appendix A (as may be amended from time to time).
II. TERMINATION OF EMPLOYMENT
A. General Rule. If your employment is terminated for any reason other than
those specified in the following paragraphs, the portion of this stock option
that is unvested will expire on the date your employment ends; the portion of
this stock option that is vested will expire unless exercised before the New
York Stock Exchange closes (the “Close of Business”) on the day before the
same day of the third month (“Within Three Months”) after the date of the
termination (but in no event after the expiration of the Option Period). Close
of Business for any day on which the New York Stock Exchange is not open
means the close of business prior to that date when the Exchange is open.
Where there is no corresponding day of a month, the last day of the month is
deemed to be the same day as a later day (e.g., November 28, 29 and 30 all
correspond to February 28 in non leap years). If you are rehired by the
Company or JV, this option nevertheless will expire unless exercised Within
Three Months, or the original Expiration Date if earlier.
B. Retirement. If you retire from service with the Company the portion of this
stock option that would have become exercisable according to its original
schedule within one year of the date your employment terminates will vest
and become
exercisable on its applicable Vesting Date and the remainder will expire
immediately. Whether already vested on the date your employment
terminates or vested as a result of such retirement, this option will expire on
the earlier of (a) the day before the fifth anniversary of the termination date
or (b) its original Expiration Date. For grantees who are employed in the
U.S., “retirement” means a termination of employment after attaining the
earliest of (a) age 55 with at least 10 years of service (b) such age and
service that provides eligibility for subsidized retiree medical coverage or (c)
age 65 without regard to years of service. For other grantees, “retirement” is
determined by the Company. If your employment is terminated as described
in this paragraph and you are later rehired by the Company or JV, this option
nevertheless will expire according to this paragraph notwithstanding such
rehire.
C. Involuntary Termination. If your employment is terminated by the
Company and the Company determines that such termination was
involuntary, including the result of a restructuring or job elimination, but
excluding non-performance of your duties and the reasons listed under
paragraphs B or D through H, the portion of this stock option that is unvested
will expire on the date your employment ends; the portion of this stock option
that is vested will expire on the day before the one year anniversary of the
date your employment ends, but in no event later than the original Expiration
Date. If your employment is terminated as described in this paragraph and
you are later rehired by the Company or JV, this option nevertheless will
expire according to this paragraph notwithstanding such rehire.
D. Sale. If your employment is terminated and the Company determines that
such termination resulted from the sale of your subsidiary, division or joint
venture, the following portion of this stock option award will vest and become
exercisable immediately upon such termination: one-third if employment
terminates on or after the Grant Date but before the first anniversary thereof;
and all if employment terminates on or after the first anniversary of the Grant
Date. Whether already vested on the date your employment terminates or
vested as a result of such sale, this stock option will expire the day before
the first anniversary of the date your employment with the Company ends,
but in no event later than the original Expiration Date. Notwithstanding the
foregoing, the Committee may determine, for purposes of this stock option
grant, whether employment with an entity that is established from the
Company’s spin off, split off, split up or distribution of equity securities in
connection with that entity constitutes a termination of employment, and may
make adjustments, if any, as it deems appropriate, at the time of the
distribution of such equity securities, in the kind and/or number of shares
subject to this option, and/or in the option price of such option. If your
employment is terminated as described in this paragraph and you are later
rehired by the Company or JV, this option nevertheless will expire according
to this paragraph notwithstanding such rehire.
E. Misconduct. If your employment is terminated as a result of your
deliberate, willful or gross misconduct, this stock option
(whether vested or unvested) will expire immediately upon your receipt of
notice of such termination.
F. Death. If your employment terminates as a result of your death, the
portion of this stock option that is unvested will vest immediately upon your
death. Whether already vested on the date of your death or vested as a
result of your death, this stock option will expire on the day before the first
anniversary of your death, even if such date is later than the Original
Expiration date. This stock option will expire on such earlier date than
otherwise specified in this paragraph as may be required under applicable
non-U.S. law (e.g., in France, six months from the date of death). If you die
while any portion of this stock option remains outstanding, but after your
employment terminates for the reasons listed under paragraphs B, C, D, G
or H of this section, the portion that remains outstanding after such
employment termination will become immediately exercisable and will
continue to be exercisable until the expiration date prescribed in paragraph
B, C, D, G or H as applicable (and at least a year from your death in those
jurisdictions where such extension is required by law).
G. Disability. If your employment is terminated and the Company
determines that such termination resulted from your inability to perform the
material duties of your role by reason of a physical or mental infirmity that is
expected to last for at least six months or to result in your death, whether or
not you are eligible for disability benefits from any applicable disability
program, then this stock option will continue to become exercisable on
applicable Vesting Dates and will expire on the earlier of (a) the day before
the fifth anniversary of the day your employment terminates and (b) its
original Expiration Date. If your employment is terminated as described in
this paragraph and you are later rehired by the Company or JV, this option
nevertheless will expire according to this paragraph notwithstanding such
rehire.
H. Change in Control. If the Company involuntarily terminates your
employment without Cause before the second anniversary after the closing
of a change in control, each unvested Stock Option that is outstanding
immediately prior to the change in control will immediately become fully
vested and exercisable. All options, including options vested prior to such
time, will expire on the day before the fifth anniversary of the termination of
your employment following a change in control (but not beyond the
Expiration Date). This extended exercise period does not apply in the case
of termination by reasons of retirement, involuntary termination, sale,
misconduct, death or disability, as described in paragraphs B, D, E, F and G
above or termination prior to a change in control. If this stock option does not
remain outstanding following the change in control and is not converted into
a successor stock option, then you will be entitled to receive cash for this
option in an amount at least equal to the difference between the price paid to
stockholders in the change in control and the Option Price of this stock
option. A "change in control" has the same meaning that it has under the
Merck & Co., Inc. Change in Control Separation Benefits Plan (excluding an
MSD Change in Control).
I. Joint Venture. Employment with a joint venture or other entity in which the
Company has determined that it has a significant business or ownership
interest (a “JV”) is not considered termination of employment for purposes of
this stock option. If you transfer employment from the Company to a JV or
from a JV to the Company, such employment must be
approved by, and contiguous with employment by, the Company or the JV.
The terms set out in paragraphs A through H above apply to this stock option
while the option holder is employed by the JV.
III. TRANSFERABILITY
This stock option is not transferable and may not be assigned or otherwise
transferred except, under specific terms, by executives who hold or who
retired within the prior 12 months from a Section 16 officer position.
IV. ADMINISTRATION
The Committee is responsible for construing and interpreting this grant,
including the right to construe disputed or doubtful plan provisions, and may
establish, amend and construe such rules and regulations as it may deem
necessary or desirable for the proper administration of this grant. Any
decision or action taken or to be taken by the Committee, arising out of or in
connection with the construction, administration, interpretation and effect of
this grant shall, to the maximum extent permitted by applicable law, be within
its absolute discretion (except as otherwise specifically provided herein) and
shall be final, binding and conclusive upon the Company, all eligible
employees and any person claiming under or through any eligible employee.
All determinations by the Committee including, without limitation,
determinations of the eligible employees, the form, amount and timing of
incentives, the terms and provisions of incentives and the writings
evidencing incentives, need not be uniform and may be made selectively
among eligible employees who receive, or are eligible to receive, Incentives
hereunder, whether or not such eligible employees are similarly situated.
V. GRANTS NOT PART OF EMPLOYMENT CONTRACT
Notwithstanding reference to grants of incentives in letters offering
employment or in specific employment agreements, incentives do not
constitute part of any employment contract between the Company or JV and
the grantee, whether the employment contract arises as a matter of
agreement or applicable law. The value of any grant or of the proceeds of
any exercise of Incentives are not included in calculating compensation for
purposes of pension payments, separation pay, termination indemnities or
other similar payments due upon termination of employment.
This stock option is subject to the provisions of the 2010 Incentive
Stock Plan. For further information regarding your stock options, you may
access the Merck Global Long-Term Incentives homepage via
http://onemerck.com
Unless you notify the Company in writing that you wish to refuse this grant
within 60 days of the Grant Date, you will be deemed to acknowledge that you
have read, understood and agree to all of the terms, conditions and
provisions of this document and the Merck & Co., Inc. 2010 Incentive Stock
Plan. If you wish to reject this grant, you must send your written notice of
rejection to the Company at:
Attention: Global Executive Compensation and Benefits
Merck & Co., Inc.
2000 Galloping Hill Road, Building K-1
Kenilworth, New Jersey, U.S.A. 07033
Appendix A
Recoupment of Compensation for Compliance Violations
POLICIES AND PROCEDURES
Policy
It is the policy of the Compensation and Benefits Committee of the Board of
Directors (the “Committee”) that the Committee will exercise its discretion to
determine whether to seek Recoupment of any bonus and/or other incentive
compensation paid or awarded to an Affected Employee with respect to any
performance period beginning after December 31, 2013, where it
determines, in consultation with the Audit Committee, that: a) the Affected
Employee engaged in misconduct, or failed to reasonably supervise an
employee who engaged in misconduct, that resulted in a Material Policy
Violation relating to the research, development, manufacturing, sales, or
marketing of Company products; and b) the Committee concludes that the
Material Policy Violation caused Significant Harm to the Company, as those
terms are defined in this policy. The Committee’s exercise of its discretion
may take into account any considerations determined by the Committee to
be relevant.
Definitions
1. “Recoupment” is defined to include any and all of the following actions to
the extent permitted by law: (a) reducing the amount of a current or future
bonus or other cash or non-cash incentive compensation award, (b)
requiring reimbursement of a bonus or other cash-based incentive
compensation award paid with respect to the most recently completed
performance period, (c) cancelling all or a portion of a future-vesting equity
award, (d) cancelling all or a portion of an equity award that vested within the
previous twelve-month period, (e) requiring return of shares paid upon
vesting and/or reimbursement of any proceeds received from the sale of an
equity award, in each case that vested within the previous twelve-month
period, and (f) any other method of reducing the total compensation paid to
an employee for any prior twelve-month period or any current or future
period.
2. A “Material Policy Violation” is defined as a material violation of a
Company policy relating to the research, development, manufacturing, sales,
or marketing of Company products.
3. An “Affected Employee” is an employee in Band 600 or higher who (i)
engaged in misconduct that results in a Material Policy Violation; or (ii) failed
in his or her supervisory responsibilities to reasonably manage or monitor
the conduct of an employee who engaged in misconduct that results in a
Material Policy Violation.
4. “Significant Harm” means a significant negative impact on the Company’s
financial operating results or reputation.
Procedures
1. The Committee, acting in consultation with the Audit Committee, shall
administer this policy and have full discretion to interpret and to make any
and all determinations under this policy, subject to the approval of the full
Board of Directors in the case of a determination to seek or waive
Recoupment from the Chief Executive Officer.
2. The General Counsel, in consultation with the Chief Ethics and
Compliance Officer and the Executive Vice President, Human Resources, is
responsible for determining whether to
refer a matter to the Committee for review under this policy and for assisting
the Committee with its review. The Committee may consult with other Board
Committees and any external or internal advisors as it deems appropriate.
3. If the Committee, acting in consultation with the Audit Committee,
determines that there is a basis for seeking
Recoupment under this policy, the Committee shall exercise its discretion to
determine for each Affected Employee, on an individual basis, whether, and
to what extent and in which manner, to seek Recoupment.
4. In exercising its discretion, the Committee may take into consideration, as
it deems appropriate, all of the facts and circumstances of the particular
matter and the general interests of the Company.
Delegation to Management for Certain Recoupment Decisions
The Committee hereby delegates to the Chief Executive Officer (who may
further delegate as he deems appropriate) the authority to administer this
policy and to make any and all decisions under it regarding Affected
Employees who are not Section 16 Officers of the Company. Section 16
Officers are employees of the Company who are subject to Section 16 of the
Securities Exchange Act of 1934. Management shall report to the Committee
on any affirmative decisions to seek Recoupment pursuant to this
delegation.
Disclosure of Recoupment Decisions
The Company will comply with all applicable securities laws and regulations,
including Securities and Exchange Commission disclosure requirements
regarding executive compensation. The Company may also, but is not
obligated to, provide additional disclosure beyond that required by law when
the Company deems it to be appropriate and determines that such
disclosure is in the best interest of the Company and its shareholders.
Miscellaneous
Nothing in this policy shall limit or otherwise affect any of the following: 1)
management’s ability to take any disciplinary action with respect to any
Affected Employee; 2) the Committee’s ability to use its negative discretion
with respect to any incentive compensation performance target at any time;
or 3) the Committee’s or management’s ability to reduce the amount (in
whole or in part) of a current or future bonus or other cash or non-cash
incentive compensation award to any executive or other employee for any
reason as they may deem appropriate and to the extent permitted by law.
Nothing in this policy shall replace or otherwise limit or affect the Clawback
Policy for EIP Awards Upon Significant Restatement of Financial Results
and/or the Clawback Policy for PSUs upon Significant Restatement of
Financial Results.
TERMS FOR
2016 RESTRICTED STOCK UNIT GRANTS
UNDER THE MERCK & CO., INC. 2010 INCENTIVE STOCK PLAN
EXHIBIT 10.20
This is a summary of the terms applicable to the Restricted Stock Unit (RSU) Award specified in this document. Different terms may apply
to any prior or future RSU Awards.
Grant Type:
Grant Date:
Vesting Date:
RSU - Annual
May 10, 2016
May 10, 2019
Eligibility : Eligibility for grants is determined under the Merck & Co., Inc. 2010
Incentive Stock Plan for employees of the Company, its subsidiaries, its affiliates or
its joint ventures if designated by the Compensation and Benefits Committee of
Merck’s Board of Directors, or its delegate (the “Committee”).
I. GENERAL INFORMATION
A. Restricted Period. The Restricted Period is the period during which this RSU
Award is restricted and subject to forfeiture. The Restricted Period begins on the
Grant Date and ends on the third anniversary of the Grant Date unless ended
earlier under Article II below.
B. Dividend Equivalents. During the Restricted Period, dividend equivalents will
be accrued for the holder (“you”) if and to the extent dividends are paid by the
Company on Merck Common Stock. Payment of such dividends will be made,
without interest or earnings, at the end of the Restricted Period. If any portion of this
RSU Award lapses, is forfeited or expires, no dividend equivalents will be credited
or paid on such portion. Any payment of dividend equivalents will be reduced to the
extent necessary for the Company to satisfy any tax or other withholding
obligations. No voting rights apply to this RSU Award.
C. Distribution. Upon the expiration of the Restricted Period if you are then
employed, you will be entitled to receive a number of shares of Merck common
stock equal to the number of RSUs that have become unrestricted and the dividend
equivalents that accrued on that portion. Prior to distribution, you must deliver to the
Company an amount the Company determines to be sufficient to satisfy any
amount required to be withheld, including applicable taxes. The Company may, in
its sole discretion, withhold from the RSU Award distribution a number of shares to
pay applicable withholding (including taxes).
D. 409A Compliance. Anything to the contrary notwithstanding, no distribution of
RSUs may be made unless in compliance with Section 409A of the Internal
Revenue Code or any successor thereto. Specifically, distributions made due to a
separation from service (as defined in Section 409A) to a “Specified Employee” as
defined in Treas. Reg. Sec. 1.409A-1(i) or any successor thereto, to the extent
required by Section 409A of the Code will not be made until administratively
feasible following the first day of the sixth month following the separation from
service, in the same form as they would have been made had this restriction not
applied; provided further, that dividend equivalents that otherwise would have
accrued will accrue during the period during which distribution is suspended.
E. Subject to Recoupment. For employees in Band 600 and above, this RSU
Award will be subject to recoupment in the event
of certain violations of Company policy in accordance with the Company’s policy for
Recoupment of Compensation for
Compliance Violations, as set forth in Appendix A (as may be amended from time to
time).
II. TERMINATION OF EMPLOYMENT
If your employment with the Company is terminated during the Restricted Period,
your right to this RSU Award will be determined according to the terms in this
Section II.
A. General Rule. If your employment is terminated during the Restricted Period for
any reason other than those specified in the following paragraphs, this RSU Award
(and any accrued dividend equivalents) will be forfeited on the date your
employment ends. If your employment is terminated as described in this paragraph
and you are later rehired by the Company or JV, this grant nevertheless will expire
according to this paragraph notwithstanding such rehire.
B. Sale. If your employment is terminated during the Restricted Period and the
Company determines that such termination resulted from the sale of your
subsidiary, division or joint venture, the following portion of your RSU Award and
accrued dividend equivalents will be distributed to you at such time as it would have
been paid if your employment had continued: one‑third if employment terminates on
or after the Grant Date but before the first anniversary thereof; and all if
employment terminates on or after the first anniversary of the Grant Date. The
remainder will be forfeited on the date your employment ends. If your employment
is terminated as described in this paragraph and you are later rehired by the
Company or JV, this grant nevertheless will expire according to this paragraph
notwithstanding such rehire.
C. Involuntary Termination. If your employment terminates during the Restricted
Period and the Company determines that your employment was involuntarily
terminated on or after the first anniversary of the Grant Date and during the
Restricted Period, a pro rata portion (based on the number of completed months
held prior to the date your employment terminated) of your RSU Award and accrued
dividend equivalents will be distributed to you at such time as they would have been
paid if your employment had continued. The remainder will be forfeited on the date
your employment ends. An “involuntary termination” includes termination of your
employment by the Company as the result of a restructuring or job elimination, but
excludes non-performance of your duties and the reasons listed under paragraphs
B, or D through H of this section. If your employment is terminated as described in
this paragraph and you are later rehired by the Company or JV, this grant
nevertheless will expire according to this paragraph notwithstanding such rehire.
D. Retirement. If you terminate employment during the Restricted Period by
retirement then a pro-rata portion of this RSU Award will continue and be
distributable in accordance with its terms as if employment had continued and will
be distributed at the time active RSU Grantees receive distributions with respect to
this Restricted Period. The pro-rata portion is the number of complete months of
employment, beginning on the Grant Date and ending on the date
employment terminates, divided by 36. The remainder of this RSU Award and any
accrued dividends will terminate on the date employment terminates. For grantees
who are employed in the U.S., “retirement” means a termination of employment
after attaining the earliest of (a) age 55 with at least 10 years of service (b) such
age and service that provides eligibility for subsidized retiree medical coverage or
(c) age 65 without regard to years of service. For other grantees, “retirement” is
determined by the Company. If your employment is terminated as described in this
paragraph and you are later rehired by the Company or JV, this grant nevertheless
will expire according to this paragraph notwithstanding such rehire.
E. Death. If your employment terminates due to your death during the Restricted
Period, all of this RSU Award and accrued dividend equivalents will be distributed to
your estate as soon as possible after your death. If you die during the Restricted
Period, but after your employment terminates for the reasons listed under
paragraphs B, C, D, G or H of this section, the remaining, non-forfeited portion of
this RSU Award and accrued dividend equivalents will be distributed to your estate
as soon as possible after your death.
F. Misconduct. If your employment is terminated as a result of your deliberate,
willful or gross misconduct, this RSU Award and accrued dividend equivalents will
be forfeited immediately upon your receipt of notice of such termination.
G. Disability. If your employment is terminated during the Restricted Period and the
Company determines that such termination resulted from inability to perform the
material duties of your role by reason of a physical or mental infirmity that is
expected to last for at least six months or to result in your death, whether or not you
are eligible for disability benefits from any applicable disability program, then this
RSU Award will continue and be distributable in accordance with its terms as if
employment had continued and will be distributed at the time active RSU Grantees
receive distributions with respect to this RSU Award.
