Merck & Co Annual Report 2017

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FY2017 Annual Report · Merck & Co

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As filed with the Securities and Exchange Commission on February 27, 2018

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, 2017

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, 2018: 2,696,190,502.
Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2017 based on closing price on June 30,

2017: $174,700,000,000.

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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer
Non-accelerated filer

☒
☐ (Do not check if a smaller reporting company)

Accelerated filer
Smaller reporting company
Emerging growth company

☐
☐
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying

with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Proxy Statement for the Annual Meeting of Shareholders to be held May 22, 2018, to be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report

Documents Incorporated by Reference:

Document

Part of Form 10-K
Part III

Table of Contents

Part I

Item 1.
Item 1A. Risk Factors

Business

Cautionary Factors that May Affect Future Results

Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.

Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant

Part II

Item 5.

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

Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
(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

Item 9.
Item 9A. Controls and Procedures

Management’s Report

Item 9B. Other Information

Part III

Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.

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

Item 13.
Item 14.

Item 15.

Exhibits and Financial Statement Schedules

Part IV

Item 16.

Form 10-K Summary
Signatures

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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 Company also has an Animal Health segment that discovers, develops, manufactures and markets 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. 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:

($ in millions)
Total Sales

Pharmaceutical

Januvia/Janumet

Keytruda

Gardasil/Gardasil 9

Zetia/Vytorin

ProQuad/M-M-R II/Varivax

Zepatier

Isentress/Isentress HD

Remicade

Pneumovax 23

Simponi
Animal Health
Other Revenues(1)

2017

2016

2015

40,122

39,807

35,390

35,151

5,896

3,809

2,308

2,095

1,676

1,660

1,204

837

821

819

3,875

857

6,109

1,402

2,173

3,701
1,640

555

1,387

1,268

641

766

3,478

1,178

39,498

34,782

6,014

566

1,908

3,777
1,505

—

1,511

1,794

542

690

3,331

1,385

(1) Other revenues are primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, and third-party manufacturing

sales.

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; and Adempas (riociguat), a
cardiovascular drug for the treatment of pulmonary arterial hypertension.

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; 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.

HIV: Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other

antiretroviral agents for the treatment of HIV-1 infection.

Hospital Acute Care: Bridion (sugammadex) Injection, a medication for the reversal of two types of
neuromuscular blocking agents used during surgery; 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; Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections
or bacteremia, when caused by designated susceptible organisms; 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), the Company’s anti-PD-1 (programmed death receptor-1) therapy, as
monotherapy for the treatment of certain patients with non-small-cell lunch cancer (NSCLC), melanoma, classical
Hodgkin Lymphoma (cHL), urothelial carcinoma, head and neck squamous cell carcinoma (HNSCC), gastric or
gastroesophageal junction adenocarcinoma, and microsatellite instability-high (MSI-H) or mismatch repair deficient
cancer, and in combination with pemetrexed and carboplatin in certain patients with NSCLC; 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; Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid
for the treatment of nasal allergy symptoms; and Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate
dihydrate), a combination medicine for the treatment of asthma.

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; and Fosamax (alendronate sodium) (marketed as Fosamac in Japan) for the treatment and prevention
of osteoporosis.

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); Pneumovax 23 (pneumococcal vaccine polyvalent), a
vaccine to help prevent pneumococcal disease; RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help
protect against rotavirus gastroenteritis in infants and children; and Zostavax (Zoster Vaccine Live), a vaccine to help
prevent shingles (herpes zoster).

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; Paracox and

Coccivac coccidiosis vaccines and Exzolt, a systemic treatment for poultry red mite infestations.

Companion Animal Products: Bravecto (fluralaner), a line of oral and topical products that kills fleas and
ticks in dogs and cats 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.

Table of Contents

2017 Product Approvals

Set forth below is a summary of significant product approvals received by the Company in 2017.

Product

Date

Approval

Keytruda

December 2017

September 2017

May 2017

March 2017

January 2017

Lynparza(1)

August 2017

Isentress

November 2017

Japanese Ministry of Health, Labour and Welfare approved Keytruda for
the treatment of patients with radically unresectable urothelial carcinoma
who progressed after cancer chemotherapy.

The U.S. Food and Drug Administration (FDA) approved Keytruda for
previously treated patients with recurrent locally advanced or metastatic
gastric or gastroesophageal junction cancer whose tumors express PD-L1.

The European Commission (EC) approved Keytruda for the treatment of
certain patients with locally advanced or metastatic urothelial carcinoma, a
type of bladder cancer.

FDA approved Keytruda for the treatment of adult and pediatric patients
with previously treated unresectable or metastatic, microsatellite
instability-high (MSI-H) or mismatch repair deficient, solid tumors.
FDA approved Keytruda for the treatment of certain patients with locally
advanced or metastatic urothelial carcinoma, a type of bladder cancer.
FDA approved Keytruda in combination with pemetrexed and carboplatin
for the first-line treatment of patients with metastatic nonsquamous
NSCLC.
EC approved Keytruda for the treatment of adult patients with relapsed or
refractory classical Hodgkin Lymphoma (cHL) who have failed autologous
stem cell transplant (ASCT) and brentuximab vedotin (BV), or who are
transplant-eligible and have failed BV.
FDA approved Keytruda for the treatment of adult and pediatric patients
with refractory cHL, or who have relapsed after three or more prior lines of
therapy.
EC approved Keytruda for the first-line treatment of metastatic NSCLC in
adults whose tumors have high PD-L1 expression with no EGFR or ALK
positive tumor mutations.
FDA approved the oral poly (ADP-ribose) polymerase (PARP) inhibitor,
Lynparza (olaparib), as follows:
• New use of Lynparza as a maintenance treatment for recurrent,

epithelial ovarian, fallopian tube or primary peritoneal adult cancer
who are in response to platinum-based chemotherapy, regardless of
BRCA status;

• New use of Lynparza tablets (2 tablets twice daily) as opposed to

capsules (8 capsules twice daily);

• Lynparza tablets also now indicated for the use in patients with
deleterious or suspected deleterious germline BRCA-mutated
advanced ovarian cancer, who have been treated with three or more
prior lines of chemotherapy.

FDA approved Isentress for use in combination with other antiretroviral
agents for the treatment of HIV-1 in neonates - newborn patients from birth
to four weeks of age - weighing at least 2 kg.

Table of Contents

Isentress HD

July 2017

May 2017

Prevymis

November 2017

Steglatro/
Steglujan/
Segluromet(2)

December 2017

EC approved Isentress 600 mg film-coated tablets, in combination with
other anti-retroviral medicinal products, as a once-daily treatment of HIV-1
infection in patients who are treatment-naïve or who are virologically
suppressed on an initial regimen of Isentress 400 mg twice daily.

FDA approved Isentress HD, a once-daily dose of Isentress, in combination
with other antiretroviral agents, for the treatment of HIV-1 infection
patients who are treatment-naïve or whose virus has been suppressed on an
initial regimen of Isentress 400 mg given twice daily.

FDA approved Prevymis (letermovir) for prophylaxis (prevention) of
cytomegalovirus (CMV) infection and disease in adult CMV-seropositive
recipients [R+] of an allogeneic hematopoietic stem cell transplant
(HSCT).
FDA approved Steglatro (ertugliflozin) tablets, an oral sodium-glucose
cotransporter 2 (SGLT2) inhibitor, the fixed-dose combination Steglujan
(ertugliflozin and sitagliptin) tablets, and the fixed-dose combination
Segluromet (ertugliflozin and metformin hydrochloride) for the treatment
of type 2 diabetes.

(1) In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s

Lynparza for multiple cancer types.

(2) In 2013, Merck and Pfizer Inc. announced that they entered into a worldwide collaboration, except Japan, for the co-development and co-promotion

of ertugliflozin.

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 collaborations, and has been refining its sales and marketing efforts to
further address 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.

Table of Contents

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)). Various insurance market reforms have since 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 $385 million, $415 million and
$550 million was recorded by Merck as a reduction to revenue in 2017, 2016 and 2015, respectively, related to the
donut hole provision. Beginning in 2019, the 50% point of service discount will increase to a 70% point of service
discount in the coverage gap, as a result of the Balanced Budget Act of 2018. In addition, the 70% point of service
discount will be extended to biosimilar products. Also, pharmaceutical manufacturers are now required to pay an annual
non-tax deductible health care reform fee. The total annual industry fee was $4.0 billion in 2017 and will increase to
$4.1 billion in 2018. The annual fee will decline to $2.8 billion in 2019 and is currently planned to remain at that amount
thereafter. 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 $210 million, $193 million
and $173 million of costs within Marketing and administrative expenses in 2017, 2016 and 2015, respectively, for the
annual health care reform fee. 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 health care 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. During 2017,
Nevada and California passed similar price transparency bills requiring manufacturers to disclose certain pricing
information and to provide advance notification of price increases. 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
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,

Table of Contents

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 health care 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 Pricing Action Transparency Report for the United States for the years 2010 - 2017. 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 from 2010 - 2016. In 2017, the average net price across the Company’s portfolio declined by 1.9%, reflecting
specific in-year dynamics, including the impact of loss of patent protection for three major Merck medicines.
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 2017, the Company’s gross U.S. sales were reduced by
45.1% 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 will occur again in 2018. 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
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 2018 to varying degrees in the emerging markets.

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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.

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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:

Product
Cancidas
Zostavax
Zetia
Vytorin
Asmanex
NuvaRing
Emend for Injection
Follistim AQ
Noxafil
RotaTeq
Recombivax
Dulera
Januvia
Janumet
Janumet XR
Isentress
Simponi
Adempas(5)
Bridion
Nexplanon
Bravecto
Gardasil
Gardasil 9
Keytruda
Lynparza(6)
Zerbaxa
Sivextro
Belsomra
Prevymis
Steglatro(9)
Steglujan(9)
Segluromet(9)
Zepatier
N/A: Currently no marketing approval.
Note: Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and

Year of Expiration (EU)(1)
Expired
2018 (use)
2018
2019
2018 (formulation)
2018 (delivery system)
2020(2)
2019 (formulation)
2019
Expired
Expired
N/A
2022(2)
2023
N/A
2022(2)
2024
2023 (patents), 2028(2) (SPCs)
2023
2025 (device)
2025 (patents), 2029 (SPCs)
2021(2)
2025 (patents), 2030(2) (SPCs)
2028 (patents), 2030(2) (SPCs)
2024 (patents), 2029(2) (SPCs)
2023 (patents), 2028(2) (SPCs)
2024 (patents), 2029(2) (SPCs)
N/A
2024(8)
N/A
N/A
N/A
2030 (patents), 2031(2) (SPCs)

Year of Expiration (U.S.)
Expired
Expired
Expired
Expired
2018 (formulation)
2018 (delivery system)
2019(2)
2019 (formulation)
2019
2019
2020 (method of making)
2020 (combination)
2022(2)
2022(2)
2022(2)
2024
N/A(4)
2026(2)
2026(2) (with pending PTE)
2027 (device)
2027 (with pending PTE)
2028
2028
2028
2028(2) (with pending PTE)
2028(2) (with pending PTE)
2028(2)
2029(2)
2029(2) (with pending PTE)
2031(2) (with pending PTE)
2031 (with pending PTE)
2031 (with pending PTE)
2031(2)

Year of Expiration (Japan)
2022
N/A
2019
2019
2020 (formulation)
N/A
2020
2019 (formulation)
N/A
Expired
Expired
N/A
2025-2026(3)
N/A
N/A
2022
N/A(4)
2027-2028(3)
2024
Not Marketed
2029
2017
N/A
2032
2024(7)
N/A
N/A
2031
N/A
N/A
N/A
N/A
2034 (with pending PTE)

Supplementary Data,” Note 11. “Contingencies and Environmental Liabilities” below.