H. Change in Control. If the Company involuntarily terminates your employment
during the Restricted Period without Cause before the second anniversary after the
closing of any change in control, then this RSU Award will continue in accordance
with its terms as if employment had continued and will be distributed at the time
active RSU Grantees receive distributions with respect to this RSU Award. If this
RSU does not remain outstanding following the change in control and is not
converted into a successor RSU, then you will be entitled to receive cash for this
RSU in an amount equal to the fair market value of the consideration paid to Merck
stockholders for a share of Merck common stock in the change in control payable
within 30 days of the closing of the change in control. On the second anniversary of
the closing of the change in control, this paragraph shall expire. Change in control is
defined in the Merck & Co., Inc. Change in Control Separation Benefits Plan
(excluding an MSD Change in Control), but if RSUs are considered “deferred
compensation” under Section 409A of the Internal Revenue Code, the definition of
change in control will be modified to the extent necessary to comply with Section
409A.
I. Joint Venture. Employment with a joint venture or other entity in which the
Company has a significant business or ownership interest is not considered
termination of employment for purposes of this RSU Award. Such employment must
be approved by, and contiguous with employment by, the Company. The terms set
out in paragraphs A-H above apply to this RSU Award while you are employed by
the joint venture or other entity.
III. TRANSFERABILITY
This RSU Award is not transferable and may not be assigned or otherwise
transferred.
IV. ADMINISTRATION
The Committee is responsible for construing and interpreting this grant, including
the right to construe disputed or doubtful plan provisions, and may establish, amend
and construe such rules and regulations as it may deem necessary or desirable for
the proper administration of this grant. Any decision or action taken or to be taken
by the Committee, arising out of or in connection with the construction,
administration, interpretation and effect of this grant shall, to the maximum extent
permitted by applicable law, be within its absolute discretion (except as otherwise
specifically provided herein) and shall be final, binding and conclusive upon the
Company, all eligible employees and any person claiming under or through any
eligible employee. All determinations by the Committee including, without limitation,
determinations of the eligible employees, the form, amount and timing of incentives,
the terms and provisions of incentives and the writings evidencing incentives, need
not be uniform and may be made selectively among eligible employees who
receive, or are eligible to receive, Incentives hereunder, whether or not such eligible
employees are similarly situated.
V. GRANTS NOT PART OF EMPLOYMENT CONTRACT
Notwithstanding reference to grants of incentives in letters offering employment or
in specific employment agreements, incentives do not constitute part of any
employment contract between the Company or JV and the grantee, whether the
employment contract arises as a matter of agreement or applicable law. The value
of any grant or of the proceeds of any exercise of incentives are not included in
calculating compensation for purposes of pension payments, separation pay,
termination indemnities or other similar payments due upon termination of
employment.
This RSU Award is subject to the provisions of the 2010 Incentive Stock Plan.
For further information regarding your RSU Award, you may access the Merck
Global Long-Term Incentives homepage via http://onemerck.com
Unless you notify the Company in writing that you wish to refuse this grant
within 60 days of the Grant Date, you will be deemed to acknowledge that you
have read, understood and agree to all of the terms, conditions and
provisions of this document and the Merck & Co., Inc. 2010 Incentive Stock
Plan.
If you wish to reject this grant, you must send your written notice of rejection
to the Company at:
Attention: Global Executive Compensation and Benefits
Merck & Co., Inc.
2000 Galloping Hill Road, Building K-1
Kenilworth, New Jersey, U.S.A. 07033
Appendix A
Recoupment of Compensation for Compliance Violations
individual basis, whether, and to what extent and in which manner, to seek
Recoupment.
4. In exercising its discretion, the Committee may take into consideration, as it
deems appropriate, all of the facts and circumstances of the particular matter and
the general interests of the Company.
Delegation to Management for Certain Recoupment Decisions
The Committee hereby delegates to the Chief Executive Officer (who may further
delegate as he deems appropriate) the authority to administer this policy and to
make any and all decisions under it regarding Affected Employees who are not
Section 16 Officers of the Company. Section 16 Officers are employees of the
Company who are subject to Section 16 of the Securities Exchange Act of 1934.
Management shall report to the Committee on any affirmative decisions to seek
Recoupment pursuant to this delegation.
Disclosure of Recoupment Decisions
The Company will comply with all applicable securities laws and regulations,
including Securities and Exchange Commission disclosure requirements regarding
executive compensation. The Company may also, but is not obligated to, provide
additional disclosure beyond that required by law when the Company deems it to be
appropriate and determines that such disclosure is in the best interest of the
Company and its shareholders.
Miscellaneous
Nothing in this policy shall limit or otherwise affect any of the following: 1)
management’s ability to take any disciplinary action with respect to any Affected
Employee; 2) the Committee’s ability to use its negative discretion with respect to
any incentive compensation performance target at any time; or 3) the Committee’s
or management’s ability to reduce the amount (in whole or in part) of a current or
future bonus or other cash or non-cash incentive compensation award to any
executive or other employee for any reason as they may deem appropriate and to
the extent permitted by law. Nothing in this policy shall replace or otherwise limit or
affect the Clawback Policy for EIP Awards Upon Significant Restatement of
Financial Results and/or the Clawback Policy for PSUs Upon Significant
Restatement of Financial Results.
POLICIES AND PROCEDURES
Policy
It is the policy of the Compensation and Benefits Committee of the Board of
Directors (the “Committee”) that the Committee will exercise its discretion to
determine whether to seek Recoupment of any bonus and/or other incentive
compensation paid or awarded to an Affected Employee with respect to any
performance period beginning after December 31, 2013, where it determines, in
consultation with the Audit Committee, that: a) the Affected Employee engaged in
misconduct, or failed to reasonably supervise an employee who engaged in
misconduct, that resulted in a Material Policy Violation relating to the research,
development,
manufacturing, sales, or marketing of Company products; and b) the Committee
concludes that the Material Policy Violation caused Significant Harm to the
Company, as those terms are defined in this policy. The Committee’s exercise of its
discretion may take into account any considerations determined by the Committee
to be relevant.
Definitions
1. “Recoupment” is defined to include any and all of the following actions to the
extent permitted by law: (a) reducing the amount of a current or future bonus or
other cash or non-cash incentive compensation award, (b) requiring reimbursement
of a bonus or other cash-based incentive compensation award paid with respect to
the most recently completed performance period, (c) cancelling all or a portion of a
future-vesting equity award, (d) cancelling all or a portion of an equity award that
vested within the previous twelve-month period, (e) requiring return of shares paid
upon vesting and/or reimbursement of any proceeds received from the sale of an
equity award, in each case that vested within the previous twelve-month period, and
(f) any other method of reducing the total compensation paid to an employee for
any prior twelve-month period or any current or future period.
2. A “Material Policy Violation” is defined as a material violation of a Company
policy relating to the research, development, manufacturing, sales, or marketing of
Company products.
3. An “Affected Employee” is an employee in Band 600 or higher who (i) engaged in
misconduct that results in a Material Policy Violation; or (ii) failed in his or her
supervisory responsibilities to reasonably manage or monitor the conduct of an
employee who engaged in misconduct that results in a Material Policy Violation.
4. “Significant Harm” means a significant negative impact on the Company’s
financial operating results or reputation.
Procedures
1. The Committee, acting in consultation with the Audit Committee, shall administer
this policy and have full discretion to interpret and to make any and all
determinations under this policy, subject to the approval of the full Board of
Directors in the case of a determination to seek or waive Recoupment from the
Chief Executive Officer.
2. The General Counsel, in consultation with the Chief Ethics and Compliance
Officer and the Executive Vice President, Human Resources, is responsible for
determining whether to refer a matter to the Committee for review under this policy
and for assisting the Committee with its review. The Committee may consult with
other Board Committees and any external or internal advisors as it deems
appropriate.
3. If the Committee, acting in consultation with the Audit Committee, determines
that there is a basis for seeking Recoupment under this policy, the Committee shall
exercise its discretion to determine for each Affected Employee, on an
2016 PERFORMANCE SHARE UNIT
AWARD TERMS
UNDER THE MERCK & CO., INC. 2010 STOCK INCENTIVE PLAN
EXHIBIT 10.21
I. GENERAL. These Performance Share Units (“PSUs”) are
granted under and subject to the following Award Terms and the
Merck & Co., Inc. 2010 Stock Incentive Plan (the "Merck ISP").
II. DEFINITIONS. For the purpose of these Award Terms:
Grant Type:
PSU - Annual
Grant Date:
March 31, 2016
Award Period:
Jan. 1, 2016 -
Dec. 31, 2018
“ Adjusted Operating Cash Flow ” means the sum of the Company’s after-tax non-GAAP net income (attributable to the Company) less the
change in working capital (working capital includes Trade Accounts Receivable and Inventory – including Trade Accounts Receivables and
Inventory included in Other Assets – net of Accounts Payable) plus non-GAAP depreciation and amortization for each of calendar year of the
Award Period.
The above result shall be adjusted to exclude charges or items from the measurement of performance relating to (1) the impact of foreign
exchange; (2) the impact of significant unplanned acquisitions/divestitures and (3) the impact of significant, unplanned research &
development investments.
“ Award Period ” means the three-year period commencing on January 1, 2016 and ending on December 31, 2018.
“ Cash Flow Performance Payout ” means the percentage of Target Shares to be paid out based upon the Company’s Adjusted Operating
Cash Flow goal as determined under paragraph C of Section III.
“ Code ” means the Internal Revenue Code of 1986 or any successor thereto.
“ Final Award ” means the percentage of the Target described in Section III hereof.
“ Grant Date ” means the date a Performance Share Unit is granted.
“ Peer Healthcare Companies " are the healthcare companies used by the Committee in evaluating the Company’s TSR Performance for the
entire Award Period. For 2016 and for so long thereafter during the Award Period that such companies are publicly traded on a nationally
recognized stock exchange, the following are the Peer Healthcare Companies except as described below.
AbbVie
Amgen
Astra Zeneca
Bristol-Myers Squibb
Eli Lilly
GlaxoSmithKline
Roche
Johnson & Johnson
Novartis
Pfizer
Sanofi-Aventis
The Committee intends that the Peer Healthcare Companies be subject to such adjustment as may be necessary to reflect merger,
reorganization, recapitalization, extraordinary cash dividend, combination of shares, consolidation, rights offering, spin off, split off, split up,
bankruptcy, liquidation, acquisition, or other similar change in any Peer Healthcare Company.
“ Performance Share ” means a phantom share of Common Stock. Until distributed pursuant to Article VI, Performance Shares shall not
entitle the holder to any of the rights of a holder of Common Stock, including voting rights; provided, however, that the Committee retains the
right to make adjustments as described in Section 7 of the Merck ISP.
“ Performance Unit Grantee ” or “ Grantee ” means an eligible employee who receives a Performance Share Unit.
“ Performance Share Unit ” or “ PSU ” means an award of Performance Shares as described in these Award Terms.
“ Target Shares ” means the number of Performance Shares that will be distributable if the Performance Measures are achieved at the level
identified as “target” for the entire Award Period.
“ Total Shareholder Return” or “TSR ” means the change in value of one share of a company’s Common Stock over the Award Period, taking
into account both stock price appreciation (or depreciation) and the reinvestment of dividends. The beginning and ending stock prices will be
based on the average closing stock prices during the months of December 2015 and December 2018, respectively. TSR will be calculated on a
compound annualized basis over the Award Period.
“TSR Performance Payout” means the percentage of Target Shares to be paid out based upon the Company’s TSR Performance as determined
under paragraph B of Section III.
III. CALCULATION OF FINAL AWARD OF PERFORMANCE SHARE UNITS
The Performance Unit Grantee shall vest in the number of PSUs to the extent provided for in this Section III unless otherwise provided for in
Section V (“Termination of Employment”).
Performance Metrics. The vesting of 50% of the Target Shares will be determined based upon the Company’s TSR Performance
A.
as determined under paragraph B (the “ TSR Performance Payout ”); and 50% of the Target Shares will be determined based upon the
Company’s level of achievement of the Adjusted Operating Cash Flow goal as described in paragraph C (the “ Cash Flow Performance Payou
t”). The Final Award equals the TSR Performance Payout plus the Cash Flow Performance Payout.
TSR Performance Payout
%
x Target Shares
x 50%
+
Adjusted Operating Cash
Flow Payout %
x Target Shares
x 50%
=
Final Award
B.
TSR Performance Payout . The TSR Performance Payout shall be determined as follows:
a. If the Company’s annualized TSR is greater than the median of the annualized TSR of the Peer Healthcare Companies, then the
TSR Performance Payout will equal 100% plus five times the difference in percentage points up to a maximum of 200%; provided, however,
that if the Company’s annualized TSR is negative, then in no event will the TSR Performance Payout be greater than 100%.
For example, if the Company’s annualized TSR is 25% and the median annualized TSR of the Peer Healthcare Companies is 20%,
then the TSR Performance Payout would be 125% [100% + ((25% -20%) x 5%)].
b. If the Company’s TSR is less than the median of the annualized TSR among the Peer Healthcare Companies, then the TSR
Performance Payout will equal 100% minus five times the difference in percentage points; provided, however, that if such median exceeds
the Company’s TSR by more than 10 percentage points, no TSR Performance Payout will be earned with respect to this portion of the PSU.
C. Cash Flow Performance Payout. The Cash Flow Performance Payout shall be determined in accordance with the following
performance schedule:
Adjusted Operational Cash Flow
($ Billion)
Less than $30.86
$30.86 (Threshold)
$36.30 (Target)
$38.12
$39.94 (Stretch)
Payout Percentage
0%
25%
100%
150%
200%
A Payout Percentage corresponding to performance between two discrete values in the table will be interpolated.
D. Maximum Award . Anything in these Award Terms to the contrary notwithstanding, the Final Award shall be reduced to the extent
necessary to reflect that the value of the Final Award may not exceed four times the Target Share, valued as of the Grant Date.
IV. DIVIDENDS
During the Award Period, dividend equivalents will be accrued on the Performance Shares if and to the extent dividends are paid by
the Company on Merck Common Stock. Payment of such dividends will be made, without interest or earnings, at the end of the Award only
on the Final Award. Such dividends shall be paid as additional shares in an amount equal to the sum of the dividends paid during the Award
Period on the Final Award divided by the price of a share of Merck common stock on the date the Final Award is determined. If any portion
of this PSU award lapses, is forfeited or expires, no dividend equivalents will be credited or paid on such portion. Any payment of dividend
equivalents will be reduced to the extent necessary for the Company to satisfy any tax or other withholding obligations.
V. TERMINATION OF EMPLOYMENT
A. General Rule. If a Grantee’s employment is terminated during the Award Period for any reason other than those specified in the
following paragraphs, this PSU award will be forfeited on the date employment ends.
B. Involuntary Termination. If a Grantee’s employment terminates during the Award Period and the Company determines that
employment was involuntarily terminated on or after the first anniversary of the Grant Date, a pro rata portion (based on the number of
completed months held during the Award Period prior to the date employment terminated) of this PSU Award will be distributed at such time
as it would have been paid if employment had continued, based on actual performance during the Award Period as determined in accordance
with Section III. The remainder will be forfeited on the date employment ends. The pro rata portion shall be determined by multiplying the
Final Award by a fraction, the numerator of which is the number of completed months in the Award Period during which the Grantee was
employed by the Company or JV, and the denominator of which is 36. An “involuntary termination” includes termination of employment by
the Company as the result of a restructuring or job elimination, but excludes non-performance of duties and the reasons listed under
paragraphs C through G of this section.
C. Sale. If a Grantee’s employment is terminated during the Award Period and the Company determines that such termination resulted from
the sale of his or her subsidiary, division or joint venture, the following portion of this PSU Award will be distributed at such time as it would
have been paid if employment had continued, based on the Final Award: one third if employment terminates on or after the Grant Date but
before the first anniversary of the Award Period thereof; and all if employment terminates on or after the first anniversary of the first day of
the Award Period. The remainder will be forfeited on the date a Grantee’s employment ends.
D. Retirement. If a Grantee terminates employment during the Award Period by retirement (including early and disability retirement), then
this PSU Award will continue and be distributable on a pro rata basis at the time active Grantees receive such distributions with respect to that
Award Period based on the Final Award. The pro rata portion shall be determined by multiplying the Final Award by a fraction, the
numerator of which is the number of completed months in the Award Period during which the Grantee was employed by the Company or JV,
and the denominator of which is 36. For Grantees who are employed in the U.S., “retirement” means a termination of employment after
attaining the earliest of (a) age 55 with at least 10 years of service (b) such age and service that provides eligibility for subsidized retiree
medical coverage or (c) age 65 without regard to years of service. For other Grantees, “retirement” is determined by the Company.
E. Death. If a Grantee’s employment terminates due to death during the Award Period, all of this PSU Award will continue and be
distributed to his or her estate at the time active Grantees receive such distributions with respect to this PSU Award, based on the Final
Award. If a Grantee dies while any portion of this PSU Award remains outstanding, but after employment terminates for the reasons listed
under paragraphs B, C, D or G of this section, the portion that remains outstanding will continue and be distributable at the time active
Grantees receive such distributions with respect to that Award Period based on the Final Award.
F. Misconduct. If a Grantee’s employment is terminated as a result of deliberate, willful or gross misconduct, this PSU Award will be
forfeited immediately upon the Grantee’s receipt of notice of such termination.
G. Disability. If a Grantee’s employment is terminated during the Award Period and the Company determines that such termination
resulted from inability to perform the material duties of his or her role by reason of a physical or mental infirmity that is expected to last for at
least six months or to result in death, whether or not he or she is eligible for disability benefits from any applicable disability program, then
this PSU Award will continue and be distributable in accordance with its terms as if employment had continued based on the Final Award and
will be distributed at the time active PSU Grantees receive distributions with respect to this PSU Award.
H. Joint Venture Service. A transfer of a Grantee’s employment to a joint venture, including, in the case of grants to Legacy Merck
Employees, any other entity in which the Company has determined that it has a significant business or ownership interest, is not considered
termination of employment for purposes of this PSU Award. Such employment must be approved by, and contiguous with employment by,
the Company. The terms set out in paragraphs A-G above apply to this PSU Award while a Grantee is employed by the joint venture or other
entity.
VI. DISTRIBUTION OF PERFORMANCE SHARES
A. General Rule. Following the end of the Award Period, each Grantee shall be entitled to receive a number of shares of Common Stock
equal to the Final Award plus the shares for accrued dividend equivalents set forth in Section IV, rounded to the nearest whole number (no
fractional shares shall be issued). Such distribution shall be made as soon as administratively feasible, but in no event later than the end of the
calendar year in which the Final Award is determined in accordance with Section III. Unless otherwise determined by the Committee, the
Company shall withhold any applicable taxes directly from a Performance Share Unit before it is denominated in actual shares of Common
Stock.
B. Death. In the case of distribution on account of a Grantee’s death, the portion of the Performance Share Unit distributable shall be
distributed to the Grantee’s estate. Unless the Committee determines otherwise, the Company will withhold any applicable taxes directly from
a Performance Unit before it is denominated in actual shares of Common Stock.
VII. TRANSFERABILITY
Prior to distribution pursuant to Section VI, the PSU Award shall not be transferable, assignable or alienable except by will or the laws of
descent or distribution following a Grantee’s death.
VIII. ADMINISTRATIVE POWERS
In addition to the Committee’s powers set forth in the Merck ISP, anything in these Award Terms to the contrary notwithstanding, the
Committee may revise the terms of any PSU not yet granted or, with respect to any PSU not intended to constitute “performance-based
compensation” under Section 162(m) of the Code, granted but prior to the end of an Award Period if unforeseen events occur and which, in
the judgment of the Committee, make the application of the Terms of this PSU Award unfair and contrary to their intentions unless a revision
is made.
IX.
CLAWBACK POLICY FOR PSUS UPON SIGNIFICANT RESTATEMENT OF FINANCIAL RESULTS AND
CERTAIN COMPLIANCE VIOLATIONS
A. PSUs Subject to Clawback. For employees in Band 600 and above, this PSU Award will be subject to recoupment in the event of
violations of the Company policy for Recoupment of Compensation for Compliance violations as set forth in Appendix A as amended from
time to time. In addition, PSUs, and any proceeds therefrom, are subject to the Company’s right to reclaim their benefits in the event of a
significant restatement of financial results for any Award Period, pursuant to the process described below.
1.
The Audit Committee of the Board will review the issues and circumstances that resulted in a restatement of
financial results to determine if the restatement was significant and make an initial determination of the cause of the restatement-that
is whether the restatement was caused, in whole or in part, by Executive Fault (as those terms are defined below); and
2.
The Compensation and Benefits Committee of the Board will (a) recalculate the Company's results for any Award
Period with respect to PSUs that included an Award Period which occurred during the restatement period; and (b) if it is determined
that such restatement was caused in whole or in part by the Executive's Fault, the Compensation and Benefits Committee will seek
reimbursement from the Executive of that portion of the payout of the PSU that the Executive received within 18 months of the
restatement based on the erroneous financial results.
B. “Executive” means executive officers for the purposes of the Securities Exchange Act of 1934, as amended.
C. “Fault” means fraud or willful misconduct. "Willful misconduct" is generally viewed as dereliction of a duty or unlawful or improper
behavior committed voluntarily and intentionally; something more than negligence. If the Audit Committee determines that Fault may have
been a factor causing the restatement, the Audit Committee will appoint an independent investigator whose determination shall be final and
binding.
D. Exclusions from Clawback. This Section does not apply to restatements that the Audit Committee determines (1) are required or
permitted under generally accepted accounting principles (“GAAP”) in connection with the adoption or implementation of a new accounting
standard or (2) are caused due to the Company's decision to change its accounting practice as permitted under GAAP.
E. Compliance Violations. For employees in Band 600 and above, this PSU will be subject to recoupment in the event of certain
violations of Company policy in accordance with the Company’s policy for Recoupment of Compensation for Compliance Violations, as set
forth in Appendix A (as may be amended from time to time).
X. Change-in-Control
Upon the occurrence of a change-in-control (as such term is defined in the Merck ISP), the Final Award shall be 100%. The Final Award will
be distributed at the same time and in the same manner as described in Section VI.
If the Company terminates a Grantee’s employment except as described in Section V(F), (1) during the Award Period and (2) within two
years following a change-in-control, the Final Award will be 100% and will be distributed when distributed to active Grantees.
XI. Section 409A Compliance .
Anything in the ISP or these Award Terms to the contrary notwithstanding, no distribution of PSUs may be made unless in compliance with
Section 409A of the Code or any successor thereto. In addition, distributions, if any, to a “Specified Employee” as defined in Treas. Reg. Sec.
1.409A-1(i) or any successor thereto, to the extent required by Section 409A of the Code, made due to a separation from service (as defined
in Section 409A) will not be made before the first day of the sixth month following the separation from service, in the same form as they
would have been made had this restriction not applied; provided further, that no dividend or dividend equivalents will be paid, accrued or
accumulated in respect of the period during which distribution was suspended.
APPENDIX A
Recoupment of Compensation for Compliance Violations
individual basis, whether, and to what extent and in which manner, to seek
Recoupment.
4. In exercising its discretion, the Committee may take into consideration, as it
deems appropriate, all of the facts and circumstances of the particular matter and
the general interests of the Company.
Delegation to Management for Certain Recoupment Decisions
The Committee hereby delegates to the Chief Executive Officer (who may further
delegate as he deems appropriate) the authority to administer this policy and to
make any and all decisions under it regarding Affected Employees who are not
Section 16 Officers of the Company. Section 16 Officers are employees of the
Company who are subject to Section 16 of the Securities Exchange Act of 1934.
Management shall report to the Committee on any affirmative decisions to seek
Recoupment pursuant to this delegation.
Disclosure of Recoupment Decisions
The Company will comply with all applicable securities laws and regulations,
including Securities and Exchange Commission disclosure requirements regarding
executive compensation. The Company may also, but is not obligated to, provide
additional disclosure beyond that required by law when the Company deems it to be
appropriate and determines that such disclosure is in the best interest of the
Company and its shareholders.
Miscellaneous
Nothing in this policy shall limit or otherwise affect any of the following: 1)
management’s ability to take any disciplinary action with respect to any Affected
Employee; 2) the Committee’s ability to use its negative discretion with respect to
any incentive compensation performance target at any time; or 3) the Committee’s
or management’s ability to reduce the amount (in whole or in part) of a current or
future bonus or other cash or non-cash incentive compensation award to any
executive or other employee for any reason as they may deem appropriate and to
the extent permitted by law. Nothing in this policy shall replace or otherwise limit or
affect the Clawback Policy for EIP Awards Upon Significant Restatement of
Financial Results and/or the Clawback Policy for PSUs Upon Significant
Restatement of Financial Results.
POLICIES AND PROCEDURES
Policy
It is the policy of the Compensation and Benefits Committee of the Board of
Directors (the “Committee”) that the Committee will exercise its discretion to
determine whether to seek Recoupment of any bonus and/or other incentive
compensation paid or awarded to an Affected Employee with respect to any
performance period beginning after December 31, 2013, where it determines, in
consultation with the Audit Committee, that: a) the Affected Employee engaged in
misconduct, or failed to reasonably supervise an employee who engaged in
misconduct, that resulted in a Material Policy Violation relating to the research,
development, manufacturing, sales, or marketing of Company products; and b) the
Committee concludes that the Material Policy Violation caused Significant Harm to
the Company, as those terms are defined in this policy. The Committee’s exercise
of its discretion may take into account any considerations determined by the
Committee to be relevant.
Definitions
1. “Recoupment” is defined to include any and all of the following actions to the
extent permitted by law: (a) reducing the amount of a current or future bonus or
other cash or non-cash incentive compensation award, (b) requiring reimbursement
of a bonus or other cash-based incentive compensation award paid with respect to
the most recently completed performance period, (c) cancelling all or a portion of a
future-vesting equity award, (d) cancelling all or a portion of an equity award that
vested within the previous twelve-month period, (e) requiring return of shares paid
upon vesting and/or reimbursement of any proceeds received from the sale of an
equity award, in each case that vested within the previous twelve-month period, and
(f) any other method of reducing the total compensation paid to an employee for
any prior twelve-month period or any current or future period.
2. A “Material Policy Violation” is defined as a material violation of a Company
policy relating to the research, development, manufacturing, sales, or marketing of
Company products.
3. An “Affected Employee” is an employee in Band 600 or higher who (i) engaged in
misconduct that results in a Material Policy Violation; or (ii) failed in his or her
supervisory responsibilities to reasonably manage or monitor the conduct of an
employee who engaged in misconduct that results in a Material Policy Violation.
4. “Significant Harm” means a significant negative impact on the Company’s
financial operating results or reputation.
Procedures
1. The Committee, acting in consultation with the Audit Committee, shall administer
this policy and have full discretion to interpret and to make any and all
determinations under this policy, subject to the approval of the full Board of
Directors in the case of a determination to seek or waive Recoupment from the
Chief Executive Officer.
2. The General Counsel, in consultation with the Chief Ethics and Compliance
Officer and the Executive Vice President, Human Resources, is responsible for
determining whether to refer a matter to the Committee for review under this policy
and for assisting the Committee with its review. The Committee may consult with
other Board Committees and any external or internal advisors as it deems
appropriate.
3. If the Committee, acting in consultation with the Audit Committee, determines
that there is a basis for seeking Recoupment under this policy, the Committee shall
exercise its discretion to determine for each Affected Employee, on an
EXHIBIT 10.24
MERCK & CO. INC. U.S. SEPARATION BENEFITS PLAN
Amended and Restated as of January 1, 2017
MERCK & CO., INC., U.S. SEPARATION BENEFITS PLAN
SECTION 1
PREAMBLE
Merck Sharp & Dohme Corp. established the MSD Separation Benefits Plan (the "MSD Plan"), as amended from time to time, to
provide benefits to eligible non-union employees whose employment with
Merck Sharp & Dohme Corp. or a participating wholly owned subsidiary (collectively, "MSD") was terminated under certain
circumstances at the initiative of MSD.
Schering-Plough Corporation established the Schering-Plough Separation Benefits Plan (the "Schering Plan"), as amended from time
to time, for the purpose of providing severance benefits to eligible union and non-union employees whose employment with
Schering Corporation and certain of its U.S. affiliated companies was terminated under certain circumstances.
Effective January 1, 2012, the Schering Plan merged into the MSD Plan with the MSD Plan being renamed the Merck & Co., Inc.
U.S. Separation Benefits Plan (the "Plan"). The Plan was amended and restated in its entirety at that time. Effective January 1, 2013,
September 1, 2013, October 1, 2013 and November 15, 2014, the Plan was reinstated in its entirety. Effective January 1, 2017, the
Plan is again being amended and restated in its entirety as set forth herein.
The purpose of the Plan is to provide benefits to eligible employees whose employment with an Employer is terminated at the
initiative of the Employer for reasons described below. This Plan is part of the MSD Separation Allowance Plan (Plan No. 514).
1
SECTION 2
DEFINITIONS
For the purposes of this Plan, the following terms shall have the following meanings:
2.1 “ Annual Base Salary ” means
(a) With respect to a Participant who is exempt as of his or her Separation Date, his or her annual base salary in effect
as of his or her Separation Date, according to the Employer’s payroll records, without reduction for any contributions to
Employer-sponsored benefit plans. For the avoidance of doubt, (i) with respect to a Participant who is exempt and regularly
scheduled to work less than full-time as of his or her Separation Date, Annual Base Salary is the reduced annual base salary
in effect on his or her Separation Date applicable to the less than full time position, according to the Employer’s payroll
records, without reduction for any contributions to the Employer-sponsored benefit plans and (ii) no adjustment is made to
Annual Base Salary if the Participant’s annual base salary in effect during any period prior to his or her Separation Date is
higher or lower (for any reason, including promotion/demotion or a move to or from full-time or part-time status) than his or
her annual base salary in effect as of his or her Separation Date, according to the Employer’s payroll records.
(b) With respect to a Participant who is non-exempt as of his or her Separation Date, the hourly rate according to the
Employer’s payroll records in effect as of his or her Separation Date multiplied by the number of hours the Eligible
Employee is regularly scheduled to work as of his or her Separation Date (up to a maximum of 2080 hours) .
Annual Base Salary does not include bonuses, commissions, overtime pay, shift pay, premium pay, lump sum merit
increases, cost of living allowances, income from stock options or other incentives under an Incentive Stock Plan of the
Employer (or the Parent or any of its subsidiaries), stock grants or other incentives, or other pay not specifically included
above.
For example, a Participant who is regularly scheduled to work less than full-time on his Separation Date has 10
Complete Years of Continuous Service (9 at full-time and 1 at less than full-time), had an annual base salary of $100,000 as a
full-time employee but on his Separation Date has an annual base salary of $50,000 according to the Employer’s payroll
records because it was reduced as applicable for the less than full-time position. The Participant’s Separation Pay will be
calculated using 10 Complete Years of Continuous Service and an Annual Base Salary of $50,000. There is no adjustment in
Annual Base Salary for prior years of higher annual base salary due to full-time service.
2.2 “ Base Pay Rate ” means
(a) With respect to an Eligible Employee who is exempt, his/her annual base pay according to the Employer’s
payroll records in effect as of the date the Eligible Employee is offered a Qualified Alternative Position or a Negotiated Job
Offer. For an Eligible Employee who is regularly scheduled to work less than full-time, annual base pay is the reduced annual
base pay to the less than full-time position.
(b) With respect to an Eligible Employee who is non-exempt, the hourly rate according to the Employer’s payroll
records in effect as of the date the Eligible Employee is
2
offered a Qualified Alternative Position or a Negotiated Job Offer multiplied by the number of hours the Eligible Employee
is regularly scheduled to work (up to a maximum of 2080 hours).
Base Pay Rate is calculated without reduction for any contributions to Employer-sponsored benefit plans. Base Pay Rate
includes applicable shift pay and premium pay but does not include bonuses, commissions, overtime pay, lump sum merit
increases, cost of living allowances, income from awards granted under an Incentive Stock Plan of the Employer (or the
Parent or its subsidiaries), or other pay not specifically included above .
2.3 “ Basic Life Insurance ” means life insurance provided to an Eligible Employee under a plan sponsored by Parent or a
subsidiary of Parent equal to 1x "base pay" as defined under the life insurance plan in which the Eligible Employee
participates, as it may be amended from time to time.
2.4 “ Benefits Continuation Period ” means the period of time, as set forth on Schedule B-2, during which a Participant
is eligible to receive Separation Benefits, provided, however that the Participant may elect to end the period earlier than
indicated on Schedule B-2 by notifying the Employer's health and insurance plan administrator (i) within the later of thirty
(30) days from the Participant's Separation Date or the date by which the Participant is provided to review the Separation
Letter so that the Benefit Continuation Period ends on the date it would have otherwise begun, or (ii) during the Employer's
annual open enrollment period for health and insurance benefits so that the Benefit Continuation Period ends the following
January 1 (provided that date is not beyond the period set forth on Schedule B-2), or (iii) mid-year with a qualified status
change that otherwise permits the Participant to make a change to the Participant's healthcare coverage in accordance with the
terms of the Employer's healthcare plan so that the Benefits Continuation Period ends on the date the mid-year change would
otherwise be effective under the terms of the Employer's healthcare plan (provided that date is not beyond the period set forth
on Schedule B-2).
2.5 “ Change in Control ” shall have the meaning set forth in the CIC Plan (and, for avoidance of doubt, a valid
amendment of that definition under the CIC Plan shall constitute an amendment of this Plan without further action).
2.6 “ CIC Plan ” means the Merck & Co., Inc. Change in Control Separation Benefits Plan, as amended and restated
effective January 1, 2013 and as it may be further amended from time to time, and any successor thereto.
2.7 “ Claims Reviewer ” means the Merck & Co., Inc. Employee Benefits Committee (or its delegate) whose members
are appointed by the Parent's Executive Vice President of Human Resources or his or her delegate; provided, however, for
Section 16 Officers, Claims Reviewer means the Compensation and Benefits Committee of the Board of Directors of Parent
or its delegate.
2.8 “ Code ” means the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder.
2.9 “ Complete Years of Continuous Service ” means (a) for a Legacy Schering Employee, a year from the Participant’s
Most Recent Hire Date with a Legacy Schering Entity to its anniversary, and thereafter from each anniversary to the next, (b)
for a Legacy Merck Employee, a year from the Participant's Most Recent Hire Date with a Legacy Merck Entity to its
anniversary, and thereafter from each anniversary to the next, (c) for a Legacy Inspire Employee, a year from
3
the Participant’s Most Recent Hire Date with a Merck Entity to its anniversary, and thereafter from each anniversary to the
next, and (d) for a Non-Legacy Company Employee, from the Participant’s Most Recent Hire Date with a Merck Entity, and
thereafter from each anniversary to the next.
2.10 “ Continuous Service ” means (a) for a Legacy Schering Employee, the period of a Participant's continuous
employment with a Legacy Schering Entity commencing on the Participant's Most Recent Hire Date with a Legacy Schering
Entity and ending on the Separation Date as reflected on the Employer’s employee database, (b) for a Legacy Merck
Employee, the period of a Participant's continuous employment with a Legacy Merck Entity commencing on the Participant's
Most Recent Hire Date with a Legacy Merck Entity and ending on the Separation Date as reflected on the Employer’s
employee database, (c) for a Legacy Inspire Employee, the period of a Participant's continuous employment with a Merck
Entity commencing on the Participant's Most Recent Hire Date with a Merck Entity and ending on the Separation Date as
reflected on the Employer’s employee database, and (d) for a Non-Legacy Company Employee, the period of a Participant's
continuous employment with a Merck Entity commencing on the Participant's Most Recent Hire Date with a Merck Entity
and ending on the Separation Date as reflected on the Employer’s employee database. For the avoidance of doubt, service
prior to November 4, 2009 by a Legacy Schering Employee with a Legacy Merck Entity or a Legacy Merck Employee with a
Legacy Schering Entity is excluded from “Continuous Service.” Notwithstanding anything contained in this Plan to the
contrary, employment with a Legacy Schering Entity, Legacy Merck Entity or a Merck Entity as an Excluded Person does
not count as "Continuous Service".
2.11 “ Eligible Employee ” means (a) any regular full-time or regular part-time employee of an Employer who is on the
Employer's normal U.S. payroll and as to whom the terms and conditions of employment are not covered by a collective
bargaining agreement unless the collective bargaining agreement specifically provides for coverage under the Plan; or (b) a
U.S. Expatriate on an Employer's normal U.S. payroll.
The term “Eligible Employee” shall not include:
(i) an employee (x) who is a party to an employment agreement with the Employer or with the Parent (or any of its
subsidiaries) or (y) who is entitled, upon termination of employment with the Employer, to separation, severance,
termination or other similar payments (1) under another plan or program sponsored by the Employer or Parent (or any of
its subsidiaries); or (2) pursuant to a separate agreement with the Employer or Parent (or any of its subsidiaries) or (z)
who is a party to an agreement with the Employer or Parent (or any of its subsidiaries) that provides that no payment or
benefits are due to the employee in connection with his or her termination of employment; provided, however, in each
case under the foregoing clauses (x), (y) and (z) unless the plan, program or agreement expressly provides for benefits
under this Plan;
(ii) a participant in the CIC Plan (but this clause shall only apply during the Protection Period (as defined in Section
8.1));
(iii) temporary employees (including college coops, summer employees, high school coops, flexible workforce
employees, post-doctorate research fellows and any other such temporary classifications ) and/or employees called by the
Employer at any time for employment in theU.S. on a non-scheduled and non-recurring basis, and who becomes an
employee of the Employer only after reporting to work for the period of time during which the person is working;
4
(iv) an Excluded Person;
(v) employees of a non-US subsidiary of an Employer (or who are dual employees of a non-US subsidiary of an
Employer) who are on assignment in the US;
(vi) employees whose employment ends for any reason while on unapproved leaves of absence;
(vii) employees whose employment ends for any reason while on approved leaves of absence for a period equal to or
more than six continuous months regardless of the reason(s) for the leave excluding the following approved leaves of
absence: medical disability leaves, military leaves and family medical leaves under federal or state family medical leave
laws and excluding Grandfathered Legacy Schering Employees;
(viii) employees whose employment ends for any reason while on approved leaves of absence for medical disability for a
period equal to or more than one year excluding Grandfathered Legacy Schering Employees;
(ix) employees who are covered by the IAM Agreement at the Kenilworth, NJ site and the Union, NJ site, whose
Separation Date occurs (or occurred) or layoff begins (or began) (i) before February 1, 2014, or (ii) on or after February
1, 2014 and who elect to retain their recall rights;
(x) employees who are covered by the IAM Agreement at the Summit, NJ site whose Separation Date occurred or layoff
began before October 1, 2013; and/or
(xi) Grandfathered Legacy Schering Employees who have not been medically cleared to return to work or who do not
return to work within two years of their first day absent.
For purposes of the foregoing clauses (vii) and (viii), a series of leaves of absence is considered one continuous leave for
purposes of calculating the six-month or one-year requirement if the employee does not return to active employment for
any reason, including but not limited to because the employee’s former position is unavailable and the employee is unable
to secure a new position.
Whether an individual is an Eligible Employee or not is determined as of the date of his/her Termination due to
Workforce Restructuring or for Rebadged Employees as of the date of his/her termination of employment due to an outsource
transaction or for Grandfathered Legacy Schering Employees as of the date of his/her Grandfathered Legacy Schering
Termination.
2.12 “ Employer ” means individually and collectively, the entities identified on Schedule A attached hereto.
2.13 “ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations
promulgated thereunder.
2.14 “ Excluded Person ” means a person who (i) is an independent contractor, or agrees or has agreed that he/she is an
independent contractor, or (ii) has any agreement or understanding with the Employer, or any of its affiliates that he/she is
not an employee or an Eligible Employee, or (iii) is employed by a temporary or other employment agency, regardless of the
amount of control,
5
supervision or training provided by the Employer or its affiliates, or (iv) is a “leased employee” as defined under Section
414(n) of the Internal Revenue Code of 1986, as amended, or (v) is not treated by the Employer as an employee for purposes
of withholding federal income taxes, regardless of any contrary Internal Revenue Service, governmental or judicial
determination relating to such employment status or tax withholding. An Excluded Person is not eligible to participate in the
Plan even if a court, agency or other authority rules that he/she is a common‑law employee of the Employer or its affiliates.