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the United Kingdom (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.
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.
Being commercialized in a worldwide collaboration with Bayer AG.
Being developed and commercialized in a global strategic oncology collaboration with AstraZeneca.
PTE application to be filed by April 2018. Expected expiry 2029.
SPC applications to be filed by July 2018. Expected expiry 2029. Eligible for Pediatric Exclusivity.
Being developed and promoted in a worldwide, except Japan, collaboration with Pfizer.

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

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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.

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)
MK-1439 (doravirine)
MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate)

Currently Anticipated
Year of Expiration (in the U.S.)
2020 (method of making)
2031
2031

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-5618 (selumetinib)(1)
MK-7655A (relebactam + imipenem/cilastatin)
MK-1242 (vericiguat)(2)

Currently Anticipated
Year of Expiration (in the U.S.)
2023
2023
2030
2031

(1)

(2)

Being developed and commercialized in a global strategic oncology collaboration with AstraZeneca.
Being developed in a worldwide clinical development collaboration with Bayer AG.

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 11. “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 2017 on patent and know-how licenses and other rights amounted to $158 million. Merck

also incurred royalty expenses amounting to $944 million in 2017 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. At December 31, 2017, approximately 12,650 people
were employed in the Company’s research activities. Research and development expenses were $10.2 billion in 2017,

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$10.1 billion in 2016 and $6.7 billion in 2015 (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.

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 ensuring that externally sourced programs remain an important
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 that 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 cancer,
cardiovascular diseases, diabetes, infectious diseases, neurosciences, obesity, pain, respiratory diseases, and vaccines.

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.

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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
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
European Medicines Agency (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.

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Research and Development Update

The Company currently has several candidates under regulatory review in the United States and

internationally.

Keytruda is an approved anti-PD-1 therapy in clinical development for expanded indications in different

cancer types.

In December 2017, the FDA accepted for review a supplemental BLA for Keytruda for the treatment of
adult and pediatric patients with refractory primary mediastinal B-cell lymphoma (PMBCL), or who have relapsed
after two or more prior lines of therapy. The FDA granted Priority Review status with a PDUFA, or target action, date
of April 3, 2018.

Additionally, Keytruda has received Breakthrough Therapy designation from the FDA in combination with
axitnib as a first-line treatment for patients with advanced or metastatic renal cell carcinoma; for the treatment of high-
risk early-stage triple-negative breast cancer in combination with neoadjuvant chemotherapy; and for the treatment of
Merkel cell carcinoma. Also, in January 2018, Merck and Eisai Co., Ltd. (Eisai) announced receipt of Breakthrough
Therapy designation from the FDA for Eisai’s multiple receptor tyrosine kinase inhibitor Lenvima (lenvatinib) in
combination with Keytruda for the potential treatment of patients with advanced and/or metastatic renal cell carcinoma.
The Lenvima and Keytruda combination therapy is being jointly developed by Eisai and Merck. This marks the 12th
Breakthrough Therapy designation granted to Keytruda. 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.

In January 2018, Merck announced that the pivotal Phase 3 KEYNOTE-189 trial investigating Keytruda in
combination with pemetrexed (Alimta) and cisplatin or carboplatin, for the first-line treatment of patients with metastatic
non-squamous NSCLC, met its dual primary endpoints of overall survival (OS) and progression-free survival (PFS).
Based on an interim analysis conducted by the independent Data Monitoring Committee, treatment with Keytruda in
combination with pemetrexed plus platinum chemotherapy resulted in significantly longer OS and PFS than pemetrexed
plus platinum chemotherapy alone. Results from KEYNOTE-189 will be presented at an upcoming medical meeting
and submitted to regulatory authorities.

In 2017, the FDA placed a full clinical hold on KEYNOTE-183 and KEYNOTE-185 and a partial clinical
hold on Cohort 1 of KEYNOTE-023, three combination studies of Keytruda with lenalidomide or pomalidomide versus
lenalidomide or pomalidomide alone in the blood cancer multiple myeloma. This decision followed a review of data
by the Data Monitoring Committee in which more deaths were observed in the Keytruda arms of KEYNOTE-183 and
KEYNOTE-185. The FDA determined that the data available at the time indicated that the risks of Keytruda plus
pomalidomide or lenalidomide outweighed any potential benefit for patients with multiple myeloma. All patients
enrolled in KEYNOTE-183 and KEYNOTE-185 and those in the Keytruda/lenalidomide/dexamethasone cohort in
KEYNOTE-023 have discontinued investigational treatment with Keytruda. This clinical hold does not apply to other
studies with Keytruda.

The Keytruda clinical development program consists of more than 700 clinical trials, including more than
400 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, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung and triple-negative
breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.

MK-8835, ertugliflozin, an investigational oral SGLT-2 inhibitor in development to help improve glycemic
control in adults with type 2 diabetes, and two fixed-dose combination products (MK-8835A, ertugliflozin and Januvia,
and MK-8835B, ertugliflozin and metformin) are under review in the EU. In January 2018, the Committee for Medicinal
Products for Human Use (CHMP) of the EMA adopted a positive opinion recommending approval of these medicines.
The CHMP positive opinion will be considered by the EC. Ertugliflozin and the two fixed-dose combination products
were approved by the FDA in December 2017.

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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.

MK-1439, doravirine, is an investigational, non-nucleoside reverse transcriptase inhibitor for the treatment
of HIV-1 infection. In January 2018, Merck announced that the FDA accepted for review two NDAs for doravirine.
The NDAs include data for doravirine as a once-daily tablet for use in combination with other antiretroviral agents,
and for use of doravirine with lamivudine and tenofovir disoproxil fumarate in a once-daily fixed-dose combination
single tablet as a complete regimen (MK-1439A). The PDUFA action date for both applications is October 23, 2018.

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 joint venture 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. In November 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies
are working to provide additional data requested by the FDA. 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-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-7339, Lynparza (olaparib), is an oral PARP inhibitor currently approved for certain types of ovarian
and breast cancer. In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-
develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types.

MK-5618, selumetinib, is an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein
kinase (MAPK) pathway, currently being developed for multiple cancer types. Additionally, in February 2018, the FDA
granted Orphan Drug designation for selumetinib for the treatment of neurofibromatosis type 1. The development of
selumetinib is part of the global strategic oncology collaboration between Merck and AstraZeneca reference above.

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
to be included in the first regulatory filing are anticipated in the first half of 2018.

MK-1242, vericiguat, is an investigational treatment for heart failure being studied in patients suffering
from chronic heart failure. The development of vericiguat is part of a worldwide strategic collaboration between Merck
and Bayer.

V212 is an inactivated varicella zoster virus (VZV) vaccine in development for the prevention of herpes
zoster. The Company completed a Phase 3 trial in autologous hematopoietic cell transplant patients and 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. The study in

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patients with solid tumor malignancies undergoing chemotherapy met its primary endpoints, but the primary efficacy
endpoint was not met in patients with hematologic malignancies. Merck will present the results from this study at an
upcoming scientific meeting. Due to the competitive environment, the development of V212 is currently on hold.

The Company also discontinued certain drug candidates.

In February 2018, Merck announced that it will be stopping protocol 019, also known as the APECS study,
a Phase 3 study evaluating verubecestat, MK-8931, an investigational small molecule inhibitor of the beta-site amyloid
precursor protein cleaving enzyme 1 (BACE1), in people with prodromal Alzheimer’s disease. The decision to stop
the study follows a recommendation by the external Data Monitoring Committee (eDMC), which assessed overall
benefit/risk during a recent interim safety analysis. The eDMC concluded that it was unlikely that positive benefit/risk
could be established if the trial continued.

In 2017, Merck announced that it will not submit applications for regulatory approval for MK-0859,
anacetrapib, the Company’s investigational cholesteryl ester transfer protein (CETP) inhibitor. The decision followed
a thorough review of the clinical profile of anacetrapib, including discussions with external experts.

Also in 2017, Merck made a strategic decision to discontinue the development of the investigational
combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the
treatment of HCV infection. This decision was made based on a review of available Phase 2 efficacy data and in
consideration of the evolving marketplace and the growing number of treatment options available for patients with
chronic HCV infection, including Zepatier, which is currently marketed by the Company for the treatment of adult
patients with chronic HCV infection.

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The chart below reflects the Company’s research pipeline as of February 23, 2018. 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

Cancer

Bacterial Infection

MK-3475 Keytruda

Advanced Solid Tumors
Ovarian
Prostate

Chronic Cough
MK-7264

Diabetes Mellitus
MK-8521(2)
HIV Infection
MK-8591

Pneumoconjugate Vaccine

V114

Schizophrenia
MK-8189

MK-7655A (relebactam+imipenem/cilastatin)
(October 2015)

Cancer

MK-3475 Keytruda

Breast (October 2015)
Colorectal (November 2015)
Esophageal (December 2015)
Gastric (May 2015) (EU)
Head and Neck (November 2014) (EU)
Hepatocellular (May 2016)
Nasopharyngeal (April 2016)
Renal (October 2016)
Small-Cell Lung (May 2017)

MK-7339 Lynparza(1)

Pancreatic (December 2014)
Prostate (April 2017)
MK-5618 (selumetinib) (1)
Thyroid (June 2013)

Ebola Vaccine

V920 (March 2015)

Heart Failure

MK-1242 (vericiguat) (September 2016)(1)

Herpes Zoster

V212 (inactivated VZV vaccine)

(December 2010)(2)

HIV

MK-1439 (doravirine) (December 2014) (EU)
MK-1439A (doravirine/lamivudine/tenofovir
disoproxil fumarate) (June 2015) (EU)

New Molecular Entities/Vaccines
Diabetes Mellitus

MK-0431J (sitagliptin+ipragliflozin) (Japan)(1)
MK-8835 (ertugliflozin) (EU)(1)
MK-8835A (ertugliflozin+sitagliptin) (EU)(1)
MK-8835B (ertugliflozin+metformin) (EU)(1)

HIV

MK-1439 (doravirine) (U.S.)
MK-1439A (doravirine/lamivudine/tenofovir

disoproxil fumarate) (U.S.)

Pediatric Hexavalent Combination Vaccine

V419 (U.S.)(3)

Certain Supplemental Filings

MK-3475 Keytruda

Relapsed or Refractory Primary Mediastinal
B‑Cell Lymphoma (PMBCL) (U.S.)

MK-7339 Lynparza(1)

Broader Approval for Ovarian Cancer (EU)

Footnotes:
(1) Being developed in a collaboration.
(2) Development is currently on hold.
(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. In November 2015, the FDA issued a
CRL with respect to V419. Both companies are
working to provide additional data requested by
the FDA.

Employees

As of December 31, 2017, the Company had approximately 69,000 employees worldwide, with
approximately 26,700 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. Since inception of the programs through December 31, 2017,
Merck has eliminated approximately 43,350 positions comprised of employee separations, as well as the elimination
of contractors and vacant positions. The Company has substantially completed the actions under these programs.