2.15 "Grandfathered Legacy Schering Employees " means Legacy Schering Employees who (i) were absent from work
on December 31, 2011 on an approved medical leave of absence and receiving disability benefits under an Employer-
sponsored disability plan and (ii) were notified on or prior to December 31, 2011 that their position was scheduled to be
eliminated.
2.16 " Grandfathered Legacy Schering Termination " means the termination of employment by the Employer of a
Grandfathered Legacy Schering Employee who is medically cleared to return to work within two years of his or her first day
absent but does not return to work within such time period because he or she is unable to secure a Qualified Alternate
Position.
2.17 “ IAM Agreement ” means a collective bargaining agreement between Merck Sharp & Dohme Corp. and District 15,
Lodge 315 of the International Association of Machinists and Aerospace Workers. As of November 15, 2014, there are two
separate bargaining agreements with the IAM (Kenilworth/Union, NJ and Summit, NJ).
2.18 “ Legacy Inspire Employee ” means an Eligible Employee who (a) as of December 31, 2012 is employed by a
Merck Entity and either continues to be employed by such entity until his/her Separation Date or is rehired or transferred to
such entity after December 31, 2012, and (b) as of his/her Separation Date is (i) employed by an Employer, and (ii) coded in
the employee data base of Parent as S6 (Legacy Inspire) under infotype 35, and (iii) not covered by a collective bargaining
agreement.
2.19 " Legacy Merck Employee " means an Eligible Employee who (a) as of December 31, 2012 is employed by a
Merck Entity and either continues to be employed by such entity until his/her Separation Date or is rehired or transferred to
such entity after December 31, 2012, and (b) as of his/her Separation Date is (i) employed by an Employer, and (ii) coded in
the employee data base of Parent with a blank indicator under infotype 35, and (iii) not covered by a collective bargaining
agreement, other than one of the IAM Agreements. For the avoidance of doubt, “Legacy Merck Employee” excludes the
following: employees who are covered by the IAM Agreement (A) at the Kenilworth, NJ site and the Union, NJ site, whose
Separation Date occurs (or occurred) or layoff begins (or began) (i) before February 1, 2014, or (ii) on or after February
1,2014 and who elect to retain their recall rights and (B) at the Summit, NJ site whose Separation Date occurred or layoff
began before October 1, 2013.
2.20 " Legacy Merck Entity " means (a) for the period prior to November 4, 2009, Old Merck and its direct or indirect
wholly owned subsidiaries and (b) for the period beginning November 4, 2009, New Merck and its direct or indirect wholly
owned subsidiaries.
2.21 " Legacy Schering Employee " means an Eligible Employee who (a) as of December 31, 2012 is employed by a
Merck Entity and either continues to be employed by such entity until his/her Separation Date or is rehired by or transferred
to such entity after December 31, 2012, and (b) as of his/her Separation Date is (i) employed by an Employer, (ii) coded in
the employee data base of Parent as S1 (Legacy Organon), S2 (Legacy Intervet) or S5 (Legacy Schering-Plough)
6
under infotype 35, and (iii) not covered by a collective bargaining agreement other than one of the IAM Agreements or an
agreement that specifically provides for benefits under this Plan. For the avoidance of doubt, “Legacy Schering Employee”
excludes the following: employees who are covered by the IAM Agreement (A) at the Kenilworth, NJ site and the Union, NJ
site, whose Separation Date occurs (or occurred) or layoff begins (or began) (i) before February 1, 2014, or (ii) on or after
February 1, 2014 and who elect to retain their recall rights and (B) at the Summit, NJ site whose Separation Date occurred or
layoff began before October 1, 2013.
2.22 " Legacy Schering Entity " means (a) for the period prior to November 4, 2009, Schering-Plough Corporation and
its direct or indirect wholly owned subsidiaries and (b) for the period beginning November 4, 2009, New Merck and its direct
or indirect wholly owned subsidiaries.
2.23 “ Merck Entity ” means for the period beginning November 4, 2009, New Merck and its direct or indirect wholly
owned subsidiaries.
2.24 “ Merck Retiree Medical Plan ” means the retiree medical plan sponsored by Merck Sharp & Dohme which
includes the following components: (i) the Merck Group Retiree Medical Plan which provides group retiree medical and
prescription drug benefits to eligible retirees and their eligible dependents, in each case who are under age 65 or not
Medicare-eligible as more fully described in the Merck Group Retiree Medical Plan SPD, and (ii) the Merck Retiree HRA
which provides reimbursement benefits to eligible retirees and their eligible dependents who are eligible for subsidized
retiree medical benefits and, in each case ,who are age 65 or older and Medicare-eligible as more fully described in the
Merck Retiree Health Reimbursement Account SPD.
2.25 “ Misconduct ” means conduct which includes (a) falsification of an Employer's or Parent's
records/misrepresentation; (b) theft; (c) acts or threats of violence; (d) refusal to carry out assigned work; (e) unauthorized
possession of alcohol or illegal drugs on an Employer's or Parent's premises; (f) being under the influence of alcohol or
illegal drugs during work hours; (g) willful intent to damage or destroy an Employer's or Parent's property; (h) violation of
the Parent's "Our Values and Standards"; (i) acts of discrimination/harassment; (j) conduct jeopardizing the integrity of the
products of an Employer, Parent or one or more of its subsidiaries; (k) violation of rules, policies, and/or practices of an
Employer or Parent; or (l) other conduct considered to be detrimental to an Employer, the Parent or one or more of its
subsidiaries.
2.26 “ Most Recent Hire Date ” means (a) for a Legacy Schering Employee, his or her most recent hire date at a Legacy
Schering Entity or an entity acquired by a Legacy Schering Entity as reflected on the Employer’s employee data system, (b)
for a Legacy Merck Employee, his or her most recent hire date at a Legacy Merck Entity or an entity acquired by a Legacy
Merck Entity asreflected on the Employer’s employee data system, (c) for a Legacy Inspire Employee, his or her most recent
hire date at a Merck Entity or an entity acquired by a Merck Entity as reflected on the Employer’s employee data system, and
(d) for a Non-Legacy Company Employee, his or her most recent hire date at a Merck Entity or an entity acquired by a Merck
Entity as reflected on the Employer’s employee data system. Notwithstanding the foregoing, the most recent hire date for a
Legacy Merck Employee who was employed by a Legacy Merck Entity on December 31, 1997, transferred from that entity
to Merial as of January 1, 1998, remained continuously employed by Merial through the date he or she transferred
employment from Merial to a Legacy Merck Entity and whose transfer to a Legacy Merck Entity occurred between October
1, 2000 and June 1, 2001, is his or her most recent hire date on the Employer's employee data system at a Legacy Merck
Entity prior to his or her transfer to Merial. Notwithstanding the foregoing, the most recent hire date for a Legacy Merck
Employee who was employed by a Legacy Merck Entity on December 31, 2007, transferred from that entity to PRWT as of
January 1, 2008, remained continuously
7
employed by PRWT through September 3, 2010 and who was rehired by a Legacy Merck Entity as of September 3, 2010, is
his or her most recent hire date on the Employer’s employee data system at a Legacy Merck Entity prior to his or her transfer
to PRWT. For the avoidance of doubt, the most recent hire date at an acquired entity may occur before the date the entity was
acquired by a Legacy Schering Entity, Legacy Merck Entity or Merck Entity, provided such date is reflected on the
Employer’s employee data system.
2.27 "Negotiated Job Offer " means an offer of employment (or an offer of continued employment) with a successor
employer or outsource vendor the terms and conditions of which are negotiated by an Employer, Parent or one of its
subsidiaries or affiliates and may include, among other things, a reduction in Base Pay Rate.
2.28 “ New Merck ” means Merck & Co., Inc. (formerly known as Schering-Plough Corporation) on and after November
4, 2009.
2.29 “ Non-Legacy Company Employee ” means an Eligible Employee who (a) is first hired by a Merck Entity on or
after January 1, 2013, and (b) as of his/her Separation Date is (i) employed by an Employer, and (ii) coded in the employee
data base of Parent with a blank indicator under infotype 35, and (iii) not covered by a collective bargaining agreement. For
purposes of determining whether an Eligible Employee is a “Non-Legacy Company Employee” only, an Eligible Employee
who was an employee of an entity on the date that it was acquired by a Merck Entity is considered to be first hired by a
Merck Entity on the date the entity became a wholly owned subsidiary of New Merck or one of its wholly owned
subsidiaries.
2.30 " Offer Outside Geographic Parameters " means (A) for an Eligible Employee who is not eligible to participate in
the Company’s sales incentive plan and who does not qualify as other field-based personnel, a Negotiated Job Offer that
results in the relocation of the Eligible Employee's principal business location to a new principal business location (x) where
the distance between the Eligible Employee’s residence immediately prior to the extension of the Negotiated Job Offer and
his/her new principal business location is more than 50 miles greater than the distance between the Eligible Employee's
residence and his/her principal business location at the time the Negotiated Job Offer is extended or (y) more than 75 miles
from the Eligible Employee's residence at the time the Negotiated Job Offer is extended and not closer to the Eligible
Employee's residence at that time, and (B) for an Eligible Employee who is eligible to participate in the Company’s sales
incentive plan or who qualifies as other field-based personnel, a Negotiated Job Offer that results in the relocation of the
Eligible Employee's geographic workload center location to a new geographic workload center location (x) where the
distance between the Eligible Employee’s residence immediately prior to the extension of the Negotiated Job Offer and
his/her new geographic workload center location is more than 50 miles greater than the distance between the Eligible
Employee's residence and his/her geographic workload center location at the time the Negotiated Job Offer is extended and
(y) more than 75 miles from the Eligible Employee's residence at the time the Negotiated Job Offer is extended and not closer
to the Eligible Employee's residence at that time.
The Employer, in its sole and absolute discretion, will determine (i) whether an Eligible Employee qualifies as other field-
based personnel, (ii) distance using a nationally recognized mapping service, (iii) principal business location, and (iv) the
geographic workload center.
Whether a position is an Offer Outside Geographic Parameters shall be determined at the time a Negotiated Job Offer is
offered or communicated to the Eligible Employee or to the Grandfathered Legacy Schering Employee by the Employer.
8
2.31
“ Old Merck ” means Merck & Co., Inc. prior to November 4, 2009 (subsequently known as Merck Sharp & Dohme
Corp).
2.32 “ Outplacement Benefits ” means benefits for outplacement counseling or other outplacement services made
available to a Participant as provided pursuant to Section 4.4 of this Plan.
2.33 “ Parent ” means New Merck.
2.34 “ Participant ” means an Eligible Employee who has experienced a Termination due to Workforce Restructuring and
who has signed, and, if a revocation period is applicable, not revoked, a Release of Claims in a form that is satisfactory to the
Employer in its sole and absolute discretion.
The term "Participant" shall also include, where and as applicable a Rebadged Employee and a Grandfathered Legacy
Schering Employee who has experienced a Grandfathered Legacy Schering Termination, in each case, who has signed and, if
a revocation period is applicable, not revoked a Release of Claims in a form that is satisfactory to the Employer in its sole and
absolute discretion.
2.35 “ Plan ” means the Merck & Co., Inc., U.S. Separation Benefits Plan as set forth herein, and as may be amended from
time to time.
2.36 “ Plan Administrator ” means the Parent or its delegate.
2.37 “ Plan Year ” means the calendar year January 1 through December 31 on which the records of the Plan are kept.
2.38 “ Qualified Alternative Position ” means a position with an Employer, the Parent or any of its subsidiaries which
does not result in either of the following:
(i) a reduction in the Eligible Employee's Base Pay Rate; or
(ii) (A) for an Eligible Employee who is not eligible to participate in the Company’s sales incentive plan, relocation of
the Eligible Employee's principal business location to a new principal business location (x) where the distance between
the Eligible Employee’s residence immediately prior to the relocation and his/her new principal business location is more
than 50 miles greater than the distance between the the Eligible Employee's residence and his/her principal business
location immediately prior to the relocation or (y) that is more than 75 miles from the Eligible Employee's residence
immediately prior to the relocation and not closer to the Eligible Employee's residence at that time, and (B) for an
Eligible Employee who is eligible to participate in the Company’s sales incentive plan or who qualifies as other field-
based personnel, relocation of the Eligible Employee's geographic workload center location to a new geographic
workload center location (x) where the distance between the Eligible Employee’s residence immediately prior to the
relocation and his/her new geographic workload center location is more than 50 miles greater than the distance between
the Eligible Employee's residence and his/her geographic workload center location immediately prior to the relocation
and (y) more than 75 miles from the Eligible Employee's residence at the time the Negotiated Job Offer is extended and
not closer to the Eligible Employee's residence at that time.
9
The Employer, in its sole and absolute discretion, will determine (i) whether an Eligible Employee qualifies as other
field-based personnel, (ii) distance using a nationally recognized mapping service, (iii) principal business location, and
(iv) the geographic workload center.
Whether a position is a Qualified Alternative Position shall be determined at the time such position is offered or
communicated to the Eligible Employee or to the Grandfathered Legacy Schering Employee by his/her manager.
2.39 " Rebadged Employee ” means an Eligible Employee whose employment with the Employer is terminated by the
Employer in connection with the outsourcing of work by the Employer in a transaction with a third‑party vendor where the
Eligible Employee is offered a Negotiated Job Offer and:
(a) (i) accepts the Negotiated Job Offer; or (ii) declines the Negotiated Job Offer, provided the Negotiated Job Offer is
not an Offer Outside Geographic Parameters; and
(b) remains employed with the Employer through the date established by the Employer as the employee's Separation
Date unless the Employer expressly waives this provision.
Whether an Eligible Employee is a Rebadged Employee shall be determined by the Employer or Parent in its sole discretion.
An Eligible Employee shall not be considered to be a Rebadged Employee if his or her employment with the Employer (i)
does not end as set forth in this Section 2.38 (ii) ends due to the declination of a Negotiated Job Offer that is an Offer Outside
Geographic Parameters, or (iii) ends as a result of any of the events described in Section 3.1(e).
For the avoidance of doubt, a Rebadged Employee shall not be considered to have experienced a Termination due to
Workforce Restructuring for purposes of the Plan.
2.40 “ Release of Claims ” means the agreement that an Eligible Employee must execute in order to become a Participant
and to receive Separation Plan Benefits, which shall be prepared by the Employer or the Parent and shall contain such terms
and conditions as determined by the Employer or the Parent, including but not limited to a general release of claims, known
or unknown, that the Eligible Employee may have against the Employer (and the Parent and any of its subsidiaries and/or
affiliates), including claims related to the employment and termination of employment of the Eligible Employee; such
Release of Claims may also contain, in the Employer’s or the Parent's discretion, other terms and conditions including,
without limitation, cooperation in litigation, non-disclosure, confidentiality, non-disparagement, non-solicitation and/or non-
competition provisions.
2.41 “ Section 16 Officer ” means an “officer” as such term is defined in Rule 16(a)-1(f) of the Securities Exchange Act of
1934 of the Parent who is also an Eligible Employee of an Employer.
2.42 “ Separation Benefits ” means the benefits provided pursuant to Sections 4.2 and 4.3 of this Plan.
2.43 “ Separation Date ” means the Eligible Employee’s last day of employment with the Employer due to a Termination
due to Workforce Restructuring or, in the case of a Rebadged Employee, due to the outsourcing transaction. The Separation
Date of an Eligible Employee who dies prior to his or her scheduled Separation Date but after he or she was notified of a
scheduled Separation Date shall be deemed to have occurred on the day before his/her date of death. For
10
Grandfathered Legacy Schering Employees, "Separation Date" means the last day of employment with the Employer due to a
Grandfathered Legacy Schering Termination.
2.44 “ Separation Pay ” means the cash benefit payable under this Plan pursuant to Section 4.1 or to a Rebadged
Employee pursuant to Section 4.5.
2.45 “ Separation Plan Benefits ” means, collectively, Separation Pay, Separation Benefits and Outplacement Benefits.
2.46 "Termination Due to Non-Performance " means a termination of an Eligible Employee's employment as
determined and caused by the Employer due to the Eligible Employee's failure to perform his or her job assignments in a
satisfactory manner.
2.47 “ Termination due to Workforce Restructuring ” means the termination of an Eligible Employee's employment as
determined and caused by the Employer due to:
(a)the elimination of an Eligible Employee's job;
(b)organizational changes; or
(c)a general reduction of the workforce.
Whether an Eligible Employee's job is eliminated is determined by the Employer but excludes the maintenance of the
position with the elimination of a part-time or job share arrangement or other flexible work arrangement.
Organizational changes are determined by the Employer and include the following actions: discontinuance of operations,
location closings, corporate restructuring but exclude a reduction in job title, grade or band level, Base Pay Rate, short term
incentive opportunity (e.g., cash bonuses under any bonus or incentive plan or program of the Parent), long-term incentive
compensation opportunity, equity compensation opportunity and/or other forms of remuneration of an Eligible Employee
with or without a change in the Eligible Employee's job duties where such reduction is due to (i) a general change in the
Employer’s or the Parent’s compensation framework as it applies to similarly situated Eligible Employees (e.g., a change in
the general compensation framework applicable to similar jobs with the Employer, or an identifiable segment of the
Employer such as a subsidiary, division or department); (ii) an action to align the Eligible Employee with the Employer's or
the Parent's compensation and career framework as it applies to similarly situated Eligible Employees; or (iii) a demotion or
other action taken as a result of the Eligible Employee's performance or behaviors.
An Eligible Employee shall not be considered to have incurred a Termination due to Workforce Restructuring if his or her
employment with the Employer (i) does not end due to this Section 2.46 (a), (b) or (c) or (ii) ends as a result of any of the
events described in Section 3.1(d).
For the avoidance of doubt with respect to outsourcing transactions, (x) an Eligible Employee whose employment with the
Employer is terminated by the Employer in connection with the outsourcing of work by the Employer in a transaction with a
third‑party vendor where the individual is offered a Negotiated Job Offer and declines the Negotiated Job Offer because it is
an Offer Outside Geographic Parameters, is considered to have incurred a Termination due to Workforce Restructuring
provided his or her employment with the Employer does not end as a result of any of the events described in Section 3.1 (d),
and (y) a Rebadged Employee shall not be considered to have experienced a Termination due to Workforce Restructuring for
purposes the Plan.
11
2.48 “ U.S. Expatriate ” means a U.S. citizen or individual with U.S. Permanent Resident status who is employed by the
Employer and on assignment outside the U.S. and who is not an Excluded Person .
12
SECTION 3
ELIGIBILITY FOR BENEFITS
3.1 Eligibility .
(a) An Eligible Employee will be eligible for Separation Plan Benefits described in Section 4 (excluding Section
4.5) when he/she experiences a Termination due to Workforce Restructuring; provided, however, that a Legacy Inspire
Employee will be eligible for Separation Plan Benefits described in Section 4 (excluding Section 4.5) only if he/she
experiences a Termination due to Workforce Restructuring on or after May 17, 2013. A Grandfathered Legacy Schering
Employee will be eligible for Separation Plan Benefits described in Section 4 (excluding Section 4.5) if he or she experiences
a Grandfathered Legacy Schering Termination. Separation Plan Benefits shall be provided under this Plan to an Eligible
Employee who experiences a Termination due to Workforce Restructuring or to a Grandfathered Legacy Schering Employee
who experiences a Grandfathered Legacy Schering Termination, in each case only if the Eligible Employee or Grandfathered
Legacy Schering Employee has executed and, if a revocation period is applicable, not revoked a Release of Claims in a form
satisfactory to the Employer or Parent in its sole and nonreviewable discretion. An Eligible Employee or a Grandfathered
Legacy Schering Employee who has executed and, if a revocation period is applicable, not revoked a Release of Claims is a
Participant.
(b) A Rebadged Employee will be eligible for Separation Pay described in Section 4.5; provided, however, that a
Rebadged Employee who is a Legacy Inspire Employee will be eligible for Separation Pay described in Section 4.5 only if
his/her employment with an Employer is terminated by the Employer in connection with the outsourcing of work on or after
May 17, 2013. Separation Pay shall be provided under this Plan to a Rebadged Employee only if the Rebadged Employee has
executed and, if a revocation period is applicable, not revoked a Release of Claims in a form satisfactory to the Employer or
Parent in its sole and nonreviewable discretion. A Rebadged Employee who has executed and, if a revocation period is
applicable, not revoked a Release of Claims is a Participant. A Rebadged Employee is not eligible for Separation Benefits or
Outplacement Benefits.
(c) An Eligible Employee will also be entitled to receive those pension benefits set forth in Schedule D (Change in
Control/Pension) and retiree medical benefits set forth in Schedule E (Change in Control/Retiree Medical) if (i) a Change in
Control has occurred and (ii) within two years thereafter, the Eligible Employee’s employment with the Employer (or
successor employer) is terminated by the Employer (or successor employer) for any reason other than for Misconduct, death
or "Permanent Disability" (as such term is defined in the CIC Plan), and (iii) the Eligible Employee signs and returns the
release of claims in use under the CIC Plan and in accordance with the process established under the CIC Plan.
(d) Notwithstanding anything herein to the contrary, an Eligible Employee shall not be considered to have incurred
a Termination due to Workforce Restructuring under the Plan if his or her employment ends as a result of any of the
following events:
(i) a divestiture of a subsidiary, division or other identifiable segment of the Employer or Parent or a
transfer of the Eligible Employee to a joint venture or other business entity in which the Employer or the Parent
directly or indirectly will own some outstanding voting or other ownership interest, in each case where either
(x) the Eligible Employee is offered and accepts, or continues in, a Negotiated Job Offer; or
13
(y) the Eligible Employee is offered and declines a Negotiated Job Offer, unless the Negotiated Job
Offer is an Offer Outside Geographic Parameters with the acquiring entity or vendor;
(ii) the Employer's decision to outsource work to a third-party vendor where the Eligible Employee is a
Rebadged Employee;
(iii) the Eligible Employee's voluntary resignation for any reason including after reaching early or normal
retirement age under the retirement plan applicable to the Eligible Employee;
(iv) a termination for Misconduct;
(v) death (unless the Eligible Employee is not a Grandfathered Legacy Schering Employee and dies after
he/she has been notified of his/her scheduled Separation Date but before the Separation Date occurs and a valid
Release of Claims is executed by the Eligible Employee's estate) in which case the Eligible Employee's Separation
Date shall be deemed to have occurred on the day before his/her date of death;
(vi) the Eligible Employee terminating employment with the Employer prior to the date identified as the
date the employee would experience a Termination due to Workforce Restructuring unless the Employer expressly
agreed to waive this provision;
(vii) failure by the Eligible Employee (other than a Legacy Schering Grandfathered Employee) to return to
work at the Employer (or the Parent or any of its subsidiaries) for any reason, including, but not limited to the Eligible
Employee’s failure to secure a position at the Employer (or the Parent or any of its subsidiaries) upon a return from a
leave of absence for any reason; or
(viii) failure by a Legacy Schering Grandfathered Employee to return to work at the Employer (or the Parent
or any of its subsidiaries) within two years of his or her first day absent due to disability; or
(ix) the Eligible Employee's decision to decline a Qualified Alternative Position for any reason (including,
but not limited to because the employee is a part-time employee and is offered a full-time position, is a shift-worker
and the position offered is on a different shift or has a job share or other flexible work arrangement and the position
offered is not a job share or does not include a flexible work arrangement) that is offered to the Eligible Employee
prior to the Eligible Employee's Separation Date; or
(x) the Eligible Employee's decision to accept an alternate position with the Employer, Parent or any of its
subsidiaries (whether or not the position is a Qualified Alternative Position) and to later decline it; or
(xi) Termination Due to Non-Performance.
(e) Notwithstanding anything herein to the contrary, an Eligible Employee shall not be considered to be a Rebadged
Employee under the Plan if his or her employment ends as a result of any of the following events:
(i) a divestiture of a subsidiary, division or other identifiable segment of the Employer or Parent or a
transfer of the Eligible Employee to a joint venture or other business entity in which the Employer or the Parent
directly or indirectly will own some outstanding voting or other ownership interest;
(ii) the Employer's decision to outsource work to a third-party vendor where the Eligible Employee is
offered a Negotiated Job Offer and declines it because it is an Offer Outside Geographic Parameters;
14
(iii) the Eligible Employee's voluntary resignation for any reason including after reaching early or normal
retirement age under the retirement plan applicable to the Eligible Employee;
(iv) a termination for Misconduct;
(v) death (unless the Eligible Employee is not a Grandfathered Legacy Schering Employee and dies after
he/she has been notified of his/her scheduled Separation Date but before the Separation Date occurs and a valid
Release of Claims is executed by the Eligible Employee's estate) in which case the Eligible Employee's Separation
Date shall be deemed to have occurred on the day before his/her date of death;
(vi) the Eligible Employee terminating employment with the Employer prior to the date identified by the
Employer as the Separation Date unless the Employer expressly agreed to waive this provision;
(vii) failure by the Eligible Employee (other than a Legacy Schering Grandfathered Employee) to return to
work at the Employer (or the Parent or any of its subsidiaries) for any reason, including, but not limited to the Eligible
Employee’s failure to secure a position at the Employer (or the Parent or any of its subsidiaries) upon a return from a
leave of absence for any reason;
(viii) failure by a Legacy Schering Grandfathered Employee to return to work at the Employer (or the Parent
or any of its subsidiaries) within two years of his or her first day absent due to disability; or
(ix) Termination Due to Non-Performance.
3.2 Termination of Eligibility for Benefits . A Participant shall cease to participate in the Plan, and all Separation Plan
Benefits shall cease upon the occurrence of the earliest of:
(a) Termination of the Plan prior to, or more than two years following, a Change in Control;
(b) Inability of the Employer to pay Separation Plan Benefits when due;
(c) Completion of payment to the Participant of the Separation Plan Benefits for which the Participant is
eligible; and
(d) The Claims Reviewer's determination, in its sole discretion, of the occurrence of the Eligible Employee’s
Misconduct, regardless of whether such determination occurs before or after the Eligible Employee’s Separation Date,
unless the Claims Reviewer determines in its sole discretion that Misconduct shall not cause the cessation of Separation
Plan Benefits in a particular case.
15
SECTION 4
BENEFITS
4.1 Separation Pay . Separation Pay shall be payable under this Plan to a Participant who is not a Rebadged Employee as
set forth on Schedule B-1. The terms of Schedule B-1 are hereby fully incorporated into and shall be considered as part of
Section 4 of this Plan. For Separation Pay payable under this Plan to a Rebadged Employee, see Section 4.5 of this Plan.
4.2
Medical and Dental Benefits For Participants With a Separation Date Before January 1, 2017:
(a) A Participant who is covered under any of the Employer's group employee medical and dental plans as of his or
her Separation Date shall be provided the opportunity to elect to continue such active coverage, as it may be amended from
time to time, in accordance with the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, Section
4980B of the Code, and Section 601, et seq., of ERISA (“COBRA”) and in accordance with the Employer’s regular COBRA
coverage payment practices, at active employee rates, as the same may be changed from time to time, for his or her Benefits
Continuation Period, as determined in accordance with Schedule B-2. The terms of such Schedule B-2 are hereby fully
incorporated into and shall be considered as part of Section 4 of this Plan.
(b) A Participant who does not elect to continue employee medical and/or dental coverage in accordance with
COBRA shall not be eligible for employee medical and/or dental benefit continuation coverage at active employee rates
during his or her Benefits Continuation Period nor will he or she be eligible to continue such active coverage during the
COBRA continuation period at the full COBRA premium.
(c) A Participant who, prior to his or her Separation Date, had elected no employee medical or dental coverage
under the applicable medical or dental plan will not be permitted to change from no medical and/or dental coverage to
coverage as a result of a Termination due to Workforce Restructuring or a Grandfathered Legacy Schering Termination.
(d) Provided the Participant elects to continue coverage under COBRA, employe medical and dental continuation
coverage, as it may be amended from time to time, at active rates shall begin on the first day of the month
coincident with or following the Participant's Separation Date and shall end on the last day of the month in which
the Benefits Continuation Period ends, provided the Participant pays the required contributions for coverage in the
time and manner required under COBRA. If the Participant fails to pay the required contributions for coverage in
the time and manner required under COBRA, or the Participant elects to terminate active medical and/or dental
coverage, coverage will end as of the last day of the month for which the contribution was paid and it will not be
reinstated. If the Participant has dental coverage on the last day of the Benefits Continuation Period, the
Participant may be eligible to continue the dental coverage in effect at the end of the Benefits Continuation Period
for the remaining COBRA period, if any, in accordance with COBRA by paying the full COBRA premium. If the
Participant is eligible to participate in the Merck Retiree Medical Plan as of his or her Separation Date at
subsidized or unsubsidized retiree rates, see Section (e) below.
16
(e) If, as of his or her Separation Date, a Participant is eligible to participate in the Merck Retiree Medical Plan at
subsidized or unsubsidized rates, then he or she (i) shall be eligible to continue employee medical and dental benefits in
accordance with this Section 4.2 and, (ii) if eligible for subsidized rates, following the completion of the Benefits
Continuation Period, shall be eligible for retiree medical benefits at subsidized rates under the terms of the Merck Retiree
Medical Plan applicable to such Participant, as it may be amended from time to time, provided that those eligible dependents
who are age 65 or older and Medicare-eligible will only be eligible to participate in the Merck HRA component of the Merck
Retiree Medical Plan, and (iii) if eligible for unsubsidized rates, following the completion of the Benefits Continuation Period
and, if applicable, the COBRA period described in Section (f) below, shall be eligible for retiree medical benefits at
unsubsidized rates under the terms of the Merck Retiree Medical Plan applicable to such Participant, as it may be amended
from time to time provided that those eligible dependents who are age 65 or older and Medicare-eligible will not be eligible
to participate in the Merck Retiree Medical Plan. If a Participant is not eligible to continue employee medical coverage
during the Benefits Continuation Period (e.g., because the Participant had no active coverage on his/her Separation Date or
he/she failed to timely elect continuation coverage under COBRA) or the Participant's employee medical coverage ends
during the Benefits Continuation Period (for any reason, including non-payment), the Participant cannot enroll for medical
coverage as a retiree until the end of the Benefits Continuation Period. If the Participant elects to end the Benefits
Continuation Period earlier than the period set forth on Schedule B-2 as permitted in Section 2.4, all employee medical
and/or dental benefit coverage that the Participant would otherwise have been eligible to receive during the maximum
Benefits Continuation Period will be permanently and irrevocably forfeited. A Participant cannot be covered as an employee
and as a retiree (even under the retiree no coverage option, if available) in a medical plan of an Employer (or Parent) during
the same period; provided, however, that a Participant may be covered through COBRA at full COBRA rates (for the
remainder of the COBRA period only) for dental coverage even if during that period the Participant is also covered as a
retiree for medical coverage.
(f) If, as of his or her Separation Date, a Participant is not eligible to participate in a retiree medical plan of an
Employer (or Parent) or is eligible to participate in a retiree medical the Merck Retiree Medical Plan at unsubsidized rates,
then following the completion of the Benefits Continuation Period (provided coverage has not terminated prior thereto for
any reason, including failure to pay the required contribution) he or she may be eligible to continue coverage in effect at the
end of the Benefits Continuation Period for the remaining COBRA period, if any, in accordance with COBRA by paying the
full COBRA premium.
(g) Rebadged Employees are not eligible for continuation of active medical and dental benefits at active
contribution rates during the Benefits Continuation Period described in this Section 4.2.
Medical and Dental Benefits For Participants With a Separation Date On or After January 1, 2017:
(a) A Participant who is covered under any of the Employer's group employee medical and dental plans as of his or
her Separation Date will be provided the opportunity to continue such employee coverage during his or her Benefits
Continuation Period, as determined in accordance with Schedule B-2 of this SPD. as such coverage may be amended from
time to time, in accordance with the terms and conditions of such plans, provided the Participant timely pays the required
contribution to continue coverage. The required contribution is calculated at active employee rates, as the same may be
changed from time to time, during his or her Benefits Continuation Period.
17
(b) A Participant who, prior to his or her Separation Date, had elected no employee medical or dental coverage
under the applicable employee medical or dental plan will not be permitted to change from no medical and/or dental coverage
to coverage as a result of a Termination due to Workforce Restructuring.
(c) Employee medical and dental continuation coverage, as it may be amended from time to time, at active rates
shall continue during the Benefits Continuation Period. The Benefits Continuation Period begins on the first day of the month
following the Participant's Separation Date and shall end on the last day of the month in which the Benefits Continuation
Period ends as determined in accordance with Schedule B-2 of this SPD, provided the Participant pays the required
contributions for coverage in the time and manner required. If the Participant fails to pay the required contributions for
coverage in the time and manner required, or the Participant elects to terminate active medical and/or dental coverage,
coverage will end as of the last day of the month for which the contribution was paid and it will not be reinstated during the
Benefits Continuation Period. If the Participant has medical and/or dental coverage on the last day of the Benefits
Continuation Period, the Participant may be eligible to continue coverage in effect at the end of the Benefits Continuation
Period in accordance with COBRA by timely electing and paying the full COBRA premium.
(d) If, as of his or her Separation Date, a Participant is eligible to participate in the Merck Retiree Medical Plan at
subsidized rates, then he or she (i) shall be eligible to continue employee medical and dental benefits in accordance with this
Section 4.2 and, (ii) following the completion of the Benefits Continuation Period, shall be eligible for retiree medical
benefits at subsidized rates under the Merck Retiree Medical Plan, as it may be amended from time to time, provided that
those eligible dependents who are age 65 or older and Medicare-eligible will only be eligible to participate in the Merck HRA
component of the Merck Retiree Medical Plan. If a Participant is not eligible to continue active medical coverage during the
Benefits Continuation Period (i.e., because the Participant had no employee coverage on his/her Separation) or the
Participant's employee medical coverage ends during the Benefits Continuation Period (for any reason, including non-
payment), the Participant cannot enroll for medical coverage as a retiree until the end of the Benefits Continuation Period. If
the Participant elects to end the Benefits Continuation Period earlier than the period set forth on Schedule B-2 as permitted in
Section 2.4, all employee medical and/or dental benefit coverage that the Participant would otherwise have been eligible to
receive during the maximum Benefits Continuation Period will be permanently and irrevocably forfeited. A Participant
cannot be covered as an employee and as a retiree (even under the retiree no coverage option, if available) in a medical plan
of an Employer (or Parent) during the same period; provided, however, that a Participant may be covered through COBRA at
full COBRA rates for dental coverage even if during that period the Participant is also covered as a retiree for medical
coverage.
(e) Rebadged Employees are not eligible for continuation of employee medical and dental benefits at active
contribution rates during the Benefits Continuation Period described in this Section 4.2.
4.3 Life Insurance Benefits
(a) A Participant shall be eligible to continue Basic Life Insurance coverage at no cost to the Participant during his
or her Benefits Continuation Period, as determined in accordance with Schedule B-2, subject to and in accordance with the
terms of the applicable life insurance plan as
18
they may be amended from time to time. The Participant is responsible for paying applicable tax on imputed income, if any,
for Basic Life Insurance coverage during his or her Benefits Continuation Period. The terms of such Schedule B-2 are hereby
fully incorporated into and shall be considered as part of Section 4 of this Plan.
(b) Basic Life Insurance coverage shall end on the last day of the month in which the Benefits Continuation Period
ends. If the Participant elects to end the Benefits Continuation Period earlier than the period set forth on Schedule B-2 as
permitted in Section 2.4, all Basic Life Insurance coverage that the Participant would otherwise have been eligible to receive
during the maximum Benefits Continuation Period will be permanently and irrevocably forfeited.
(c) Rebadged Employees are not eligible for the life insurance benefits described in this Section 4.3.
4.4 Outplacement Benefits . Benefits for outplacement counseling or other outplacement services, as set forth in Schedule
C, will be made available to a Participant. The terms of such Schedule C are hereby fully incorporated into and shall be
considered as part of Section 4 of this Plan. Outplacement benefits shall be provided in kind; cash shall not be paid in lieu of
outplacement benefits nor will Separation Pay be increased if a Participant declines or does not use the outplacement
benefits. Rebadged Employees are not eligible for outplacement benefits described in this Section 4.4.
4.5. Separation Pay for Rebadged Employees . A Rebadged Employee who is a Participant shall be eligible for
Separation Pay under this Plan in an amount equal to 50% of the Separation Pay that would be payable had he or she
experienced a Termination due to Workforce Restructuring.
For the avoidance of doubt, a Rebadged Employee shall not be eligible for any Separation Plan Benefits other than the
Separation Pay described in this Section 4.5.
4.6 Reduction of Benefits . Notwithstanding anything in this Plan to the contrary, a Participant's Separation Pay
(including Separation Pay described in Section 4.5) and Separation Benefits, if applicable, shall be reduced by:
(a) any amount the Plan Administrator reasonably concludes the Participant owes the Employer (or the Parent or
any subsidiary or affiliate of the Parent) including, without limitation, unpaid bills under the corporate credit card program,
and for vacation used, but not earned;
(b) any severance or severance type benefits that the Employer (or the Parent or any subsidiary or affiliate of the
Parent) must pay to a Participant under applicable law;
(c) where permitted by law, any payments received by the Participant pursuant to state workers compensation laws;
(d) short-term disability benefits where state law does not permit Separation Pay to be offset from short-term
disability benefits (or where the Employer in its sole and absolute discretion determines it is administratively easier for the
Employer to reduce Separation Pay by short-term disability benefits in lieu of reducing short-term disability benefits by
Separation Pay);
(e) For Participants whose employment ends on or after January 1, 2017 who experienced one or more one-way
transfers from a non-U.S. subsidiary to another non-U.S. subsidiary and/or to a U.S. subsidiary, any severance or severance
type benefits paid by the Parent or any subsidiary or affiliate of the Parent to the Participant as a result of such transfer(s),
provided
19
such amount is determined using the exchange rate on the date(s) of the one-way transfer(s) or the Separation Date,
whichever provides the lowest amount.
Notwithstanding anything in the Plan to the contrary, a Participant’s Separation Pay (including Separation Pay described in
Section 4.5) and Separation Benefits are not meant to duplicate pay and benefits provided by the Employer (or the Parent or
any of its subsidiaries) in connection with any Participant's Termination due to Workforce Restructuring or in connection
with a Participant's termination due to the outsourcing of work to a third-party vendor, including pay and benefits under the
federal Worker Adjustment Retraining and Notification Act and any state or local equivalent (collectively, the "WARN
Act"). If the Plan Administrator determines that a Participant is entitled to WARN Act damages or WARN Act notice, the
Plan Administrator in its sole and absolute discretion may reduce the Participant's Separation Pay and Separation Benefits
under the Plan by the WARN Act damages or pay and benefits after receiving WARN Act notice, but not below $500, with
the remaining Separation Pay and Separation Benefits provided to the Participant in accordance with the terms of the Plan in
satisfaction of the Participant's WARN Act notice rights or damages. In all other cases, Separation Pay paid under the Plan in
excess of $500 will be treated as having been paid to satisfy any WARN Act damages, if applicable.