Environmental Matters

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environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation
and environmental liabilities were $11 million in 2017, and are estimated at $56 million in the aggregate for the years
2018 through 2022. 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 $82 million and $83
million at December 31, 2017 and 2016, 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 $63 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 57% of sales in 2017,
54% of sales in 2016 and 56% of sales in 2015.

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.

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

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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 11.
“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. 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. 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
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 lost U.S. patent protection for Vytorin in April 2017. As a result, the
Company experienced a significant and rapid loss of sales of Zetia and Vytorin in the United States in 2017, which the
Company expects will continue in 2018. In addition, the patent that provides U.S. market exclusivity for NuvaRing
will expire in April 2018 and the Company anticipates a significant decline in U.S. NuvaRing sales thereafter.

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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 and Isentress.
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.

For example, in 2018, the Company anticipates that sales of Zepatier will be materially unfavorably affected
by increasing competition and declining patient volumes. The Company also anticipates that sales of Zostavax will be
materially unfavorably affected due to competition.

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 that it may develop
through collaborations and joint ventures and products that 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 and Japan. 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 in 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 that encourage 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 continued pricing pressure with respect to its products.

The Company faces continued 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.

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 continue 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 the Executive
branch, 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”). In 2017, the
Company’s revenue was reduced by $385 million due to this requirement. Beginning in 2019, the 50% point of service
discount will increase to a 70% point of service discount in the coverage gap, as a result of the Balanced Budget Act
of 2018. In addition, the 70% point of service discount will be extended to biosimilar products. Also, pharmaceutical
manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry
fee was $4.0 billion in 2017 and will be $4.1 billion in 2018. 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. In
2017, the Company recorded $210 million of costs for this annual fee.

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

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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.

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.

The Company is increasingly dependent on sophisticated software applications and computing
infrastructure. In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide
operations, including manufacturing, research and sales operations. The Company could be a target of future
cyber-attacks.

The Company is increasingly dependent on sophisticated software applications and complex information
technology systems and computing infrastructure (collectively, “IT systems”) to conduct critical operations. Disruption,
degradation, or manipulation of these IT systems through intentional or accidental means could impact key business
processes. Cyber-attacks against the Company’s IT systems could result in exposure of confidential information, the
modification of critical data, and/or the failure of critical operations. Misuse of these IT systems could result in the
disclosure of sensitive personal information or the theft of trade secrets, intellectual property, or 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.

On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide
operations, including manufacturing, research and sales operations. All of the Company’s manufacturing sites are now
operational, manufacturing active pharmaceutical ingredient (API), formulating, packaging and shipping product. The
Company’s external manufacturing was not impacted. Throughout this time, Merck continued to fulfill orders and ship
product.

Due to the cyber-attack, as anticipated, the Company was unable to fulfill orders for certain products in certain
markets, which had an unfavorable effect on sales in 2017 of approximately $260 million. In addition, the Company
recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in Materials and Production
costs, as well as expenses related to remediation efforts in Marketing and Administrative expenses and Research and
Development expenses, which aggregated $285 million in 2017, net of insurance recoveries of approximately $45
million. Due to a residual backlog of orders, the Company anticipates that in 2018 sales will be unfavorably affected
in certain markets by approximately $200 million from the cyber-attack. Merck does not expect a significant impairment
to the value of intangible assets related to marketed products or inventories as a result of the cyber-attack.

The Company has insurance coverage insuring against costs resulting from cyber-attacks and has received
proceeds. However, there may be disputes with the insurers about the availability of the insurance coverage for claims
related to this incident.

Additionally, the temporary production shut-down from the cyber-attack contributed to the Company’s inability
to meet higher than expected demand for Gardasil 9, which resulted in Merck’s decision to borrow doses of Gardasil
9 from the U.S. Centers for Disease Control and Prevention Pediatric Vaccine Stockpile. The Company subsequently
replenished a portion of the borrowed doses in 2017. The net effect of the borrowing and subsequent partial replenishment
was a reduction in sales of $125 million in 2017. The Company anticipates it will replenish the remaining borrowed
doses in the second half of 2018.

The Company has implemented a variety of measures to further enhance its systems to guard against similar
attacks in the future, and also is pursuing an enterprise-wide effort to enhance the Company's resiliency against future
cyber-attacks, including incidents similar to the June 2017 attack. The objective of these efforts is not only to protect
against future cyber-attacks, but also to improve the speed of the Company’s recovery from such attacks and enable
continued business operations to the greatest extent possible during any recovery period.

Although the aggregate impact of cyber-attacks and network disruptions, including the June 2017 cyber-attack,
on the Company’s operations and financial condition has not been material to date, the Company continues to be a

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target of events of this nature and expects them to continue. The Company monitors its data, information technology
and personnel usage of Company IT 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 IT systems
will be successful in preventing disruptions to its operations, including its manufacturing, research and sales operations.
Any such disruption could result in loss of revenue, or the loss of critical or sensitive information from the Company’s
or the Company’s third party providers’ databases or IT systems and could also result in financial, legal, business or
reputational harm to the Company and potentially substantial remediation costs.

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 health care 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.

Uncertainty in global economic and geopolitical conditions may result in a 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 the United States, pricing pressures continue on many of the Company’s products and, in several 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 2017. The Company anticipates these
pricing actions, including the biennial price reductions in Japan that will occur again in 2018, and other austerity
measures will continue to negatively affect revenue performance in 2018.

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, including the imposition of
trade sanctions or similar restrictions by the United States or other governments;

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

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insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or
disease. For example, in 2017, the Company’s lone manufacturing plant in Puerto Rico was negatively affected by
Hurricane Maria.

On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the
EU, commonly referred to as “Brexit”. As a result of the referendum, the British government has begun negotiating
the terms of the UK’s future relationship with the EU. Although it is unknown what those terms will be, it is possible
that there will be greater restrictions on imports and exports between the UK and EU countries, increased regulatory
complexities, and cross boarder labor issues that could adversely impact the Company’s business operations in the UK.

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 certain of its

products, including vaccines.

Merck has, in the past, experienced difficulties in manufacturing certain of its products, including vaccines.
In addition, the network cyber-attack experienced by the Company in June 2017 led to a disruption of the Company’s
operations, including its manufacturing operations. 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.

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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.

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, such as tax rate changes, new tax laws,

and revised tax law interpretations in domestic and foreign jurisdictions.

Further, on December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (TCJA) became law. The final
impact of the TCJA on the Company may differ from the estimates reported, possibly materially, due to such factors
as changes in interpretations and assumptions made, additional guidance that may be issued, and actions taken by the
Company as a result of the TCJA, among others.

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.

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

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substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to animal health include
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 and vaccines 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 and vaccines,
particularly human and animal health vaccines, is a long, expensive and uncertain process. There are unique risks and
uncertainties with biologics and vaccines, 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 and vaccines 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 generally required for the
release of each manufactured commercial lot.

• Manufacturing biologics and vaccines, 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
and vaccine 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 and vaccines are frequently costly to manufacture because production ingredients are derived
from living animal or plant material, and most biologics and vaccines 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 variability in the manufacturing process and
could lead to allegations of harm, including infections or allergic reactions, which allegations would
be reviewed through a standard investigation process that could lead to 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. The Company is subject to a substantial number of product liability claims. See Item 8. “Financial
Statements and Supplementary Data,” Note 11. “Contingencies and Environmental Liabilities” below for more
information on the Company’s current product liability litigation. 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

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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 or its
products on 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, or negative variations of any of the
foregoing. 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.

•
performance.

Increased “brand” competition in therapeutic areas important to the Company’s long-term business

•

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.

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•

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.

operations.

•

Cyber-attacks on the Company’s information technology systems, which could disrupt the Company’s

Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA

and foreign regulatory authorities.

•

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 Upper Gwynedd,
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 $1.9 billion in 2017, $1.6 billion in 2016 and $1.3 billion in 2015. In the United
States, these amounted to $1.2 billion in 2017, $1.0 billion in 2016 and $879 million in 2015. Abroad, such expenditures
amounted to $728 million in 2017, $594 million in 2016 and $404 million in 2015.

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.

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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 11. “Contingencies and Environmental Liabilities”.

Item 4. Mine Safety Disclosures.

Not Applicable.

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Executive Officers of the Registrant (ages as of February 1, 2018)

All officers listed below 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 any other person(s).

Name

Age

Offices and Business Experience

Kenneth C. Frazier

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

Ashley Watson

Chairman, President and Chief Executive Officer (since December
2011)

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, Chief Financial Officer & Global Services
(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)

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 and President, Global Human Health (since
May 2010)

Senior Vice President, Chief Ethics and Compliance Officer (since
March 2015); Senior Vice President, Deputy General Counsel and
Chief Ethics & Compliance Officer, Hewlett-Packard Company
(January 2011 - March 2015)

* On February 21, 2018, Mr. Holston notified the Company that he will resign from his position with the Company, effective April 1, 2018.

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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 cash dividends paid per common

share and the high and low sales prices of the Company’s Common Stock as reported by the NYSE.

Cash Dividends Paid per Common Share

2017
2016

Common Stock Market Prices
2017
High
Low
2016
High
Low

Year
$ 1.88
$ 1.84

4th Q
$ 0.47
$ 0.46

3rd Q
$ 0.47
$ 0.46

2nd Q
$ 0.47
$ 0.46

1st Q
$ 0.47
$ 0.46

4th Q
64.90
53.63

3rd Q
66.41
61.16

2nd Q
66.40
61.87

1st Q
66.80
59.05

$ 65.46
$ 58.29

$ 64.00
$ 57.18

$ 57.87
$ 52.44

$ 53.60
$ 47.97

As of January 31, 2018, there were approximately 121,125 shareholders of record of the Company’s Common

Stock.

Issuer purchases of equity securities for the three months ended December 31, 2017 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)

2,172,335

11,850,338
16,285,000

30,307,673

($ in millions)

Average Price
Paid Per
Share

Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs(1)

$63.38

$55.03
$56.05

$56.17

$2,605

$1,953
$11,040

$11,040

(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. In November 2017, the Board of Directors authorized additional purchases of up to $10 billion of Merck’s common stock
for its treasury. Shares are approximated.

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Performance Graph

The following graph assumes a $100 investment on December 31, 2012, and reinvestment of all dividends,
in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of major pharmaceutical
companies, which are: AbbVie Inc., Amgen Inc., AstraZeneca plc, Bristol-Myers Squibb Company, Johnson & Johnson,
Eli Lilly and Company, GlaxoSmithKline plc, Novartis AG, Pfizer Inc., Roche Holding AG, and Sanofi SA.

Comparison of Five-Year Cumulative Total Return*
Merck & Co., Inc., Composite Peer Group and S&P 500 Index

End of
Period Value
$162
185
208

2017/2012
CAGR**
10%
13%
16%

MERCK

PEER GRP.

S&P 500

MERCK
PEER GRP.**
S&P 500

S
R
A
L
L
O
D

300

250

200

150

100

2012

2013

2014

2015

2016

2017

MERCK
PEER GRP.
S&P 500

2012
100.00
100.00
100.00

2013
126.90
134.60
132.40

2014
148.70
150.20
150.50

2015
142.70
154.70
152.50

2016
164.30
151.60
170.80

2017
161.80
184.70
208.10

*
**

Compound Annual Growth Rate
Peer group average was calculated on a market cap weighted basis.

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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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
Property, plant and equipment, net
Total assets
Long-term debt
Total equity
Year-End Statistics:
Number of stockholders of record
Number of employees

2017 (1)

2016 (2)

2015 (3)

2014 (4)

2013

40,122
12,775
9,830
10,208
776
12
6,521
4,103
2,418
24
2,394

0.88

0.87

5,177
1.89
1,888
1,455
2,730
2,748

6,152
12,439
87,872
21,353
34,569

39,807
13,891
9,762
10,124
651
720
4,659
718
3,941
21
3,920

1.42

1.41

5,135
1.85
1,614
1,611
2,766
2,787

13,410
12,026
95,377
24,274
40,308

39,498
14,934
10,313
6,704
619
1,527
5,401
942
4,459
17
4,442

1.58

1.56

5,115
1.81
1,283
1,593
2,816
2,841

10,550
12,507
101,677
23,829
44,767

42,237
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
1.77
1,317
2,471
2,894
2,928

14,198
13,136
98,096
18,629
48,791

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

121,700
69,000

129,500
68,000

135,500
68,000

142,000
70,000

149,400
77,000

(1) Amounts for 2017 include a provisional net tax charge related to the enactment of U.S. tax legislation and a charge related to the formation of a

collaboration with AstraZeneca.

(2) Amounts for 2016 include a charge related to the settlement of worldwide patent litigation related to Keytruda.
(3) 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.

(4) 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.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Description of Merck’s Business

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. On December 31, 2016,
Merck and Sanofi Pasteur S.A. (Sanofi) terminated their equally-owned joint venture, Sanofi Pasteur MSD (SPMSD),
which developed and marketed vaccines in Europe. Beginning in 2017, Merck is recording vaccine sales and incurring
costs as a result of operating its vaccines business in the European markets that were previously part of the SPMSD
joint venture, which was accounted for as an equity method affiliate.

Overview

During 2017, Merck continued to bring innovation to patients and physicians, expanding its focus in oncology
and advancing other programs in its late-stage pipeline. Throughout 2017, Keytruda, the Company’s anti-PD-1
(programmed death receptor-1) therapy, received approval for several additional indications globally, including U.S.
Food and Drug Administration (FDA) approval in combination with pemetrexed and carboplatin, a commonly used
chemotherapy regimen, for the first-line treatment of metastatic nonsquamous non-small-cell lung cancer (NSCLC),
irrespective of PD-L1 expression. Keytruda is the only anti-PD-1 treatment approved in the first-line setting as both
monotherapy and combination therapy for appropriate patients with metastatic NSCLC. In addition, Lynparza, an oral
poly (ADP-ribose) polymerase (PARP) inhibitor, which is being developed in a collaboration, received FDA approval
for the treatment of patients with germline BRCA-mutated, HER2-negative metastatic breast cancer who have been
previously treated with chemotherapy. Additionally, in November 2017, the FDA approved Prevymis for prophylaxis
(prevention) of cytomegalovirus (CMV) infection and disease, and in December 2017, the FDA approved Steglatro,
Steglujan and Segluromet for the treatment of type 2 diabetes. In January 2018, Prevymis was also approved in the
European Union (EU).

Worldwide sales were $40.1 billion in 2017, an increase of 1% compared with 2016. Sales growth was
driven primarily by the launches of Keytruda, Zepatier and Bridion, as well as positive performance from Merck’s
Animal Health business. In addition, revenue in 2017 benefited from the sale of vaccines in the markets that were
previously part of the now-terminated SPMSD vaccines joint venture. Growth in these areas was largely offset by the
effects of generic and biosimilar competition that resulted in sales declines for products including Zetia, Vytorin, Cubicin
and Remicade.

Augmenting Merck’s portfolio and pipeline with external innovation remains an important component of
the Company’s overall strategy. In July 2017, Merck and AstraZeneca entered into a global strategic oncology
collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types. Lynparza is an
oral PARP inhibitor currently approved for certain types of ovarian and breast cancer. The companies will develop and
commercialize Lynparza both as monotherapy and in combination trials with other potential medicines. Independently,
Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and
PD‑L1 medicines. The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral,
potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being

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developed for multiple indications including thyroid cancer. In addition, in October 2017, Merck acquired Rigontec
GmbH (Rigontec), a leader in accessing the retinoic acid-inducible gene I pathway, part of the innate immune system,
as a novel and distinct approach in cancer immunotherapy to induce both immediate and long-term anti-tumor immunity.
Also, in March 2017, Merck acquired a controlling interest in Vallée S.A. (Vallée), a leading privately held producer
of animal health products in Brazil.

Merck continues to prioritize resources to maximize opportunities for ongoing and upcoming product
launches. Keytruda is launching around the world in multiple indications. In 2017, Merck achieved multiple additional
regulatory milestones for Keytruda, including approval from the FDA as combination therapy for appropriate patients
with metastatic NSCLC as noted above, as well as monotherapy approval for the treatment of certain patients with
recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma; for the treatment of
certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer; for the treatment
of adult and pediatric patients with classical Hodgkin lymphoma (cHL); and for the treatment of adult and pediatric
patients with unresectable or metastatic, microsatellite instability-high (MSI-H) or mismatch repair deficient solid
tumors. During 2017, Keytruda also received approval in the EU for the treatment of certain patients with cHL and
urothelial carcinoma.

Merck continues to evaluate its pipeline, focusing its research efforts on the opportunities it believes have
the greatest potential to address unmet medical needs. 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.
MK-1439, doravirine, an investigational, non-nucleoside reverse transcriptase inhibitor for the treatment of HIV-1
infection, and MK-1439A, doravirine with lamivudine and tenofovir disoproxil fumarate, are currently under review
with the FDA. In addition, the FDA accepted for review a supplemental Biologics License Application (BLA) for
Keytruda for the treatment of adult and pediatric patients with refractory primary mediastinal B-cell lymphoma
(PMBCL) that is refractory to or has relapsed after two prior lines of therapy. Additionally, Steglatro, Steglujan and
Segluromet are under review in the EU.

The Company’s Phase 3 oncology programs include Keytruda in the therapeutic areas of breast, colorectal,
esophageal, gastric, head and neck, hepatocellular, nasopharyngeal, renal and small-cell lung cancers; Lynparza for
pancreatic and prostate cancer; and selumetinib for thyroid cancer. Additionally, the Company has candidates in Phase
3 clinical development in several other therapeutic areas (see “Research and Development” below).

The Company continues to support its innovation strategy by remaining disciplined and prioritizing resources
wherever possible to not only fund investment in the many opportunities in Merck’s pipeline that it believes can help
drive long-term growth, but also fund near-term opportunities to grow revenue. Research and development expenses
in 2017 reflect increased clinical development spending as the Company continues to invest in the pipeline.

In November 2017, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.48 per share
from $0.47 per share. During 2017, the Company returned $9.2 billion to shareholders through dividends and share
repurchases.

Earnings per common share assuming dilution attributable to common shareholders (EPS) for 2017 were
$0.87 compared with $1.41 in 2016. EPS in both years reflect the impact of acquisition and divestiture-related costs,
which in 2016 includes a charge related to the uprifosbuvir clinical development program, as well as restructuring costs
and certain other items, which in 2017 include a provisional net tax charge related to the recent enactment of U.S. tax
legislation and an aggregate charge related to the formation of a collaboration with AstraZeneca. Non-GAAP EPS,
which exclude these items, were $3.98 in 2017 and $3.78 in 2016 (see “Non-GAAP Income and Non-GAAP EPS”
below).

Cyber-attack

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Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in Materials and
production costs, as well as expenses related to remediation efforts in Marketing and administrative expenses and
Research and development expenses, which aggregated approximately $285 million in 2017, net of insurance recoveries
of approximately $45 million. Due to a residual backlog of orders for certain products, the Company anticipates that
in 2018 sales will be unfavorably affected in certain markets by approximately $200 million from the cyber-attack.
Merck does not expect a significant impairment to the value of intangible assets related to marketed products or
inventories as a result of the cyber-attack.

As referenced above, the Company has insurance coverage insuring against costs resulting from cyber-
attacks and has received insurance proceeds. However, there may be disputes with the insurers about the availability
of the insurance coverage for claims related to this incident.

Additionally, the temporary production shut-down from the cyber-attack contributed to the Company’s
inability to meet higher than expected demand for Gardasil 9, which resulted in Merck’s decision to borrow doses of
Gardasil 9 from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile. The Company
subsequently replenished a portion of the borrowed doses in 2017. The net effect of the borrowing and subsequent
partial replenishment was a reduction in sales of $125 million in 2017. The Company anticipates it will replenish the
remaining borrowed doses in the second half of 2018.

Hurricane Maria

In September 2017, Hurricane Maria made direct landfall on Puerto Rico. The Company has one plant in
Puerto Rico that makes a limited number of its pharmaceutical products, and the Company also works with contract
manufacturers on the island. Merck’s plant did not sustain substantial damage, and production activities at the plant have
resumed. While power has been restored to the facility, it is not yet fully reliable and the plant continues to be prepared
to use alternative sources of power and water. The Company is making progress to fully restore normal operations
despite the significant damage to the island’s infrastructure. Supply chains within Puerto Rico are improving, but are
not yet fully restored. There was an immaterial impact to sales in 2017 and the Company expects an immaterial impact
to sales in 2018.

Operating Results

Sales

Worldwide sales were $40.1 billion in 2017, an increase of 1% compared with 2016. Sales growth in 2017
was driven primarily by higher sales of recently launched products including Keytruda, Zepatier and Bridion.
Additionally, sales in 2017 benefited from the December 31, 2016 termination of SPMSD, which marketed vaccines
in most major European markets. In 2017, Merck began recording vaccine sales in the markets that were previously
part of the SPMSD joint venture resulting in incremental vaccine sales of approximately $400 million during 2017.
Higher sales of Pneumovax 23 and Adempas, as well as animal health products also contributed to revenue growth in
2017. These increases were largely offset by the effects of generic competition for certain products including Zetia,
which lost U.S. market exclusivity in December 2016, Vytorin, which lost U.S. market exclusivity in April 2017, Cubicin
due to U.S. patent expiration in June 2016, and Cancidas, which lost EU patent protection in April 2017. Revenue
growth was also offset by continued biosimilar competition for Remicade and ongoing generic erosion for products
including Singulair and Nasonex. Collectively, the sales decline attributable to the above products affected by generic
and biosimilar competition was $3.3 billion in 2017. Lower sales of other products within the Diversified Brands
franchise that includes certain products approaching the expiration of their marketing exclusivity or are no longer
protected by patents in developed markets, including Dulera Inhalation Aerosol, as well as lower combined sales of
the diabetes franchise of Januvia and Janumet, and declines in sales of Isentress/Isentress HD also partially offset
revenue growth. Additionally, sales in 2017 were reduced by $125 million due to a borrowing the Company made from
the CDC Pediatric Vaccine Stockpile of doses of Gardasil 9 as discussed below. Also, as anticipated, the Company was
unable to fulfill orders for certain products in certain markets due to the cyber-attack, which had an unfavorable effect
on sales in 2017 of approximately $260 million.