20
SECTION 5
FORM AND TIMING OF BENEFITS; FORFEITURE
AND REPAYMENT OF BENEFITS
5.1 Form and Time of Payment
(a) Except as otherwise provided in subsection (b), Separation Pay, less taxes and applicable deductions shall be
paid in a lump sum as soon as practicable after the Participant's Termination due to Workforce Restructuring (or in the case
of a Rebadged Employee, after termination of employment due to the outsourcing transaction) and the expiration of any
period during which the Participant may consider, sign and, if a revocation period is applicable, revoke the Release of
Claims, but in no event later than March 15 of the calendar year following the year of a Participant's Separation Date.
(b) If it is determined by the Employer or Parent in its discretion, that (i) the Participant is, as of his or her
Separation Date, a "specified employee" (as such term is defined in Section 409A(2)(B) of the Code); and (ii) the Separation
Pay payable pursuant to the terms of the Plan constitutes nonqualified deferred compensation that would subject the
Participant to “additional tax” under Section 409A(a)(1)(B) of the Code (the "409A Tax"), then the payment of Separation
Pay will be postponed to the first business day of the seventh month following the Separation Date or, if earlier, the date of
the Participant's death.
5.1 Taxes . Separation Pay payable under this Plan shall be subject to the withholding of appropriate federal, state and
local taxes.
Notwithstanding anything in this Plan to the contrary, the Employer or Parent will take such actions as it deems necessary, in
its sole and absolute discretion, to avoid the imposition of a 409A Tax at such time and in such manner as permitted under
Section 409A of the Code, including, but not limited to, reducing or eliminating benefits and changing the time or form of
payment of benefits.
5.3 Forfeiture of Benefits . The Employer reserves the right, in its sole and absolute discretion, to cancel all Separation
Plan Benefits and seek the return of Separation Pay in the event a Participant engages in any activity that the Employer
considers detrimental to its interests (or the interests of the Parent or any of its subsidiaries) as determined by the Parent’s
Executive Vice President and General Counsel and the Parent’s Executive Vice President, Human Resources. Activities that
the Employer considers detrimental to its interest (or the interests of the Parent or any of its subsidiaries) include, but are not
limited to:
(a) breach of any obligations of the Participant's terms and conditions of employment;
(b) making false or misleading statements about the Employer, the Parent or any of its subsidiaries or their products,
officers or employees to competitors, customers, potential customers of the Employer, the Parent or any of its subsidiaries or
to current or former employees of the Employer, the Parent or any of its subsidiaries; and
(c) breaching any terms of the Release of Claims, including any non-solicitation or non-competition provisions, if
applicable.
21
5.4 Cessation of Separation Pay and Separation Benefits . Separation Pay, Outplacement Benefits and Separation
Benefits shall cease in the event a Participant is rehired by the Employer, the Parent or one of its subsidiaries or affiliates
other than Telerx Marketing, Inc.
5.5 Return of Separation Pay . Upon the occurrence of an event described in Section 5.3 or 5.4 of this Plan, the
Participant shall repay to the Employer that portion of the lump sum amount that would not have been paid had the
Separation Pay been paid in weekly installments from the Participant's Separation Date. If the Participant receives short-term
disability benefits from the Employer after his or her Separation Date, the Employer reserves the right to seek repayment by
the Participant of that portion of the Separation Pay that would not have been paid in accordance with Section 4.6 had the
Separation Pay been paid in installments.
5.6 Death of Participant .
For Participants Who Die Before January 1, 2017:
If a Participant dies before January 1, 2017 following his or her Separation Date and a valid Release of Claims was signed by
the Participant or is signed by the Participant's estate then
(a) any unpaid Separation Pay will be paid to the Participant's estate; and
(b) if the Participant was eligible to continue medical and/or dental coverage during the Benefits Continuation
Period on the Participant's date of death and the Participant’s surviving dependents were covered under the Participant's
medical and dental coverages (other than coverages applicable to retirees and their dependents) on that date, they may
continue such employee coverage for the balance of the Benefits Continuation Period, provided they continue to remain
eligible dependents and they pay the applicable contributions at active employee rates, as they may change from time to time,
to continue coverage. Thereafter, if, as of his or her Separation Date, such Participant (i) was eligible to participate in the
Merck Retiree Medical Plan at subsidized rates, then following the completion of the Benefits Continuation Period, surviving
eligible dependents shall be eligible for retiree medical benefits at subsidized rates under the terms of the Merck Retiree
Medical Plan applicable to such Participant, as may be amended from time to time, provided that those eligible dependents
who are age 65 or older and Medicare-eligible will only be eligible to participate in the Merck HRA component of the Merck
Retiree Medical Plan, or (ii) was eligible to participate in the Merck Retiree Medical Plan at unsubsidized rates, then
following the completion of the Benefits Continuation Period the surviving dependents may be eligible to continue coverage
in effect at the end of the Benefits Continuation Period for the remaining COBRA period, if any, in accordance with COBRA
by paying the full COBRA premium and thereafter may be eligible for retiree medical benefits at unsubsidized rates under
the terms of the Merck Retiree Medical Plan applicable to such Participant, as may be amended from time to time, provided
that those eligible dependents who are age 65 or older and Medicare-eligible will not be eligible to participate in the Merck
Retiree Medical Plan or (iii) was not eligible to participate in the Merck Retiree Medical Plan at subsidized or unsubsidized
rates, then following the completion of the Benefits Continuation Period the surviving dependents may be eligible to continue
coverage in effect at the end of the Benefits Continuation Period for the remaining COBRA period, if any, in accordance with
COBRA by paying the full COBRA premium, or (iv) was not eligible to participate in the Merck Retiree Medical Plan at
subsidized or unsubsidized rates but had at least 25 years of service as of his/her date of death, then following the completion
of the Benefits Continuation Period, surviving eligible dependents shall be eligible for medical benefits at subsidized rates
under the terms of medical plan that would have been applicable to such Participant if he/she had been eligible for long term
disability benefits, as may be amended from time to time; and
22
(c) if the if the Participant was eligible to continue medical coverage during the Benefits Continuation Period
on the Participant's date of death and the Participant’s surviving dependents were not covered under the Participant's medical
coverage at the time of the Participant’s death or if the Participant was not eligible to continue medical coverage during the
Benefits Continuation Period and, in either case, if as of his or her Separation Date, such Participant (i) was eligible to
participate in the Merck Retiree Medical Plan at subsidized or unsubsidized rates, then following the date of death, surviving
eligible dependents who were not then enrolled for coverage under the Participant’s medical coverage shall be eligible to
enroll for retiree medical benefits at the subsidized or unsubsidized rates, as applicable, under the terms of the Merck Retiree
Medical Plan applicable to such Participant, as may be amended from time to time, provided that those eligible dependents
who are age 65 or older and Medicare-eligible will only be eligible to participate in the Merck HRA component of the Merck
Retiree Medical Plan and will only be eligible for such coverage if they are eligible for subsidized coverage (dependents
eligible for unsubsidized coverage are not eligible to participate in the Merck HRA component of the Merck Retiree Medical
Plan), or (ii) was not eligible to participate in the Merck Retiree Medical Plan at subsidized or unsubsidized rates but had at
least 25 years of service as of his/her date of death, then following the date of death, surviving eligible dependents who were
not then enrolled for coverage under the Participant’s medical coverage shall be eligible to enroll for medical benefits at
subsidized rates under the terms of medical plan that would have been applicable to such Participant if he/she had been
eligible for long term disability benefits, as may be amended from time to time.
Medical and dental coverage under this Section 5.6 shall be subject to and in accordance with the terms of the applicable
plans as they may be amended from time to time.
The Separation Date of an Eligible Employee who dies prior to his or her scheduled Separation Date but after he or she was
notified of a scheduled Separation Date shall be deemed to have occurred on the day before his/her date of death.
For Participants Who Die On or After January 1, 2017:
If a Participant dies on or after January 1, 2017 following his or her Separation Date and a valid Release of Claims was
signed by the Participant or is signed by the Participant's estate then
(a) any unpaid Separation Pay will be paid to the Participant's estate; and
(b) if the Participant was eligible to continue medical and/or dental coverage during the Benefits Continuation Period on the
Participant's date of death and the Participant’s surviving dependents were covered under the Participant's medical and
dental coverages at the time of the Participant’s death, they may continue such employee coverage for the balance of the
Benefits Continuation Period, provided they continue to remain eligible dependents and they pay the applicable contributions
at active employee rates, as they may change from time to time, to continue coverage. Thereafter, if, as of his or her
Separation Date, such Participant (i) was eligible to participate in the Merck Retiree Medical Plan at subsidized rates, then
following the completion of the Benefits Continuation Period, surviving eligible dependents shall be eligible for retiree
medical benefits at subsidized rates under the terms of Merck Retiree Medical Plan, as may be amended from time to time,
provided that those eligible dependents who are age 65 or older and Medicare-eligible will only be eligible to participate in
the Merck HRA component of the Merck Retiree Medical Plan, or (ii) was not eligible to participate in the Merck Retiree
Medical Plan at subsidized rates, then following the completion of the Benefits Continuation Period the surviving dependents
may be eligible to continue coverage in effect at the end of the Benefits Continuation Period in accordance with COBRA by
timely electing COBRA coverage and paying the full
23
COBRA premium; or (iii) was not eligible to participate in the Merck Retiree Medical Plan at subsidized rates but had at
least 25 years of service as of his/her Separation Date, then following the completion of the Benefits Continuation Period,
surviving eligible dependents shall be eligible for retiree medical benefits at subsidized rates under the terms of the Merck
Retiree Medical Plan, as may be amended from time to time, provided that those eligible dependents who are age 65 or older
and Medicare-eligible will only be eligible to participate in the Merck HRA component of the Merck Retiree Medical Plan;
and
(c) if the Participant was eligible to continue medical coverage during the Benefits Continuation Period on the Participant's
date of death and the Participant’s surviving dependents were not covered under the Participant's medical coverage at the
time of the Participant’s death or if the Participant was not eligible to continue medical coverage during the Benefits
Continuation Period and, in either case, if as of his or her Separation Date, such Participant (i) was eligible to participate in
the Merck Retiree Medical Plan at subsidized rates, then following the date of death, surviving eligible dependents who were
not then enrolled for coverage under the Participant’s medical coverage shall be eligible to enroll for retiree medical benefits
at subsidized rates under the terms of Merck Retiree Medical Plan, as may be amended from time to time, provided that those
eligible dependents who are age 65 or older and Medicare-eligible will only be eligible to participate in the Merck HRA
component of the Merck Retiree Medical Plan; or (ii) was not eligible to participate in the Merck Retiree Medical Plan at
subsidized rates but had at least 25 years of service as of his/her Separation Date, then following the date of death, surviving
eligible dependents who were not then enrolled for coverage under the Participant’s medical coverage shall be eligible to
enroll for medical benefits at subsidized rates under the terms of the Merck Retiree Medical Plan, as may be amended from
time to time, provided that those eligible dependents who are age 65 or older and Medicare-eligible will only be eligible to
participate in the Merck HRA component of the Merck Retiree Medical Plan.
Medical and dental coverage under this Section 5.6 shall be subject to and in accordance with the terms of the applicable
plans as they may be amended from time to time.
The Separation Date of an Eligible Employee who dies prior to his or her scheduled Separation Date but after he or she was
notified of a scheduled Separation Date shall be deemed to have occurred on the day before his/her date of death.
24
SECTION 6
PLAN ADMINISTRATION
6.1 Plan Administrator . Parent or its delegate is the Plan Administrator for purposes of ERISA.
6.2 Powers and Duties of Plan Administrator . The Plan Administrator or its delegate shall have the full discretionary
power and authority to: (i) construe and interpret the Plan (including, without limitation, supplying omissions from,
correcting deficiencies in, or resolving inconsistencies or ambiguities in, the language of the Plan); (ii) determine all
questions of fact arising under the Plan, including questions as to eligibility for and the amount of benefits; (iii) establish such
rules and regulations (consistent with the terms of the Plan) as it deems necessary or appropriate for administration of the
Plan; (iv) delegate responsibilities to others to assist in administering the Plan; and (v) perform all other acts it believes
reasonable and proper in connection with the administration of the Plan. The Plan Administrator or its delegate shall be
entitled to rely on the records of the Employer in determining any Participant's entitlement to and the amount of benefits
payable under the Plan. Any determination of the Plan Administrator or its delegate, including interpretations of the Plan and
determinations of questions of fact, shall be final and binding on all parties.
With respect to determining claims and appeals for benefits under this Plan, the Claims Reviewer (and its delegate) shall be
deemed to be the delegate of the Plan Administrator and shall have all of the powers and duties of the Plan Administrator
described above.
6.3 Additional Discretionary Authority . The Plan Administrator may, upon written approval of the Parent’s Executive
Vice President, Human Resources (written approval of the Compensation and Benefits Committee of the Board of Directors
of the Parent or its delegate with respect to Section 16 Officers), take the following actions under the Plan:
(a)
(b)
eligible for such benefits under Section 3 above;
Employees to execute a Release of Claims; and
grant some, all or any portion of the benefits under this Plan to an employee who would not otherwise be
waive the requirement set forth in Section 3 for any individual Eligible Employee or group of Eligible
(c)
grant additional Separation Plan Benefits to a Participant.
25
SECTION 7
CLAIMS AND APPEALS PROCEDURES
7.1 Claims .
(a)
Any request or claim for benefits under the Plan must be filed by a claimant or the claimant’s authorized
representative within 60 days after the date claimant’s employment with an Employer ends; provided, however, for claims
under Section 5.3, claims must be filed within 60 days after the date Separation Plan Benefits are cancelled.
(b)
Any request or claim for benefits under the Plan shall be deemed to be filed when a written request made
by the claimant or the claimant's authorized representative addressed to the Claims Reviewer at the address below is received
by the Claims Reviewer.
Claims Reviewer for the Separation Benefits Plan
c/o Secretary of the Merck & Co., Inc. Employee Benefits Committee
Merck & Co., Inc.
2000 Galloping Hill Road
Mailstop K-1 3029
Kenilworth, NJ 07033
The claim for benefits shall be reviewed by, and a determination shall be made by, the Claims Reviewer, within the
timeframe required for notice of adverse benefit determinations described below.
(c) The Claims Reviewer shall provide written or electronic notification to the claimant or the claimant’s authorized
representative of any “adverse benefit determination.” Such notice shall be provided within a reasonable time but not later
than 90 days after the receipt by the Claims Reviewer of the claimant's claim, unless the Claims Reviewer determines that
special circumstances require an extension of time for processing the claim. If the Claims Reviewer determines that an
extension of time for processing is required, written notice of the extension shall be furnished to the claimant before the
expiration of the initial 90-day period indicating the special circumstances requiring an extension and the date by which the
Claims Reviewer expects to render the benefit determination. No extension can exceed 90 days from the end of the initial 90-
day period (i.e., 180 days from the receipt of the claim by the Claims Reviewer) without the consent of the claimant or the
claimant’s authorized representative.
(d) An “adverse benefit determination” is a denial, reduction, or termination of, or a failure to provide or make
payment (in whole or part) for a benefit, including one that is based on a determination of a claimant’s eligibility to
participate in the Plan.
(e) The notice of adverse benefit determination shall be written in a manner calculated to be understood by the
claimant and shall:
(i) set forth the specific reasons for the adverse benefit determination;
(ii) contain specific references to Plan provisions on which the determination is based;
(iii) describe any material or information necessary for the claim for benefits to be allowed and an
explanation of why such information is necessary; and
26
(iv) describe the Plan’s appeal procedures and the time limits applicable to such procedures, including a
statement of the claimant’s right to bring a civil action under section 502(a) of ERISA following an adverse benefit
determination on review.
7.2 Appeals of Adverse Benefit Determinations .
(a) Any request to review the Claims Reviewer’s adverse benefit determination under the Plan must be filed by a
claimant or the claimant’s authorized representative in writing within 60 days after receipt by the claimant of written
notification of adverse benefit determination by the Claims Reviewer. If the claimant or the claimant’s authorized
representative fails to file a request for review of the Claims Reviewer’s adverse benefit determination in writing within 60
days after receipt by the claimant of written notification of adverse benefit determination, the Claims Reviewer’s
determination shall become final and conclusive.
(b) Any request to review an adverse benefit determination under the Plan shall be deemed to be filed when a
written request is made by the claimant or the claimant's authorized representative addressed to the Employee Benefits
Committee at the address below is received by the Secretary of the Employee Benefits Committee.
Merck & Co., Inc. Employee Benefits Committee
c/o Secretary Employee Benefits Committee
Merck & Co., Inc.
2000 Galloping Hill Road
Mailstop K-1 3029
Kenilworth, NJ 07033
(c) If the claimant or the claimant’s authorized representative timely files a request for review of the Claims
Reviewer’s adverse benefit determination as specified in this Section 7.2, the Employee Benefits Committee shall re-examine
all issues relevant to the original adverse benefit determination taking into account all comments, documents, records, and
other information submitted by the claimant or the claimant’s authorized representative relating to the claim, without regard
to whether such information was submitted or considered in the initial benefit determination. Any such claimant or his or her
duly authorized representative may:
(i) upon request and free of charge have reasonable access to, and copies of, all documents, records, and
other information relevant to the claimant’s claim for benefits; whether an item is relevant shall be determined by the
Employee Benefits Committee in accordance with 29 CFR 2560.503-1 (m)(8); and
(ii) submit in writing any comments, documents, records, and other information relating to the claim for
benefits.
(d) The Claims Reviewer shall provide written or electronic notice to the claimant or the claimant’s authorized
representative of its benefit determination on review. Such notice shall be provided within a reasonable time but not later than
60 days after the receipt by the Claims Reviewer of the claimant's request for review, unless the Claims Reviewer determines
that special circumstances require an extension of time for processing the request for review. If the Claims Reviewer
determines that an extension of time for processing is required, written notice of the extension shall be furnished to the
claimant before the expiration of the initial 60-day period indicating the special circumstances requiring an extension and the
date by which the Claims Reviewer expects to render the benefit determination. No extension can exceed 60 days from the
end of the initial 60-day period (i.e., 120 days from the date the request for review is received by
27
the Claims Reviewer) without the consent of the claimant or the claimant’s authorized representative.
(e) If the claimant’s appeal is denied, the notice of adverse benefit determination on review shall be written in a
manner calculated to be understood by the claimant and shall:
(i) set forth the specific reasons for the adverse benefit determination on review;
(ii)
contain specific references to Plan provisions on which the
benefit determination is based;
(iii)
contain a statement that the claimant is entitled to receive,
upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information
relevant to the claimant’s claim for benefits; whether an item is relevant shall be determined by the Claims Reviewer
in accordance with 29 CFR 2560.503-1 (m)(8); and
(iv)
include a statement of the claimant’s right to bring a civil action under section 502(a) of ERISA.
28
SECTION 8
AMENDMENT AND TERMINATION
8.1 Amendment and Termination .
(a) Except as otherwise set forth in subsection (b) below, Parent or its delegate has the right to amend, suspend or
terminate the Plan at any time without prior notice to or the consent of any employee; provided, however, that amendments
that apply only to Section 16 Officers must also be approved by the Compensation and Benefits Committee of the Board of
Directors of Parent or its delegate. No such amendment shall give the Employer or Parent the right to recover any amount
paid to a Participant prior to the date of such amendment. Any such amendment, however, may cause the cessation and
discontinuance of payments of Separation Plan Benefits to any person or persons under the Plan. Parent may delegate the
authority to amend, suspend or terminate the Plan to the person, entity or committee selected by the Chief Executive Officer
and as set forth in the applicable written corporate grant signed by the Chief Executive Officer (the “Corporate Grant”). Such
Corporate Grant shall allow for the delegation of the authority to an individual, entity or committee; provided the financial
impact of such amendment, suspension or termination does not exceed certain predetermined thresholds identified in the
applicable Corporate Grant. The person, entity or committee provide with the authority to amend, suspend or terminate the
Plan by the Corporate Grant, may further delegate the authority to amend, suspend or terminate the Plan to an individual,
entity or committee, in accordance with the appropriate corporate action. Amendments to the Plan must be in writing and
approved in accordance with the Corporate Grant.