Sales in the United States were $17.4 billion in 2017, a decline of 6% compared with $18.5 billion in 2016.
The decrease was driven primarily by the effects of generic competition for Zetia and Vytorin, Cubicin, and declines
of products within Diversified Brands including Nasonex and Dulera Inhalation Aerosol. Lower sales of Januvia/
Janumet, Gardasil/Gardasil 9, Isentress/Isentress HD and Zostavax, also contributed to the U.S. sales decline in 2017.

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These declines were partially offset by higher sales of Keytruda, Zepatier, Bridion, and Pneumovax 23, along with
higher sales of animal health products.

International sales were $22.7 billion in 2017, an increase of 6% compared with $21.3 billion in 2016,
primarily reflecting growth in Keytruda and Zepatier, and higher sales of vaccines due to the termination of the SPMSD
joint venture, as well as higher sales of animal health products. Sales growth was partially offset by ongoing biosimilar
competition for Remicade, as well as generic erosion for Cancidas and products within Diversified Brands. International
sales represented 57% and 54% of total sales in 2017 and 2016, respectively.

Global efforts toward health care cost containment continue to exert pressure on product pricing and market
access worldwide. In the United States, pricing pressures continue on many of the Company’s products and, in several
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 2017. The Company
anticipates these pricing actions, including the biennial price reductions in Japan that will occur again in 2018, and
other austerity measures will continue to negatively affect revenue performance in 2018.

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 of 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 largely 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 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 the economic conditions and volatility in that country.

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Sales of the Company’s products were as follows:

($ in millions)

Primary Care and Women’s Health

Cardiovascular

Zetia
Vytorin
Atozet
Adempas

Diabetes

Januvia
Janumet

General Medicine and Women’s Health

NuvaRing
Implanon/Nexplanon
Follistim AQ

Hospital and Specialty

Hepatitis

Zepatier

HIV

Isentress/Isentress HD

Hospital Acute Care

Bridion
Noxafil
Invanz
Cancidas
Cubicin (1)
Primaxin
Immunology
Remicade
Simponi

Oncology

Keytruda
Emend
Temodar

Diversified Brands

Respiratory
Singulair
Nasonex
Dulera

Other

Cozaar/Hyzaar
Arcoxia
Fosamax

Vaccines (2)

U.S.

2017
Int’l

Total

U.S.

2016
Int’l

Total

U.S.

2015
Int’l

Total

352
124
—
—

992
627
225
300

2,153
863

1,584
1,296

564
496
123

771

565

239
309
361
20
189
10

—
—

197
191
174

888

639

465
327
241
402
193
270

837
819

1,344
751
225
300

3,737
2,158

761
686
298

1,660

1,204

704
636
602
422
382
280

837
819

2,309
342
16

1,500
213
256

3,809
556
271

40
54
261

18
—
6

692
333
26

466
363
235

732
387
287

484
363
241

1,588
473
1
—

2,286
984

972
668
146
169

1,622
1,217

576
420
157

488

721

77
284
329
25
906
4

—
—

792
356
15

40
184
412

16
—
5

202
186
197

666

405
312
233
533
181
293

1,268
766

610
193
268

874
352
24

494
450
279

2,560
1,141
146
169

3,908
2,201

777
606
355

555

1,387

482
595
561
558
1,087
297

1,268
766

1,402
549
283

915
537
436

511
450
284

1,612
479
2
—

2,263
976

515
367
160

—

797

—
212
322
24
1,030
8

—
—

393
326
7

39
449
515

30
—
12

914
771
34
30

1,601
1,175

216
221
223

—

714

353
275
247
548
97
305

1,794
690

173
209
306

892
409
21

637
471
347

2,526
1,251
36
30

3,863
2,151

732
588
383

—

1,511

353
487
569
573
1,127
313

1,794
690

566
535
312

931
858
536

667
471
359

Gardasil/Gardasil 9
ProQuad/M-M-R II/Varivax
Pneumovax 23
RotaTeq
Zostavax

Other pharmaceutical (3)

Total Pharmaceutical segment sales

Other segment sales (4)
Total segment sales

Other (5)

1,565
1,374
581
481
422
1,246
15,854
1,486
17,340
84
$ 17,424

743
303
240
204
246
3,049
19,536
2,785
22,321
377
$ 22,698

2,308
1,676
821
686
668
4,295
35,390
4,272
39,662
460
$ 40,122

1,780
1,362
447
482
518
1,345
17,073
1,374
18,447
31
$ 18,478

393
279
193
169
168
3,228
18,077
2,489
20,566
763
$ 21,329

2,173
1,640
641
652
685
4,574
35,151
3,862
39,013
794
$ 39,807

1,520
1,290
378
447
592
1,473
16,238
1,213
17,451
68
$ 17,519

388
214
164
163
157
3,785
18,544
2,454
20,998
981
$ 21,979

1,908
1,505
542
610
749
5,256
34,782
3,667
38,449
1,049
$ 39,498

U.S. plus international may not equal total due to rounding.
(1) Sales of Cubicin in 2015 represent sales subsequent to the Cubist acquisition date.
(2) On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which marketed vaccines in most major European markets
(see Note 9). Accordingly, vaccine sales in 2017 include sales in the European markets that were previously part of SPMSD. Amounts for 2016 and 2015
do not include sales of vaccines sold through SPMSD, the results of which are reflected in equity income from affiliates included in Other (income) expense,
net. Amounts for 2016 and 2015 do, however, include supply sales to SPMSD.

(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.
(5) Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other

in 2017 and 2016 also includes $85 million and $170 million, respectively, related to the sale of the marketing rights to certain products.

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Pharmaceutical Segment

Primary Care and Women’s Health

Cardiovascular

Combined global sales of Zetia (marketed in most countries outside the United States as Ezetrol), Vytorin
(marketed outside the United States as Inegy), and Atozet (marketed in certain countries outside of the United States),
medicines for lowering LDL cholesterol, were $2.3 billion in 2017, a decline of 40% compared with 2016. The sales
decline was driven by lower volumes and pricing of Zetia and Vytorin in the United States as a result of generic
competition. By agreement, a generic manufacturer launched a generic version of Zetia in the United States in December
2016. The U.S. patent and exclusivity periods for Zetia and Vytorin otherwise expired in April 2017. Accordingly, the
Company is experiencing rapid and substantial declines in U.S. Zetia and Vytorin sales and expects the declines to
continue. The Company will lose market exclusivity in major European markets for Ezetrol in April 2018 and for Inegy
in April 2019 and anticipates sales declines in these markets thereafter. Sales of Ezetrol and Inegy in these markets
were $552 million and $457 million, respectively, in 2017. Combined worldwide sales of Zetia, Vytorin and 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 by the Company in that country
and lower volumes in the United States reflecting in part generic competition for Zetia.

Pursuant to a collaboration with Bayer AG (Bayer) (see Note 4 to the consolidated financial statements),
Merck has lead commercial rights for Adempas, a 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.
The companies share profits equally under the collaboration. In 2016, Merck began promoting and distributing Adempas
in Europe. Transition from Bayer in other Merck territories, including Japan, continued in 2017. Merck recorded sales
for Adempas of $300 million in 2017, $169 million in 2016 and $30 million in 2015, 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.

Diabetes

Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in adults
with type 2 diabetes, were $5.9 billion in 2017, a decline of 3% compared with 2016 including a 1% favorable effect
from foreign exchange. The sales decline was driven primarily by ongoing pricing pressure partially offset by continued
volume growth globally. Combined global sales of Januvia and Janumet 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.

In April 2017, Merck announced that the FDA issued a Complete Response Letter (CRL) regarding Merck’s
supplemental New Drug Applications (NDA) for Januvia, Janumet and Janumet XR (sitagliptin and metformin HCl
extended-release). With these applications, Merck is seeking to include data from TECOS (Trial Evaluating
Cardiovascular Outcomes with Sitagliptin) in the prescribing information of sitagliptin-containing medicines. Merck
is taking actions to respond to the CRL.

In December 2017, the FDA approved Steglatro (ertugliflozin) tablets, an oral sodium-glucose
cotransporter 2 (SGLT2) inhibitor, and the fixed-dose combination Steglujan (ertugliflozin and sitagliptin) tablets, the
only fixed-dose combination of an SGLT2 inhibitor and dipeptidyl peptidase-4 inhibitor Januvia (sitagliptin). The FDA
also approved the fixed-dose combination Segluromet (ertugliflozin and metformin hydrochloride). Steglatro, Steglujan
and Segluromet are indicated to improve glycemic control in adults with type 2 diabetes mellitus. These products are
part of a worldwide (except Japan) collaboration between Merck and Pfizer Inc. (Pfizer) for the co-development and
co-promotion of ertugliflozin. As a result of FDA approval, Merck will make a $60 million payment to Pfizer, which
was accrued for in the fourth quarter of 2017. The amount was capitalized and will be amortized over its estimated
useful life, subject to impairment testing. Merck will exclusively promote Steglatro and the two fixed-dose combination
products in the United States. Merck and Pfizer will share revenues and certain costs on a 60%/40% basis, with Merck
having the 60% share, and Pfizer may be entitled to additional milestone payments. In January 2018, the Committee
for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion
recommending approval of ertugliflozin and the two fixed-dose combination products. The CHMP positive opinion
will be considered by the European Commission (EC). If approval of any of the products in the EU is received, Merck
will make an additional $40 million milestone payment to Pfizer.

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General Medicine and Women’s Health

Worldwide sales of NuvaRing, a vaginal contraceptive product, were $761 million in 2017, a decline of 2%
compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily
by lower sales in the United States reflecting lower volumes that were partially offset by higher pricing, and lower
demand in Europe. Global sales of NuvaRing were $777 million in 2016, an increase of 6% compared with 2015
including a 1% unfavorable effect from foreign exchange. Sales growth largely reflects higher pricing in the United
States, partially offset by volume declines in Europe. The patent that provides U.S. market exclusivity for NuvaRing
will expire in April 2018 and the Company anticipates a significant decline in U.S. NuvaRing sales thereafter.

Worldwide sales of Implanon/Nexplanon, single-rod subdermal contraceptive implants, grew to $686
million in 2017, an increase of 13% compared with 2016, primarily reflecting higher pricing and volume growth in the
United States. Global sales of Implanon/Nexplanon were $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 international markets, particularly in Venezuela.

Hospital and Specialty

Hepatitis

Global sales of Zepatier, a treatment for chronic hepatitis C (HCV) infection, were $1.7 billion in 2017 and
$555 million in 2016. Sales growth was driven primarily by higher sales in Europe, the United States and Japan following
product launch in 2016. Merck has also launched Zepatier in other international markets. The Company is beginning
to experience the unfavorable effects of increasing competition and declining patient volumes and anticipates that sales
of Zepatier in the future will be materially adversely affected by these factors.

HIV

Worldwide sales of Isentress/Isentress HD, an HIV integrase inhibitor for use in combination with other
antiretroviral agents for the treatment of HIV-1 infection, were $1.2 billion in 2017, a decline of 13% compared with
2016. The sales decline primarily reflects lower demand in the United States and Europe due to competitive pressures.
In May 2017, the FDA approved Isentress HD, a once-daily dose of Isentress. In July 2017, the EC granted marketing
authorization for the once-daily dose of Isentress (where it will be marketed as Isentress 600 mg). Global sales of
Isentress 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.

Hospital Acute Care

Global sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery,
were $704 million in 2017, growth of 46% compared with 2016, driven by strong global demand, particularly in the
United States. Worldwide sales 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.

Worldwide sales of Noxafil, for the prevention of invasive fungal infections, were $636 million in 2017, an
increase of 7% compared with 2016, primarily reflecting higher demand and pricing in the United States, as well as
volume growth in Europe. Global sales of Noxafil 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 the Asia Pacific region. Foreign exchange unfavorably affected global sales
performance by 3% in 2016.

Global sales of Invanz, for the treatment of certain infections, were $602 million in 2017, an increase of 7%
compared with 2016, driven primarily by higher sales in the United States, reflecting higher pricing that was partially
offset by lower demand, as well as higher demand in Brazil. Worldwide sales of Invanz 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 higher pricing in the United States, largely offset by a decline in Venezuela. The patent that provided U.S.

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market exclusivity for Invanz expired in November 2017 and the Company anticipates a significant decline in U.S.
Invanz sales in future periods.

Global sales of Cancidas, an anti-fungal product sold primarily outside of the United States, were $422
million in 2017, a decline of 24% compared with 2016, driven primarily by generic competition in certain European
markets. The EU compound patent for Cancidas expired in April 2017. Accordingly, the Company is experiencing a
significant decline in Cancidas sales in these European markets and expects the decline to continue. Worldwide sales
of Cancidas 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 China.

Global sales of Cubicin, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia
when caused by designated susceptible organisms, were $382 million in 2017, a decline of 65% compared with 2016,
and were $1.1 billion in 2016, a decline of 4% compared with 2015. The U.S. composition patent for Cubicin expired
in June 2016. Accordingly, the Company is experiencing a rapid and substantial decline in U.S. Cubicin sales as a result
of generic competition and expects the decline to continue. The Company anticipates it will lose market exclusivity
for Cubicin in some European markets in early 2018.

In November 2017, Merck announced that the FDA approved Prevymis (letermovir) for prophylaxis
(prevention) of CMV infection and disease in adult CMV-seropositive recipients [R+] of an allogeneic hematopoietic
stem cell transplant. As a result of FDA approval, Merck made a €105 million ($125 million) milestone payment to
AiCuris in 2017. This amount was capitalized and will be amortized over its estimated useful life, subject to impairment
testing. In January 2018, Prevymis was approved by the EC and, as a result, Merck will make an additional €30 million
milestone payment to AiCuris. Merck also has filed Prevymis for regulatory approval in other markets including Japan.

Immunology

Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia
and Turkey), were $837 million in 2017, a decline of 34% compared with 2016, and were $1.3 billion in 2016, a decline
of 29% compared with 2015. Foreign exchange unfavorably affected sales performance by 1% in 2016. The Company
lost market exclusivity for Remicade in major European markets in 2015 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.

Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by
the Company in Europe, Russia and Turkey), were $819 million in 2017, growth of 7% compared with 2016 including
a 1% favorable effect from foreign exchange. Sales growth primarily reflects higher demand in Europe. Sales of Simponi
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.

Oncology

Sales of Keytruda, an anti-PD-1 therapy, were $3.8 billion in 2017, $1.4 billion in 2016 and $566 million
in 2015. The year-over-year increases were driven by volume growth in all markets, particularly in the United States,
Europe and Japan as the Company continues to launch Keytruda with multiple new indications globally. U.S. sales of
Keytruda were $2.3 billion in 2017, $792 million in 2016 and $393 million in 2015. Sales in the United States continue
to build across the multiple approved indications, in particular for the treatment of NSCLC reflecting both the continued
adoption of Keytruda in the first-line setting as monotherapy for patients with metastatic NSCLC whose tumors have
high PD-L1 expression, as well as the uptake of Keytruda in combination with pemetrexed and carboplatin, a commonly
used chemotherapy regimen, for the first-line treatment of metastatic nonsquamous NSCLC with or without PD-L1
expression. Other indications, including melanoma, head and neck cancer, and bladder cancer, also contributed to
growth in 2017. Sales growth in international markets reflects positive performance in the melanoma indications, as
well as a greater contribution from the treatment of patients with NSCLC as reimbursement is established in additional
markets in the first- and second-line settings.

In March 2017, the FDA approved Keytruda for the treatment of adult and pediatric patients with cHL
refractory to treatment, or who have relapsed after three or more prior lines of therapy. In May 2017, the EC approved
Keytruda for the treatment of adult patients with relapsed or refractory cHL who have failed autologous stem cell
transplant and brentuximab vedotin, or who are transplant-ineligible and have failed brentuximab vedotin.

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In May 2017, the FDA approved Keytruda in combination with pemetrexed and carboplatin for the first-
line treatment of metastatic nonsquamous NSCLC, irrespective of PD-L1 expression. Keytruda is the only anti-PD-1
treatment approved in the first-line setting as both monotherapy and combination therapy for appropriate patients with
metastatic NSCLC. In October 2016, Keytruda was approved by the FDA as monotherapy in the first-line setting for
patients with metastatic NSCLC whose tumors have high PD-L1 expression, with no EGFR or ALK genomic tumor
aberrations. Keytruda as monotherapy is also indicated for the second-line or greater treatment setting for patients with
metastatic NSCLC whose tumors express PD-L1, 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. 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 with
no EGFR or ALK positive tumor mutations.

Also in May 2017, the FDA approved Keytruda for the treatment of certain patients with locally advanced
or metastatic urothelial carcinoma, a type of bladder cancer. In the first-line setting, Keytruda is approved for the
treatment of patients with locally advanced or metastatic urothelial carcinoma who are ineligible for cisplatin-containing
chemotherapy. In the second-line setting, Keytruda is approved for the treatment of patients with locally advanced or
metastatic urothelial carcinoma who have disease progression during or following platinum-containing chemotherapy
or within 12 months of neoadjuvant or adjuvant treatment with platinum-containing chemotherapy. In September 2017,
the EC approved Keytruda for use as monotherapy for the treatment of locally advanced or metastatic urothelial
carcinoma in adults who have received prior platinum-containing chemotherapy, as well as adults who are not eligible
for cisplatin-containing chemotherapy.

Additionally in May 2017, the FDA approved Keytruda for a first-of-its-kind indication: the treatment of
adult and pediatric patients with previously treated unresectable or metastatic MSI-H or mismatch repair deficient solid
tumors. With this unique indication, Keytruda is the first cancer therapy approved for use based on a
biomarker, regardless of tumor type.

In September 2017, the FDA approved Keytruda for the treatment of patients with recurrent locally advanced
or metastatic gastric or gastroesophageal junction adenocarcinoma whose tumors express PD-L1. In December 2017,
Merck announced that the pivotal Phase 3 KEYNOTE-061 trial investigating Keytruda, as a second-line treatment for
patients with advanced gastric or gastroesophageal junction adenocarcinoma, did not meet its primary endpoint of
overall survival (OS) in patients whose tumors expressed PD-L1. Additionally, progression free survival (PFS) in the
PD-L1 positive population did not show statistical significance. The safety profile observed in KEYNOTE-061 was
consistent with that observed in previously reported studies of Keytruda; no new safety signals were identified. The
current indication remains unchanged and the Company continues to evaluate Keytruda for gastric or gastroesophageal
junction adenocarcinoma through KEYNOTE-062, a Phase 3 clinical trial studying Keytruda as a monotherapy or in
combination with chemotherapy as first-line treatment for patients with PD-L1 positive advanced gastric or
gastroesophageal junction cancer, and with KEYNOTE-585, a Phase 3 trial studying Keytruda in combination with
chemotherapy in a neoadjuvant/adjuvant setting.

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. In July 2017, Merck announced that the pivotal Phase 3 KEYNOTE-040 trial investigating
Keytruda in previously treated patients with recurrent or metastatic HNSCC did not meet its pre-specified primary
endpoint of OS. The safety profile observed in KEYNOTE-040 was consistent with that observed in previously reported
studies of Keytruda; no new safety signals were identified. The current indication remains unchanged and clinical trials
continue, including KEYNOTE-048, a Phase 3 clinical trial of Keytruda in the first-line treatment of recurrent or
metastatic HNSCC.

As a result of the additional approvals received in 2017 as noted above, Keytruda is now approved in the
United States and in the EU as monotherapy for the treatment of certain patients with NSCLC, melanoma, cHL and
urothelial carcinoma. Keytruda is also approved in the United States as monotherapy for the treatment of certain patients
with HNSCC, gastric or gastroesophageal junction adenocarcinoma and MSI-H or mismatch repair deficient cancer,
and in combination with pemetrexed and carboplatin in certain patients with NSCLC. Keytruda is also approved in
Japan for the treatment of radically unresectable melanoma, PD-L1-positive unresectable advanced or recurrent NSCLC,

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relapsed or refractory cHL, and radically unresectable urothelial carcinoma. 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 11 to the consolidated financial statements). Pursuant to the
settlement, the Company will pay royalties of 6.5% on net sales of Keytruda in 2017 through 2023; and 2.5% on net
sales of Keytruda in 2024 through 2026.

Lynparza, an oral PARP inhibitor being developed as part of a collaboration formed in July 2017 with
AstraZeneca (see Note 4 to the consolidated financial statements), is currently approved for certain types of ovarian
and breast cancer. In January 2018, the FDA approved Lynparza for use in patients with BRCA-mutated, HER2-negative
metastatic breast cancer who have been previously treated with chemotherapy in the neoadjuvant, adjuvant or metastatic
setting. As a result of this approval, Merck will make a $70 million milestone payment to AstraZeneca (see Note 4 to
the consolidated financial statements). Also in January 2018, the Japanese Ministry of Health, Labour and Welfare
approved Lynparza for use as a maintenance therapy in patients for platinum-sensitive relapsed ovarian cancer, regardless
of their BRCA mutation status, who responded to their last platinum-based chemotherapy. Lynparza is the first PARP
inhibitor to be approved in Japan.

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 $732 million in 2017, a decline of 20% compared with 2016, and were
$915 million in 2016, a decrease of 2% compared with 2015. Foreign exchange unfavorably affected global sales
performance by 1% in 2017 and favorably affected global sales performance by 2% in 2016. The sales declines were
driven by lower volumes in Japan as a result of generic competition. The patents that provided market exclusivity for
Singulair in Japan expired in 2016. As a result, the Company is experiencing a significant decline in Singulair sales in
Japan and expects the decline to continue. The Company no longer has market exclusivity for Singulair in any major
market.

Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were
$387 million in 2017, a decline of 28% compared with 2016, and were $537 million in 2016, a decline of 37% compared
with 2015. Foreign exchange favorably affected global sales performance by 1% in 2017. The Company is experiencing
a substantial decline in U.S. Nasonex sales as a result of generic competition 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.

Global sales of Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, were $287
million in 2017, a decline of 34% compared with 2016, driven by lower sales in the United States reflecting ongoing
competitive pricing pressure, as well as lower demand. Worldwide sales of Dulera Inhalation Aerosol 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 pressure that was partially offset by higher
demand.