(b) Except to the extent required by applicable law, for the entirety of the Protection Period, the material terms of
the Plan, including this Section 8.1, shall not be modified in any manner that is materially adverse to a Qualifying Participant.
(c) Parent or any such successor to Parent, shall pay all legal fees and related expenses (including the costs of
experts, evidence and counsel) reasonably and in good faith incurred by a Qualifying Participant if the Qualifying Participant
prevails on at least one material item of his or her claim for relief in an action (x) by the Qualifying Participant claiming that
the provisions of this Section 8.1 have been violated (but, for the avoidance of doubt, excluding claims for plan benefits in
the ordinary course) and (y) if applicable, by the Employer, Parent or its successor to enforce post-termination covenants
against the Qualifying Participant.
(d) Definitions . For purposes of this Section 8.1:
(i) “ Protection Period ” shall mean the period beginning on the date of the Change in Control and ending on
the second anniversary of the date of the Change in Control; and
(ii) “ Qualifying Participant ” shall mean an individual who is an Eligible Employee or a Participant as of the
date immediately prior to the Change in Control.
29
SECTION 9
GENERAL PROVISIONS
9.1 Unfunded Obligation . Separation Plan Benefits provided under this Plan shall constitute an unfunded obligation of
the Employer. Payments shall be made, as due, from the general funds of the Employer. This Plan shall constitute solely an
unsecured promise by the Employer to pay such benefits to Participants to the extent provided herein.
9.2 Applicable Law . It is intended that the Plan be an "employee welfare benefit plan" within the meaning of Section 3(1)
of ERISA, and the Plan shall be administered in a manner consistent with such intent. The Plan and all rights thereunder shall
be governed and construed in accordance with ERISA and, to the extent not preempted by federal law, with the laws of the
state of New Jersey, wherein venue shall lie for any dispute arising hereunder.
9.3 Severability . If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts of this Plan, but this Plan shall be construed and enforced as if said illegal or invalid
provision had never been included herein.
9.4 Employment at Will . Nothing contained in this Plan shall give an employee the right to be retained in the
employment of the Employer or shall otherwise modify the employee's at will employment relationship with the Employer.
This Plan is not a contract of employment between the Employer and any employee.
9.5 Heirs, Assigns, and Personal Representatives . The Plan shall be binding upon the heirs, executors, administrators,
successors, and assigns of the parties, including each Participant, present and future.
9.6 Payments to Incompetent Persons, Etc . Any benefit payable to or for the benefit of a minor, an incompetent person
or other person incapable of receipting therefore shall be deemed paid when paid to such person’s guardian or to the party
providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the
Employer, Parent, the Plan Administrator, the Claims Administrator and all other parties with respect thereto.
9.7 Lost Payees . Benefits shall be deemed forfeited if the Plan Administrator is unable to locate a Participant to whom
Separation Plan Benefits are due. Such Separation Plan Benefits shall be reinstated if application is made by the Participant
for the forfeited Separation Plan Benefits within one year of the Participant’s Separation Date and while the Plan is in
operation.
30
SCHEDULE A
List of participating Employers:
All U.S. direct and indirect wholly owned subsidiaries of Merck & Co. Inc. excluding the following and their subsidiaries:
• Comsort, Inc.
•
Inspire Pharmaceuticals, Inc. (excluded effective May 16, 2011 through 5/17/2013 ; included effective May 17, 2013
through November 15, 2013 ; excluded effective November 15, 2013)
• TELERx Marketing, Inc.
• Vree Health LLC
• Merck Global Health Innovation Fund, LLC
•
• HMR Weight Management Services Corp. (excluded effective November 18, 2013)
Sirna Therapeutics, Inc. (excluded effective December 31, 2013)
31
SCHEDULE B-1
Separation Pay for Participants with a
Separation Date Occurring on or after January 1, 2013
Amount of Separation Pay in weeks (Annual Base Salary divided by 52)
BAND LEVEL
Band 200
Band 300
Band 400
Band 500
Band 600
Band 700/800
10
10
10
10
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
12
12
12
12
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
78
18
18
18
18
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
78
78
78
78
32
24
24
24
24
24
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
78
78
78
78
78
78
78
26
32
32
32
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
78
78
78
78
78
78
78
78
78
78
78
26
40
40
40
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
78
78
78
78
78
78
78
78
78
78
78
78
78
78
78
Complete Years
of Continuous
Service at
Separation Date
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38+
SCHEDULE B-2
MEDICAL / DENTAL AND LIFE INSURANCE CONTINUATION
COMPLETE YEARS OF CONTINUOUS SERVICE
AT SEPARATION DATE
< 5
5 – 9.9
10 – 19.9
20+
BENEFITS CONTINUATION PERIOD
26 weeks
39 weeks
52 weeks
78 weeks
33
SCHEDULE C
OUTPLACEMENT BENEFITS
BAND LEVEL
BENEFIT
DURATION
Band 200
Individual Career Transition Seminar
and Counseling
• 2 day Milestones Seminar
• Up to six (6) individual follow-up
consulting sessions
• 3 months access to Career Resource
Network
Band 300
Career Assistance Program
3 Months
Band 400
Career Transition Service
6 Months
Band 600/500
Executive Service
12 Months
Band 800/700
Senior Executive Service
12 Months
The Outplacement Benefits are provided through a third party vendor. The vendor and/or the programs may change from time to
time.
34
SCHEDULE D (Change in Control/Pension)
Description of Change-in-Control Benefits under the
Pension Plan
This Schedule describes benefits under the Pension Plan and the Supplemental Plan (as each is defined below)
provided to an Eligible Employee under the Plan if such Eligible Employee signs and returns the Release of Claims in use
under the CIC Plan and in accordance with the process established under the CIC Plan.
I. If an Eligible Employee’s employment is terminated in circumstances entitling him or her to the benefits provided in
Section 3.1 (c) of the Plan:
1. For an Eligible Employee who participates in the Retirement Plan for Salaried Employees of MSD or its
successor (the “MSD Pension Plan) and on his or her Separation Date is not at least age 55 with at least ten years of
Credited Service under the MSD Pension Plan but would attain at least age 50 and have at least ten years of Credited
Service under the MSD Pension Plan within two years following the date of the Change in Control (assuming
continued employment during the entirety of such two-year period), then the Eligible Employee shall be deemed to be
eligible for a subsidized early retirement benefit on his “Prior Plan Formula” (as defined in the MSD Pension Plan)
under the MSD Pension Plan commencing in accordance with the terms of the MSD Plan.
2. For an Eligible Employee who participates in the MSD Pension Plan or the Legacy Schering Retirement
Plan, or their successors (collectively the “Pension Plan”) and on his or her Separation Date is not at least age 65 but
would attain at least age 65 within two years following the date of the Change in Control (assuming continued
employment during the entirety of such two-year period), then the Eligible Employee shall be deemed to be eligible
for a Prior Plan Formula benefit unreduced for early commencement under the Pension Plan commencing in
accordance with the terms of the Pension Plan.
3. For an Eligible Employee who participates in the MSD Pension Plan and on his or her Separation Date is
not eligible for the “Rule of 85 Transition Benefit” (as such term is defined in the MSD Pension Plan) but would have
been eligible for the Rule of 85 Transition Benefit within two years following the date of the Change in Control
(assuming continued employment during the entirety of such two-year period), then the Eligible Employee shall be
deemed to be eligible for the Rule of 85 Transition Benefit upon commencement of his or her pension benefit under
the MSD Pension Plan.
4, For an Eligible Employee who participates in the Pension Plan on his or her Separation Date who is not
vested in his or her accrued benefit under the Pension Plan, he or she shall be vested in his accrued benefit under the
Pension Plan on his or her Separation Date.
II. The benefits described in this Schedule D shall be payable from the Pension Plan and, to the extent that such benefits
cannot be paid from the Pension Plan the Employer may, to the extent it deems necessary or appropriate (including to comply
with applicable law and to preserve grandfathered status of arrangements subject to Section 409A of the Code), cause such
benefits to be paid under a Supplemental Retirement Plan of MSD or the Legacy Schering Benefits Excess Plan, as
applicable and any successors thereto (collectively, the “Supplemental Plan”) or under new arrangements or from the
Employer's general assets.
35
SCHEDULE E (Change in Control/Retiree Medical)
Description of Change-in-Control Benefits under Health Plan
This Schedule describes benefits under the Health Plan provided to an Eligible Employee under the Plan if such
Eligible Employee signs and returns the Release of Claims in use under the CIC Plan and in accordance with the process
established under the CIC Plan.
I. If an Eligible Employee’s employment is terminated in circumstances entitling him or her to the benefits provided in
Section 3.1 (c) of the Plan:
If the Eligible Employee is eligible to participate in the Health Plan and on his or her Separation Date is not at least
age 55 with the requisite amount of service with an Employer to satisfy the requirements to be considered a retiree eligible
for subsidized retiree medical benefits under the Health Plan but would attain at least age 50 and meet the service
requirements to be considered a retiree eligible for subsidized retiree medical benefits under the Health Plan within two years
following the date of the Change in Control (assuming continued employment during the entirety of such two-year period),
then the Eligible Employee shall be eligible for subsidized retiree medical benefits under the Health Plan on the date his or
her Benefits Continuation Period Ends on the same terms and conditions applicable to salaried U.S.-based employees of the
Employer whose employment terminated the last day of the month prior to the Eligible Employee’s Separation Date who
were treated as retirees eligible for subsidized retiree medical benefits under the Health Plan as of that date.
II. The Employer may, to the extent it deems necessary or appropriate (including to comply with applicable law and to
preserve grandfathered status of arrangements subject to Section 409A of the Code), cause the benefits set forth in this
Schedule E to be provided from insured arrangements, or pursuant to new arrangements, individual arrangements or
otherwise. Further, notwithstanding anything to the contrary, to the extent any benefits to which an Eligible Employee is
entitled under this Schedule E would reasonably be likely to constitute a discriminatory benefit under Section 105(h) of the
Code or a similar law or regulation at the time the benefit is to be provided to the Eligible Employee, as determined in the
sole discretion of the Parent, the Employer may, to the extent it deems necessary or appropriate (including to comply with
applicable law), modify the benefit so that the benefit would no longer constitute a discriminatory benefit under Section
105(h) of the Code or such similar law, including, but not limited to, eliminating all subsidy from the Parent or the Employer,
requiring that the Eligible Employee pay for participation in the benefit program with after-tax funds or causing the full
employer and employee portions of the cost of the benefit to be imputed as gross income to the Eligible Employee.
III. For purposes of this Schedule E, “Health Plan” means one or more plans sponsored by the Parent or one of its
subsidiaries that provide medical benefits to Eligible Employees and to former Eligible Employees who are considered
retirees thereunder and to the eligible dependents of each of the foregoing.
36
MERCK & CO., INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
($ in millions except ratio data)
Exhibit 12
Income Before Taxes
Add (Subtract):
One-third of rents
Interest expense, gross
Interest capitalized, net of amortization
Equity (income) loss from affiliates, net of
distributions
Earnings as defined
One-third of rents
Interest expense, gross
Preferred stock dividends
Fixed Charges
2016
2015
2014
2013
2012
$
4,659
$
5,401
$
17,283
$
5,545
$
8,739
Years Ended December 31,
97
693
—
(70)
5,379
97
693
—
$
$
101
672
(3)
(155)
6,016
101
672
—
$
$
117
732
(1)
(72)
18,059
117
732
86
$
$
122
801
(2)
(168)
6,298
122
801
147
$
$
133
714
(49)
(350)
9,187
133
714
163
790
$
773
$
935
$
1,070
$
1,010
$
$
$
Ratio of Earnings to Fixed Charges
7
8
19
6
9
For purposes of computing these ratios, “earnings” consist of income before taxes, one-third of rents (deemed by the Company to be representative of the interest
factor inherent in rents), interest expense, interest capitalized, net of amortization and equity (income) loss from affiliates, net of distributions. “Fixed charges”
consist of one-third of rents, interest expense as reported in the consolidated financial statements and dividends on preferred stock. Interest expense does not
include interest related to uncertain tax positions.
MERCK & CO., INC. SUBSIDIARIES
as of 12/31/2016
Exhibit 21
The following is a list of subsidiaries of the Company, doing business under the name stated.
Name
7728026 Canada Inc.
Aacifar-Produtos Quimicos e Farmaceuticos, Lda
Abmaxis Inc.
Afferent Pharmaceuticals, Inc.
Aptus Health Holdings, Inc.
Aptus Health International, Inc.
Aptus Health, Inc.
Aquaculture Holdings Limited
Aquaculture Vaccines Limited
Ark Products Limited
AVL Holdings Limited
Banyu Pharmaceutical Company, Ltd.
BRC Ltd.
Burgwedel Biotech GmbH
C3i (UK) Limited
C3i Europe EOOD
C3i Japan GK
C3i Services & Technology (Dalian) Co. Ltd.
C3i Support Services Private Limited
C3i, Inc.
Canji, Inc.
cCam Biotherapeutics Ltd.
Cherokee Pharmaceuticals LLC
Comsort, Inc.
Continuum Professional Services Limited
Cooper Veterinary Products (Proprietary) Limited
Coopers Animal Health Limited
Cosmas B.V.
Cubist (UK) Ltd
Cubist Australia Pty Ltd
Cubist Bermuda Ltd.
Cubist Pharmaceuticals (UK) Ltd.
Cubist Pharmaceuticals GmbH
Cubist Pharmaceuticals LLC
Dashtag
Desarrollos Farmaceuticos Y Cosmeticos, S.A.
Dieckmann Arzneimittel GmbH
Diosynth France
Diosynth Holding B.V.
Country or State
of Incorporation
Canada
Portugal
Delaware
California
Delaware
Delaware
Delaware
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Japan
Bermuda
Germany
United Kingdom
Bulgaria
Japan
China
India
New York
Delaware
Israel
Delaware
Delaware
United Kingdom
South Africa
United Kingdom
Netherlands
United Kingdom
Australia
Bermuda
United Kingdom
Switzerland
Delaware
United Kingdom
Spain
Germany
France
Netherlands
Diosynth Limited
Diosynth Produtos Farmo-quimicos Ltda.
Elastec S.R.L.
Essex Italia s.r.l.
Essex Pharmaceuticals, Inc.
Essexfarm, S.A.
European Insurance Risk Excess Designated Activity Company
Farmacox-Companhia Farmaceutica, Lda
Farmasix-Produtos Farmaceuticos, Lda
Financiere MSD
Fontelabor-Produtos Farmaceuticos, Lda.
Frosst Laboratories, Inc.
Frosst Portuguesa - Produtos Farmaceuticos, Lda.
Fulford (India) Limited 1
Global Safety Surveillance LLC
GlycoFi, Inc.
Hangzhou MSD Pharmaceutical Co., Ltd. 1
Harrisvaccines, Inc.
Hawk and Falcon L.L.C.
Healthcare Services and Solutions, LLC
Heptafarma - Companhia Farmacêutica, Sociedade Unipessoal, Lda.
HMR Weight Management Services Corp.
Hydrochemie GmbH
Idenix GmbH
Idenix Pharmaceuticals LLC
Idenix SARL
InfoMedics International, Inc.
InfoMedics, Inc.
International Indemnity Ltd.
Intervet
Intervet (Ireland) Limited
Intervet (Israel) Ltd.
Intervet (M) Sdn. Bhd.
Intervet (Proprietary) Limited
Intervet (Thailand) Ltd.
Intervet AB
Intervet Agencies B.V.
Intervet Animal Health Production B.V.
Intervet Animal Health Taiwan Limited
Intervet Argentina S.A.
Intervet Australia Pty Limited
Intervet Bulgaria EOOD
Intervet Canada Corp.
Intervet Central America S. de R.L.
Intervet Colombia Ltda
Intervet Danmark A/S
United Kingdom
Brazil
Argentina
Italy
Philippines
Ecuador
Ireland
Portugal
Portugal
France
Portugal
Delaware
Portugal
India
Delaware
Delaware
China
Iowa
Delaware
Delaware
Portugal
Delaware
Germany
Switzerland
Delaware
France
Delaware
Delaware
Bermuda
France
Ireland
Israel
Malaysia
South Africa
Thailand
Sweden
Netherlands
Netherlands
Taiwan (Republic of China)
Argentina
Australia
Bulgaria
Canada
Panama
Colombia
Denmark
Intervet Deutschland GmbH
Intervet Ecuador S.A.
Intervet Egypt for Animal Health SAE
Intervet GesmbH
Intervet Hellas A.E.
Intervet Holding B.V.
Intervet Holding Costa Rica SA
Intervet Holding Iberia, S.L.
Intervet Holdings France
Intervet Hungaria kft.
Intervet Inc.
Intervet India Private Limited
Intervet International
Intervet International B.V.
Intervet International GmbH
Intervet K.K.
Intervet LLC
Intervet Maroc S.A.
Intervet Mexico S.A. de C.V.
Intervet Middle East Limited
Intervet Nederland B.V.
Intervet Oy
Intervet Philippines, Inc.
Intervet Productions S.A.
Intervet Productions Srl
Intervet Romania SRL
Intervet S.A.
Intervet Schering-Plough Animal Health Pty Ltd
Intervet South Africa (Proprietary) Limited
Intervet Sp. z.o.o.
Intervet UK Limited
Intervet UK Production Limited
Intervet Venezolana SA
Intervet Veterinaria Chile Ltda
Intervet Veteriner Ilaclari Pazarlama ve Ticaret Ltd. Sirketi
Intervet Vietnam Ltd.
Intervet, s.r.o.
Interveterinaria SA de CV
IOmet Pharma Ltd.
Kirby-Warrick Pharmaceuticals Limited
Laboratoires Merck Sharp & Dohme-Chibret
Laboratorios Abello, S.A.
Laboratorios Biopat, S.A.
Laboratorios Chibret, S.A.
Laboratorios Frosst, S.A.
Laboratorios Quimico-Farmaceuticos Chibret, Lda.
Germany
Ecuador
Egypt
Austria
Greece
Netherlands
Costa Rica
Spain
France
Hungary
Delaware
India
France
Netherlands
Germany
Japan
Russian Federation
Morocco
Mexico
Cyprus
Netherlands
Finland
Philippines
France
Italy
Romania
Peru
Australia
South Africa
Poland
United Kingdom
United Kingdom
Venezuela
Chile
Turkey
Viet Nam
Czech Republic
Mexico
United Kingdom
United Kingdom
France
Spain
Spain
Spain
Spain
Portugal
Livestock Nutrition Technologies Pty. Ltd.
Maple Leaf Holdings GmbH
Marketing Communications of North Carolina, LLC 1
Maya Tibbi Urunler Ticaret Limited Sirketi
MCM Vaccine B.V. 1
MCM Vaccine Co. 1
Med Help International, Inc.
Med-Nim (Proprietary) Limited
Merck and Company, Incorporated
Merck Canada Inc.
Merck Capital Ventures, LLC 1
Merck Frosst Canada & Co.
Merck Frosst Company
Merck Frosst Finco LP
Merck Global Health Innovation Fund, LLC
Merck Global Health Innovation, Private Equity, LLC
Merck Global Research LLC
Merck HDAC Research, LLC
Merck Holdings II Corp.
Merck Holdings III Corp.
Merck Holdings LLC
Merck Lumira Biosciences Fund L.P. 1
Merck Registry Holdings, Inc.
Merck Respiratory Health Company
Merck SH Inc.
Merck Sharp & Dohme (Argentina) Inc.
Merck Sharp & Dohme (Asia) Limited
Merck Sharp & Dohme (Australia) Pty. Limited
Merck Sharp & Dohme (Chile) Ltda.
Merck Sharp & Dohme (China) Limited
Merck Sharp & Dohme (Enterprises) B.V.
Merck Sharp & Dohme (Europe) Inc.