Vaccines

On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which
developed and marketed vaccines in Europe. Accordingly, vaccine sales in 2017 include sales of Merck vaccines in the
European markets that were previously part of the SPMSD joint venture, whereas sales in periods prior to 2017 do not.
Prior to 2017, vaccine sales in these European markets were sold through the SPMSD joint venture, the results of which
are reflected in equity income from affiliates included in Other (income) expense, net (see Note 15 to the consolidated
financial statements). Supply sales to SPMSD, however, are included in vaccine sales in periods prior to 2017.
Incremental vaccine sales resulting from the termination of the SPMSD joint venture in 2017 were approximately $400
million, of which approximately $215 million relate to Gardasil/Gardasil 9.

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Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and diseases caused by
certain types of human papillomavirus (HPV), were $2.3 billion in 2017, growth of 6% compared with 2016. Sales
growth was driven primarily by higher sales in Europe resulting from the termination of the SPMSD joint venture noted
above, as well as higher demand in Asia Pacific due in part to the launch in China, partially offset by lower sales in the
United States. Lower sales in the United States reflect the timing of public sector purchases. In addition, during 2017,
the Company made a request to borrow doses of Gardasil 9 from the CDC Pediatric Vaccine Stockpile, which the CDC
granted. The Company’s decision to borrow the doses from the CDC was driven in part by the temporary shutdown
resulting from the cyber-attack that occurred in June, as well as by overall higher demand than expected. As a result
of the borrowing, the Company reversed the sales related to the borrowed doses and recognized a corresponding liability.
The Company subsequently replenished nearly half of the doses borrowed from the stockpile. The net effect of the
borrowing and subsequent partial replenishment was a reduction in sales of $125 million in 2017. The Company
anticipates it will replenish the remaining borrowed doses in the second half of 2018, which will result in the recognition
of sales and a reversal of the remaining liability. Additionally, 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 CDC’s Advisory Committee on
Immunization Practices (ACIP) voted to recommend the 2-dose vaccination regimen for certain 9 through 14 year olds.
The Company is experiencing an impact from the transition from a 3-dose vaccine regimen to a 2-dose vaccination
regimen; however, increased patient starts are helping to offset the negative effects of the transition. Merck’s sales of
Gardasil/Gardasil 9 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 the Asia Pacific region, partially offset
by a decline in government tenders in Brazil. 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 10% to 18% which vary
by country and are included in Materials and production costs.

Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella
and varicella, were $528 million in 2017, $495 million in 2016 and $454 million in 2015. The increase in 2017 as
compared with 2016 was driven primarily by higher pricing and volumes in the United States, as well as volume growth
in international markets, particularly in Europe. Sales growth in 2016 as compared with 2015 was driven primarily by
higher demand and pricing in the United States.

Worldwide sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, were $382
million in 2017, $353 million in 2016 and $365 million in 2015. Sales growth in 2017 as compared with 2016 was
largely attributable to higher sales in Europe resulting from the termination of the SPMSD joint venture. Sales
performance in 2016 as compared with 2015 was driven by higher demand in 2015 resulting from measles outbreaks
in the United States.

Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $767 million in 2017, $792
million in 2016 and $686 million in 2015. The sales decline in 2017 as compared with 2016 was driven primarily by
lower volumes in Brazil due to the loss of a government tender, as well as lower sales in the United States reflecting
lower demand partially offset by higher pricing. Higher sales in Europe resulting from the termination of the SPMSD
joint venture partially offset the decline. 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 Brazil reflecting the timing of government tenders also contributed to the sales
increase in 2016 as compared with 2015.

Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, were $821 million in
2017, an increase of 28% compared with 2016, driven primarily by higher demand and pricing in the United States, as
well as higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s sales of Pneumovax 23
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 the Asia Pacific region. Foreign exchange unfavorably affected sales
performance by 1% in 2017 and favorably affected sales performance by 1% in 2016.

Global sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children,
were $686 million in 2017, an increase of 5% compared with 2016, driven primarily by higher sales in Europe resulting
from the termination of the SPMSD joint venture. Merck’s sales of RotaTeq were $652 million in 2016, an increase of
7% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales performance was driven

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primarily by the effects of public sector purchasing in the United States, as well as volume growth in several international
markets.

Worldwide sales of Zostavax, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age
and older, were $668 million in 2017, a decline of 2% compared with 2016 including a 1% favorable effect from foreign
exchange. The sales decline was driven primarily by lower demand in the United States reflecting the approval of a
competitor’s vaccine that received a preferential recommendation from the ACIP in October 2017 for the prevention
of shingles over Zostavax. The Company anticipates this competition will have a material adverse effect on sales of
Zostavax in future periods. The U.S. sales decline was largely offset by growth in Europe resulting from the termination
of the SPMSD joint venture and volume growth in the Asia Pacific region. Merck’s sales of Zostavax 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 the Asia Pacific region.

Other Segments

The Company’s other segments are the Animal Health, Healthcare Services and Alliances segments, which

are not material for separate reporting.

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 $3.9 billion in 2017, $3.5
billion in 2016 and $3.3 billion in 2015. Global sales of Animal Health products grew 11% in 2017 compared with
2016 primarily reflecting higher sales of companion animal products, largely driven by growth in Bravecto, a line of
products that kill fleas and ticks in dogs and cats for up to 12 weeks, reflecting both growth in the oral formulation and
continued uptake in the topical formulation, which was launched in 2016. Animal Health sales growth was also driven
by higher sales of ruminant, poultry and swine products. Worldwide sales of Animal Health products increased 4% in
2016 compared with 2015 including a 4% unfavorable effect from foreign exchange. Sales growth 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.

In March 2017, Merck acquired 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

Materials and Production

2017

Change

2016

Change

2015

12,775
9,830
10,208
776
12
33,601

-8% $
1%
1%
19%
-98%
-4% $

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

Materials and production costs were $12.8 billion in 2017, $13.9 billion in 2016 and $14.9 billion in 2015.
Costs include expenses for the amortization of intangible assets recorded in connection with business acquisitions which
totaled $3.1 billion in 2017, $3.7 billion in 2016 and $4.7 billion in 2015. Costs in 2017, 2016 and 2015 also include
intangible asset impairment charges of $58 million, $347 million and $45 million, respectively, related to marketed
products and other intangibles recorded in connection with business acquisitions (see Note 8 to the consolidated financial
statements). Costs in 2017 also include a $76 million intangible asset impairment charge related to a licensing agreement.
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

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inventories. Also included in materials and production costs are expenses associated with restructuring activities which
amounted to $138 million, $181 million and $361 million in 2017, 2016 and 2015, respectively, primarily reflecting
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 68.2% in 2017 compared with 65.1% in 2016 and 62.2% in 2015. The improvements in
gross margin reflect a lower net impact from the amortization of intangible assets, intangible asset impairment charges
and restructuring costs as noted above, which reduced gross margin by 8.2 percentage points in 2017, 10.6 percentage
points in 2016 and 13.2 percentage points in 2015. The gross margin improvement in 2017 compared with 2016 also
reflects the favorable effects of product mix. Manufacturing-related costs associated with the cyber-attack partially
offset the gross margin improvement in 2017. The improvement in gross margin in 2016 as compared with 2015 was
also driven by lower inventory write-offs and the favorable effects of foreign exchange.

Marketing and Administrative

Marketing and administrative (M&A) expenses were $9.8 billion in 2017, an increase of 1% compared with
2016. Higher administrative costs, including costs associated with the Company operating its vaccines business in the
European markets that were previously part of the SPMSD joint venture, remediation costs related to the cyber-attack,
and higher promotional expenses related to product launches were partially offset by lower restructuring and acquisition
and divestiture-related costs, lower selling expenses and the favorable effect of foreign exchange. 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 for 2017, 2016 and 2015 include restructuring costs of $2 million, $95
million and $78 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. M&A expenses also include acquisition and divestiture-related costs of $44 million, $78 million and
$436 million in 2017, 2016 and 2015, respectively, consisting of integration, transaction, and certain other costs related
to business acquisitions and divestitures. Acquisition and divestiture-related costs in 2015 include costs related to the
acquisition of Cubist (see Note 3 to the consolidated financial statements).

Research and Development

Research and development (R&D) expenses were $10.2 billion in 2017, an increase of 1% compared with
2016. The increase was driven primarily by a charge in 2017 related to the formation of a collaboration with AstraZeneca,
an unfavorable effect from changes in the estimated fair value measurement of liabilities for contingent consideration
and higher clinical development spending, largely offset by lower in-process research and development (IPR&D)
impairment charges and lower restructuring costs. R&D expenses were $10.1 billion in 2016 compared with $6.7 billion
in 2015. The increase was driven primarily by higher 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 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 $4.6 billion
in 2017, $4.3 billion in 2016 and $4.0 billion in 2015. 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 $2.7 billion, $2.5 billion and $2.6 billion for 2017, 2016 and 2015, respectively. Additionally,
R&D expenses in 2017 include a $2.35 billion aggregate charge related to the formation of a collaboration with
AstraZeneca (see Note 4 to the consolidated financial statements). R&D expenses also include IPR&D impairment
charges of $483 million, $3.6 billion and $63 million in 2017, 2016 and 2015, 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

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with acquisitions. During 2017, the Company recorded charges of $27 million to increase the estimated fair value of
liabilities for contingent consideration. 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 6 to the consolidated financial statements). R&D
expenses in 2017, 2016 and 2015 also reflect $11 million, $142 million and $52 million, respectively, of accelerated
depreciation and asset abandonment costs associated with restructuring activities.

Restructuring Costs

Restructuring costs, primarily representing separation and other related costs associated with these
restructuring activities, were $776 million, $651 million and $619 million in 2017, 2016 and 2015, respectively. In
2017, 2016 and 2015, separation costs of $552 million, $216 million and $208 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 2,450
positions in 2017, 2,625 positions in 2016 and 3,770 positions in 2015 related to these restructuring activities. 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 $927 million in 2017, $1.1 billion in 2016 and $1.1 billion in 2015 related to restructuring
program activities (see Note 5 to the consolidated financial statements). While the Company has substantially completed
the actions under the programs, approximately $500 million of additional pretax costs are expected to be incurred in
2018 relating to anticipated employee separations and remaining asset-related costs.

Other (Income) Expense, Net

Other (income) expense, net was $12 million of expense in 2017, $720 million of expense in 2016 and $1.5
billion of expense in 2015. For details on the components of Other (income) expense, net, see Note 15 to the consolidated
financial statements.

Segment Profits
($ in millions)
Pharmaceutical segment profits
Other non-reportable segment profits
Other
Income before taxes

2017

2016

2015

22,586
1,834
(17,899)
6,521

22,180
1,507
(19,028)
4,659

21,658
1,573
(17,830)
5,401

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, intangible
asset impairment charges and changes in the estimated fair value measurement of liabilities for contingent consideration,
restructuring costs, and a portion of equity income. Additionally, segment profits do not reflect other expenses from

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corporate and manufacturing cost centers and other miscellaneous income or expense. These unallocated items,
including a loss on the extinguishment of debt in 2017, a charge related to the settlement of worldwide Keytruda patent
litigation in 2016, gains on divestitures in 2016 and 2015, as well as a net charge related to the settlement of Vioxx
shareholder class action litigation and foreign exchange losses related to the devaluation of the Company’s net monetary
assets in Venezuela in 2015, 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 2017 compared with 2016 primarily reflecting higher sales and
the favorable effects of product mix. Pharmaceutical segment profits grew 2% in 2016 compared with 2015 primarily
reflecting higher sales.