Merck Sharp & Dohme (Holdings) Limited
Merck Sharp & Dohme (Holdings) Pty Ltd
Merck Sharp & Dohme (I.A.) LLC
Merck Sharp & Dohme (International) Limited
Merck Sharp & Dohme (Israel - 1996) Company Ltd.
Merck Sharp & Dohme (Malaysia) SDN. BHD.
Merck Sharp & Dohme (New Zealand) Limited
Merck Sharp & Dohme (Sweden) A.B.
Merck Sharp & Dohme (Switzerland) GmbH
Merck Sharp & Dohme Animal Health, S.L.
Merck Sharp & Dohme Asia Pacific Services Pte. Ltd.
Merck Sharp & Dohme B.V.
Merck Sharp & Dohme BH d.o.o.
Merck Sharp & Dohme Bulgaria EOOD
Australia
Switzerland
Delaware
Turkey
Netherlands
Pennsylvania
Delaware
South Africa
Delaware
Canada
Delaware
Canada
Canada
Canada
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Canada
New Jersey
Nevada
Delaware
Delaware
Hong Kong
Australia
Chile
Hong Kong
Netherlands
Delaware
United Kingdom
Australia
Delaware
Bermuda
Israel
Malaysia
New Zealand
Sweden
Switzerland
Spain
Singapore
Netherlands
Bosnia
Bulgaria
Merck Sharp & Dohme Colombia S.A.S.
Merck Sharp & Dohme Comercializadora, S. de R.L. de C.V.
Merck Sharp & Dohme Corp.
Merck Sharp & Dohme Cyprus Limited
Merck Sharp & Dohme d.o.o.
Merck Sharp & Dohme d.o.o. Belgrade
Merck Sharp & Dohme de Espana SAU
Merck Sharp & Dohme Farmaceutica Ltda.
Merck Sharp & Dohme Finance Europe Limited
Merck Sharp & Dohme Gesellschaft m.b.H.
Merck Sharp & Dohme IDEA AG
Merck Sharp & Dohme inovativna zdravila d.o.o.
Merck Sharp & Dohme International Services B.V.
Merck Sharp & Dohme Ireland (Human Health) Ltd
Merck Sharp & Dohme Limited
Merck Sharp & Dohme Manufacturing Unlimited Company
Merck Sharp & Dohme OU
Merck Sharp & Dohme Peru SRL
Merck Sharp & Dohme Pharmaceutical Industrial and Commercial Societe Anonyme
Merck Sharp & Dohme Quimica de Puerto Rico, Inc.
Merck Sharp & Dohme Research GmbH
Merck Sharp & Dohme Romania SRL
Merck Sharp & Dohme S.A.
Merck Sharp & Dohme s.r.o.
Merck Sharp & Dohme Saude Animal Ltda.
Merck Sharp & Dohme SIA
Merck Sharp & Dohme Singapore Trading Pte. Ltd.
Merck Sharp & Dohme Tunisie SARL
Merck Sharp & Dohme, Limitada
Merck Sharp & Dohme, S. de R.L. de C.V.
Merck Sharp & Dohme, s.r.o.
Merck Sharp Dohme Ilaclari Limited Sirketi
ML Holdings (Canada) Inc.
MMUSA Acquisition II Corp. 1
MRL Cambridge ESC, LLC
MRL San Francisco, LLC
MRL Ventures Fund LLC
MSD (I.A.) B.V.
MSD (L-SP) Unterstützungskasse GmbH
MSD (Nippon Holdings) B.V.
MSD (Norge) AS
MSD (Proprietary) Limited
MSD (Shanghai) Pharmaceuticals Consultancy Co., Ltd.
MSD (Thailand) Ltd.
MSD Access Sdn. Bhd.
Colombia
Mexico
New Jersey
Cyprus
Croatia
Serbia
Spain
Brazil
United Kingdom
Austria
Switzerland
Slovenia
Netherlands
Ireland
United Kingdom
Ireland
Estonia
Peru
Greece
Delaware
Switzerland
Romania
Morocco
Czech Republic
Brazil
Latvia
Singapore
Tunisia
Portugal
Mexico
Slovakia
Turkey
Canada
Delaware
Delaware
Delaware
Delaware
Netherlands
Germany
Netherlands
Norway
South Africa
China
Thailand
Malaysia
MSD Animal Health (Shanghai) Trading Co., Ltd.
MSD Animal Health BVBA
MSD Animal Health FZ-LLC
MSD Animal Health GmbH
MSD Animal Health Innovation
MSD Animal Health Innovation AS
MSD Animal Health Innovation GmbH
MSD Animal Health Innovation Pte. Ltd.
MSD Animal Health Korea Ltd.
MSD Animal Health Limited
MSD Animal Health Norge AS
MSD Animal Health Pension Trustee Limited
MSD Animal Health S.r.l.
MSD Animal Health, Lda.
MSD Argentina Holdings B.V.
MSD Argentina SRL
MSD Asia Holdings Pte. Ltd.
MSD Belgium BVBA/SPRL
MSD Biopharma B.V.
MSD BM 1 Ltd.
MSD BM 2 Ltd.
MSD Brazil Investments B.V.
MSD Central America Services S. de R.L.
MSD China (Investments) B.V.
MSD China B.V.
MSD China Holding Co., Ltd.
MSD Consumer Care Limited
MSD Cubist Holdings Unlimited Company
MSD Danmark ApS
MSD Egypt LLC
MSD EIC Unlimited Company
MSD Eurofinance
MSD Farmaceutica C.A.
MSD FI BV
MSD Finance 2 LLC
MSD Finance B.V.
MSD Finance Company
MSD Finance Holding NL B.V.
MSD Finance Holdings Unlimited Company
MSD Finland Oy
MSD France
MSD Global Research GmbH
MSD Holdings (Ireland) Unlimited Company
MSD Holdings 2 G.K.
MSD Holdings G.K.
MSD Hong Kong Holdings Coöperatief U.A.
China
Belgium
United Arab Emirates
Switzerland
France
Norway
Germany
Singapore
Korea, Republic of
United Kingdom
Norway
United Kingdom
Italy
Portugal
Netherlands
Argentina
Singapore
Belgium
Netherlands
Bermuda
Bermuda
Netherlands
Panama
Netherlands
Netherlands
China
United Kingdom
Ireland
Denmark
Egypt
Ireland
Bermuda
Venezuela
Netherlands
Delaware
Netherlands
Bermuda
Netherlands
Ireland
Finland
France
Switzerland
Ireland
Japan
Japan
Netherlands
MSD Human Health Holding B.V.
MSD IDEA Pharmaceuticals Nigeria Limited
MSD IDEA Tunisie SARL
MSD Idenix Holdings Unlimited Company
MSD International Finance B.V.
MSD International Finance LLC
MSD International GmbH
MSD International Holdings 2 B.V.
MSD International Holdings GmbH
MSD International Holdings, Inc.
MSD International Investment Holdings Unlimited Company
MSD International Manufacturing GmbH
MSD Investment Holdings (Ireland) Unlimited Company
MSD Investments (Holdings) GmbH
MSD IT Global Innovation Center s.r.o.
MSD Italia s.r.l.
MSD K.K.
MSD Korea Ltd.
MSD Laboratories India LLC
MSD Latin America Services S. de R.L.
MSD Latin America Services S. de R.L. de C.V.
MSD Limited
MSD Luxembourg S.a.r.l.
MSD Merck Sharp & Dohme AG
MSD Mexico Investments B.V.
MSD NL 2 B.V.
MSD NL 4 B.V.
MSD Overseas Manufacturing Co (Ireland) Unlimited Company
MSD Panama International Services S. de R.L.
MSD Participations B.V.
MSD Pharma (Singapore) Pte. Ltd.
MSD Pharma GmbH
MSD Pharma Hungary Korlatolt Felelossegu Tarsasag
MSD Pharmaceuticals
MSD Pharmaceuticals Holdings Unlimited Company
MSD Pharmaceuticals Investments 1 Unlimited Company
MSD Pharmaceuticals Investments 3 Unlimited Company
MSD Pharmaceuticals Ireland Unlimited Company
MSD Pharmaceuticals Private Limited
MSD Polska Dystrybucja Sp. z.o.o.
MSD Polska Sp.z.o.o.
MSD R&D (China) Co., Ltd.
MSD R&D Innovation Centre Limited
MSD Regional Business Support Center GmbH
MSD Registry Holdings, Inc.
MSD Shared Business Services EMEA Limited
Netherlands
Nigeria
Tunisia
Ireland
Netherlands
Delaware
Switzerland
Netherlands
Switzerland
Delaware
Ireland
Switzerland
Ireland
Switzerland
Czech Republic
Italy
Japan
Korea
Delaware
Panama
Mexico
United Kingdom
Luxembourg
Switzerland
Netherlands
Netherlands
Netherlands
Ireland
Panama
Netherlands
Singapore
Germany
Hungary
Russian Federation
Ireland
Ireland
Ireland
Ireland
India
Poland
Poland
China
United Kingdom
Germany
New Jersey
Ireland
MSD Sharp & Dohme Gesellschaft mit beschränkter Haftung
MSD Switzerland Investments 1 Unlimited Company
MSD Switzerland Investments 4 Unlimited Company
MSD Switzerland Investments 5 Limited
MSD Ukraine Limited Liability Company
MSD Unterstutzungskasse GmbH
MSD Vaccins
MSD Vaccins Holdings
MSD Venezuela Holding GmbH
MSD Ventures (Ireland) Unlimited Company
MSD Verwaltungs GmbH
MSD Vietnam Company Limited
MSD Vietnam Holdings B.V.
MSD Vostok B.V.
MSDRG LLC
MSD-SP Ltd.
MSD-Sun FZ-LLC
MSD-SUN, LLC 1
MSP Singapore Company, LLC
Multilan AG
Mycofarm UK Limited
N.V. Organon
Nanjing Organon Pharmaceutical Co., Ltd.
Nihon MSD G.K.
Nourifarma - Produtos Quimicos e Farmaceuticos Lda
NovaCardia, Inc.
OBS Holdings B.V.
Oncoethix GmbH
Optimer Pharmaceuticals LLC
Organon (India) Private Limited
Organon (Ireland) Ltd
Organon (Philippines) Inc.
Organon Agencies B.V.
Organon BioSciences International B.V.
Organon BioSciences Ventures B.V.
Organon China B.V.
Organon Dominicana SA
Organon Egypt Ltd
Organon Laboratories Limited
Organon Latin America S.A.
Organon Middle East S.A.L.
Organon Participations B.V.
Organon Teknika Corporation LLC
Organon USA Inc.
P.T. Merck Sharp & Dohme Indonesia
PI International PVT LTD.
Germany
Ireland
Ireland
Switzerland
Ukraine
Germany
France
France
Switzerland
Ireland
Germany
Vietnam
Netherlands
Netherlands
Delaware
United Kingdom
United Arab Emirates
Delaware
Delaware
Switzerland
United Kingdom
Netherlands
China
Japan
Portugal
Delaware
Netherlands
Switzerland
Delaware
India
Ireland
Philippines
Netherlands
Netherlands
Netherlands
Netherlands
Dominican Republic
Egypt
United Kingdom
Uruguay
Lebanon
Netherlands
Delaware
New Jersey
Indonesia
United Kingdom
Pitman-Moore Saude Animal Comercio e Distribuicao de Produtos Veterinarios
Plough (U.K.) Limited
Protein Transaction, LLC
PT Intervet Indonesia
PT Merck Sharp Dohme Pharma Tbk 1
PT Organon Indonesia
Rosetta Biosoftware UK Limited
Rosetta Inpharmatics LLC
Sanofi Pasteur MSD AB
Sanofi Pasteur MSD AG
Sanofi Pasteur MSD Gestion S.A. 1
Sanofi Pasteur MSD GmbH
Sanofi Pasteur MSD GmbH
Sanofi Pasteur MSD Limited
Sanofi Pasteur MSD Ltd.
Sanofi Pasteur MSD N.V./S.A. 1
Sanofi Pasteur MSD S.A.
Sanofi Pasteur MSD S.A.
Sanofi Pasteur MSD S.p.A.
Schering-Plough
Schering-Plough (India) Private Limited
Schering-Plough (Ireland) Unlimited Company
Schering-Plough Animal Health Limited
Schering-Plough Animal Health, Inc.
Schering-Plough Bermuda Ltd.
Schering-Plough Canada Inc.
Schering-Plough Central East AG
Schering-Plough Clinical Trials, S.E.
Schering-Plough Corporation
Schering-Plough Corporation, U.S.A.
Schering-Plough del Ecuador, S.A.
Schering-Plough del Peru S.A.
Schering-Plough Holdings Limited
Schering-Plough Indústria Farmacêutica Ltda.
Schering-Plough Int Limited
Schering-Plough Investments Ltd.
Schering-Plough Labo NV
Schering-Plough Limited
Schering-Plough Limited
Schering-Plough Maroc S.a.R.L.
Schering-Plough S.A.
Schering-Plough S.A.
Schering-Plough S.A.
Schering-Plough S.A.
Schering-Plough S.A. de C.V.
Schering-Plough Sante Animale
Brazil
United Kingdom
Delaware
Indonesia
Indonesia
Indonesia
United Kingdom
Delaware
Sweden
Switzerland
France
Austria
Germany
United Kingdom
Ireland
Belgium
Portugal
Spain
Italy
France
India
Ireland
New Zealand
Philippines
Bermuda
Canada
Switzerland
United Kingdom
Philippines
Delaware
Ecuador
Peru
United Kingdom
Brazil
United Kingdom
Delaware
Belgium
Taiwan (Republic of China)
United Kingdom
Morocco
Panama
Paraguay
Spain
Uruguay
Mexico
France
Sentipharm AG
Servicios Veterniarios Servet, Sociedad Anónima
Sewaren Corp.
Shanghai MSD Pharmaceutical Trading Co., Ltd.
ShareWIK, LLC 1
Sinova AG 1
Skyscape.Com India Private Limited
SmartCells, Inc.
SOL Limited
S-P Ril Ltd.
S-P Veterinary (UK) Limited
S-P Veterinary Holdings Limited
S-P Veterinary Limited
S-P Veterinary Pensions Limited
StayWell Health Management, LLC 1
StayWell Interactive, LLC 1
Supera Rx Medicamentos Ltda. 1
Tasman Vaccine Laboratory (UK) Ltd
TELERx Marketing Inc.
The StayWell Company, LLC 1
Theriak B.V.
Thomas Morson & Son Limited
Tomorrow Networks, LLC
Trius Therapeutics LLC
UAB Merck Sharp & Dohme
Undra, S.A. de C.V.
Venco Farmaceutica S.A.
Venco Holding GmbH
Vet Pharma Friesoythe GmbH
VetInvent, LLC
Vetrex B.V.
Vetrex Egypt L.L.C.
Vetrex Limited
Vree Health Italia S.r.l.
Vree Health LLC
Vree Health Ltd.
Werthenstein Biopharma GmbH
Zoöpharm B.V.
___________
1 own less than 100%
Switzerland
Costa Rica
Delaware
China
Delaware
Switzerland
India
Delaware
Bermuda
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Delaware
Delaware
Brazil
United Kingdom
Pennsylvania
Delawarae
Netherlands
United Kingdom
Delaware
Delaware
Lithuania
Mexico
Venezuela
Switzerland
Germany
Delaware
Netherlands
Egypt
United Kingdom
Italy
Delaware
United Kingdom
Switzerland
Netherlands
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-208308, 333-208306 and 333-164482) and on Form S-8
(Nos. 333-173025, 333-173024, 333‑162882, 333-162883, 333-162884, 333-162885, 333-162886, 333-134281 and 333-121089) of Merck & Co., Inc. of our
report dated February 28, 2017 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-
K.
Exhibit 23
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 28, 2017
POWER OF ATTORNEY
Each of the undersigned does hereby appoint MICHAEL J. HOLSTON as his/her true and lawful attorney to execute on behalf of the undersigned (whether
on behalf of the Company, or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) the Annual Report on Form 10-K of Merck &
Co., Inc. for the fiscal year ended December 31, 2016 under the Securities Exchange Act of 1934, including amendments thereto and all exhibits and other
documents in connection therewith.
IN WITNESS WHEREOF, this instrument has been duly executed as of the 28 th day of February 2017.
Exhibit 24.1
MERCK & CO., Inc.
/s/ Kenneth C. Frazier
Kenneth C. Frazier
/s/ Robert M. Davis
Robert M. Davis
/s/ Rita A. Karachun
Rita A. Karachun
/s/ Leslie A. Brun
Leslie A. Brun
/s/ Thomas R. Cech
Thomas R. Cech
/s/ Pamela J. Craig
Pamela J. Craig
/s/ Thomas H. Glocer
Thomas H. Glocer
/s/ C. Robert Kidder
C. Robert Kidder
/s/ Rochelle B. Lazarus
Rochelle B. Lazarus
Chairman, President and Chief Executive Officer
(Principal Executive Officer; Director)
Executive Vice President, Global Services
and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President Finance—Global Controller
(Principal Accounting Officer)
DIRECTORS
/s/ Carlos E. Represas
Carlos E. Represas
/s/ Paul B. Rothman
Paul B. Rothman
/s/ Patricia F. Russo
Patricia F. Russo
/s/ Craig B. Thompson
Craig B. Thompson
/s/ Wendell P. Weeks
Wendell P. Weeks
/s/ Peter C. Wendell
Peter C. Wendell
Exhibit 24.2
I, Katie E. Fedosz, Senior Assistant Secretary of Merck & Co., Inc. (the “Company”), a corporation duly organized and existing under the laws of the State
of New Jersey, do hereby certify that the following is a true copy of a resolution adopted at a meeting of the Board of Directors of said Company on February 28,
2017 in accordance with the provisions of the By-Laws of said Company:
“Special Resolution No. – 2017
RESOLVED, that the proposed form of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2016
attached hereto is hereby approved with such changes as the proper officers of the Company, with the advice of counsel, deem appropriate; and
FURTHER RESOLVED, that each officer and director who may be required to execute the aforesaid Annual Report on Form 10-K or any
amendments thereto (whether on behalf of the Company or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) is
hereby authorized to execute a power of attorney appointing Michael J. Holston as his/her true and lawful attorney to execute in his/her name, place and
stead (in any such capacity) such Annual Report on Form 10‑K and any and all amendments thereto and any and all exhibits and other documents
necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission, the attorney to have power to act,
and to have full power and authority to do and perform in the name and on behalf of each of said officers and directors, or both, as the case may be,
every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any such officer or director might or
could do in person.”
IN WITNESS WHEREOF, I have hereunto subscribed my signature and affixed the seal of the Company this 28 th day of February 2017.
[Corporate Seal]
/s/ Katie E. Fedosz
Katie E. Fedosz
Senior Assistant Secretary
Exhibit 31.1
I, Kenneth C. Frazier, certify that:
1. I have reviewed this annual report on Form 10-K of Merck & Co., Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: February 28, 2017
By: /s/ Kenneth C. Frazier
KENNETH C. FRAZIER
Chairman, President and Chief Executive Officer
Exhibit 31.2
I, Robert M. Davis, certify that:
1. I have reviewed this annual report on Form 10-K of Merck & Co., Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: February 28, 2017
By: /s/ Robert M. Davis
ROBERT M. DAVIS
Executive Vice President, Global Services
and Chief Financial Officer
Section 1350
Certification of Chief Executive Officer
Exhibit 32.1
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Merck & Co., Inc. (the “Company”), hereby certifies that the Company’s Annual Report on
Form 10-K for the year ended December 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 28, 2017
/s/ Kenneth C. Frazier
Name: KENNETH C. FRAZIER
Title: Chairman, President and Chief Executive Officer
Section 1350
Certification of Chief Financial Officer
Exhibit 32.2
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Merck & Co., Inc. (the “Company”), hereby certifies that the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: February 28, 2017
/s/ Robert M. Davis
Name: ROBERT M. DAVIS
Title: Executive Vice President, Global Services
and Chief Financial Officer