Taxes on Income

The effective income tax rates of 62.9% in 2017, 15.4% in 2016 and 17.4% in 2015 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. In addition, the effective income tax rate for 2017
includes a provisional net charge of $2.6 billion related to the enactment of U.S. tax legislation known as the Tax Cuts
and Jobs Act (TCJA) (see Note 16 to the consolidated financial statements). The effective income tax rate for 2017
also reflects the unfavorable impact of a $2.35 billion aggregate pretax charge recorded in connection with the formation
of a collaboration with AstraZeneca for which no tax benefit was recognized, partially offset by the favorable impact
of a net benefit of $234 million related to the settlement of certain federal income tax issues (see Note 16 to the
consolidated financial statements) and a benefit of $88 million related to the settlement of a state income tax issue. The
effective income tax rate for 2015 reflects the favorable impact of a net benefit of $410 million related to the settlement
of certain federal income tax issues, the impact of a 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 15 to the consolidated financial statements).

Net Income and Earnings per Common Share

Net income attributable to Merck & Co., Inc. was $2.4 billion in 2017, $3.9 billion in 2016 and $4.4 billion

in 2015. EPS was $0.87 in 2017, $1.41 in 2016 and $1.56 in 2015.

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
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).

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A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:

($ in millions except per share amounts)
Income before taxes as reported under GAAP
Increase (decrease) for excluded items:

Acquisition and divestiture-related costs
Restructuring costs
Other items:

Aggregate charge related to the formation of an oncology collaboration

with AstraZeneca

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
Other

Non-GAAP income before taxes
Taxes on income as reported under GAAP

Estimated tax benefit on excluded items (1)
Provisional net tax charge related to the enactment of the TCJA
Net tax benefits from the settlements of certain federal income tax issues
Tax benefit related to the settlement of a state income tax issue

Non-GAAP taxes on income
Non-GAAP net income
Less: Net income attributable to noncontrolling 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

2017

2016

2015

6,521

4,659

5,401

3,760
927

7,312
1,069

5,398
1,110

2,350
—
—

—
625
—

—
—
876

—
—
—
(16)
13,542
4,103
785
(2,625)
234
88
2,585
10,957
24
$ 10,933
$
0.87
3.11
3.98

—
—
—
(67)
13,598
718
2,321
—
—
—
3,039
10,559
21
$ 10,538
1.41
$
2.37
3.78

680
(250)
(147)
(34)
13,034
942
1,470
—
410
—
2,822
10,212
17
$ 10,195
1.56
$
2.03
3.59

(1) The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.
(2) 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 and divestitures.

Restructuring Costs

Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 5 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.

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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 2017 is an aggregate charge related to the formation
of a collaboration with AstraZeneca (see Note 4 to the consolidated financial statements), a provisional net tax charge
related to the enactment of the TCJA, a net benefit related to the settlement of certain federal income tax issues and a
benefit related to the settlement of a state income tax issue (see Note 16 to the consolidated financial statements).
Excluded from non-GAAP income and non-GAAP EPS in 2016 is a charge to settle worldwide patent litigation related
to Keytruda (see Note 11 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 15 to the consolidated financial statements), a net charge related to the previously disclosed settlement of
Vioxx shareholder class action litigation, 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 16 to the consolidated financial statements).

Research and Development

A chart reflecting the Company’s current research pipeline as of February 23, 2018 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 and

internationally.

Keytruda is an approved anti-PD-1 therapy in clinical development for expanded indications in different

cancer types.

In December 2017, the FDA accepted for review a supplemental BLA for Keytruda for the treatment of
adult and pediatric patients with refractory PMBCL, or who have relapsed after two or more prior lines of therapy. The
FDA granted Priority Review status with a Prescription Drug User Fee Action (PDUFA), or target action, date of April
3, 2018.

In January 2018, Merck announced that the pivotal Phase 3 KEYNOTE-189 trial investigating Keytruda in
combination with pemetrexed (Alimta) and cisplatin or carboplatin, for the first-line treatment of patients with metastatic
non-squamous NSCLC, met its dual primary endpoints of OS and PFS. Based on an interim analysis conducted by the
independent Data Monitoring Committee, treatment with Keytruda in combination with pemetrexed plus platinum
chemotherapy resulted in significantly longer OS and PFS than pemetrexed plus platinum chemotherapy alone. Results
from KEYNOTE-189 will be presented at an upcoming medical meeting and submitted to regulatory authorities.

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KEYNOTE-185. The FDA determined that the data available at the time indicated that the risks of Keytruda plus
pomalidomide or lenalidomide outweighed any potential benefit for patients with multiple myeloma. All patients
enrolled in KEYNOTE-183 and KEYNOTE-185 and those in the Keytruda/lenalidomide/dexamethasone cohort in
KEYNOTE-023 have discontinued investigational treatment with Keytruda. This clinical hold does not apply to other
studies with Keytruda.

MK-8835, ertugliflozin, an investigational oral SGLT-2 inhibitor in development to help improve glycemic
control in adults with type 2 diabetes, and two fixed-dose combination products (MK-8835A, ertugliflozin and Januvia,
and MK-8835B, ertugliflozin and metformin) are under review in the EU. In January 2018, the CHMP of the EMA
adopted a positive opinion recommending approval of these medicines. The CHMP positive opinion will be considered
by the EC. Ertugliflozin and the two fixed-dose combination products were approved by the FDA in December 2017.

MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under review with
the Japan Pharmaceuticals and Medical Devices Agency. MK-0431 is being developed 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.

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 joint venture 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. In 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are working
to provide additional data requested by the FDA. 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-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.

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(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
to be included in the first regulatory filing are anticipated in the first half of 2018.

V212 is an inactivated varicella zoster virus vaccine in development for the prevention of herpes zoster.
The Company completed a Phase 3 trial in autologous hematopoietic cell transplant patients and 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. The study in patients
with solid tumor malignancies undergoing chemotherapy met its primary endpoints, but the primary efficacy endpoint
was not met in patients with hematologic malignancies. Merck will present the results from this study at an upcoming
scientific meeting. Due to the competitive environment, development of V212 is currently on hold.

MK-7264 is a selective, non-narcotic, orally-administered P2X3-receptor agonist being developed for the
treatment of refractory, chronic cough. Merck plans to initiate a Phase 3 clinical trial in the first half of 2018. MK-7264
was originally developed by Afferent Pharmaceuticals (Afferent), which was acquired by the Company in 2016 (see
Note 3 to the consolidated financial statements). Upon initiation of the Phase 3 clinical trial, Merck will make a $175
million milestone payment, which was accrued for at estimated fair value at the time of acquisition.

The Company also discontinued certain drug candidates.

Also in 2017, Merck made a strategic decision to discontinue the development of the investigational
combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the
treatment of chronic HCV infection. This decision was made based on a review of available Phase 2 efficacy data and
in consideration of the evolving marketplace and the growing number of treatment options available for patients with
chronic HCV infection, including Zepatier, which is currently marketed by the Company for the treatment of adult
patients with chronic HCV infection. As a result of this decision, the Company recorded an IPR&D impairment charge
as discussed below.

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opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its
biologics capabilities. The Company is committed to ensuring that externally sourced programs remain an important
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.

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, 2017, the
balance of IPR&D was $1.2 billion.

During 2017, 2016 and 2015, $14 million, $8 million and $280 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
programs. 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.

In 2017, the Company recorded $483 million of IPR&D impairment charges within Research and
development expenses. Of this amount, $240 million resulted from a strategic decision to discontinue the development
of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/
uprifosbuvir) for the treatment of chronic HCV infection. This decision was made based on a review of available Phase
2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available
for patients with chronic HCV infection, including Zepatier, which is currently marketed by the Company for the
treatment of adult patients with chronic HCV infection. As a result of this decision, the Company recorded an IPR&D
impairment charge to write-off the remaining intangible asset related to uprifosbuvir. The Company had previously
recorded an impairment charge for uprifosbuvir in 2016 as described below. The IPR&D impairment charges in 2017
also include a charge of $226 million to write-off the intangible asset related to verubecestat, an investigational small
molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1), resulting from a decision
in February 2018 to stop a Phase 3 study evaluating verubecestat in people with prodromal Alzheimer’s disease. The
decision to stop the study followed a recommendation by the eDMC, which assessed overall benefit/risk during an
interim safety analysis. The eDMC concluded that it was unlikely that positive benefit/risk could be established if the
trial continued.

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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, was returned to
the licensor. The remaining IPR&D impairment charges in 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 6 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. In 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.

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.

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 transactions are described below. Merck is actively monitoring the
landscape for growth opportunities that meet the Company’s strategic criteria.

In February 2018, Merck and Viralytics Limited (Viralytics) announced a definitive agreement pursuant to
which Merck will acquire Viralytics, an Australian publicly traded company focused on oncolytic immunotherapy
treatments for a range of cancers, for AUD 1.75 per share. The proposed acquisition values the total issued shares in
Viralytics at approximately AUD 502 million ($394 million). Upon completion of the transaction, Merck will gain full
rights to Cavatax (CVA21), Viralytics’s investigational oncolytic immunotherapy. Cavatax is based on Viralytics’s
proprietary formulation of an oncolytic virus (Coxsackievirus Type A21) that has been shown to preferentially infect
and kill cancer cells. Cavatax is currently being evaluated in multiple Phase 1 and Phase 2 clinical trials, both as an
intratumoral and intravenous agent, including in combination with Keytruda. Under a previous agreement between
Merck and Viralytics, a study is investigating the use of the Keytruda and Cavatax combination in melanoma, prostate,
lung and bladder cancers. The transaction remains subject to a Viralytics’s shareholder vote and customary regulatory
approvals. Merck anticipates the transaction will close in the second quarter of 2018.

In October 2017, Merck acquired Rigontec. Rigontec is a leader in accessing the retinoic acid-inducible
gene I pathway, part of the innate immune system, as a novel and distinct approach in cancer immunotherapy to induce
both immediate and long-term anti-tumor immunity. Rigontec’s lead candidate, RGT100, is currently in Phase I
development evaluating treatment in patients with various tumors. Under the terms of the agreement, Merck made an
upfront cash payment of €119 million ($140 million) and may make additional contingent payments of up to €349
million (of which €184 million are related to the achievement of research milestones and regulatory approvals and €165
million are related to the achievement of commercial targets). The transaction was accounted for as an acquisition of
an asset and the upfront payment is reflected within Research and development expenses in 2017.

In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop
and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types. Lynparza is an oral PARP inhibitor
currently approved for certain types of ovarian and breast cancer. The companies are jointly developing and
commercializing Lynparza, both as monotherapy and in combination trials with other potential medicines.
Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective
PD-1 and PD-L1 medicines, Keytruda (pembrolizumab) and Imfinzi (durvalumab). The companies will also jointly
develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-
activated protein kinase (MAPK) pathway, currently being developed for multiple indications including thyroid cancer.
Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs

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for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy opportunities. Gross profits
from Lynparza and selumetinib product sales generated through monotherapies or combination therapies will be shared
equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or
selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with
Lynparza or selumetinib. As part of the agreement, Merck made an upfront payment to AstraZeneca of $1.6 billion and
is making payments of $750 million over a multi-year period for certain license options ($250 million was paid in
December 2017, $400 million will be paid in 2018 and $100 million will be paid in 2019). The Company recorded an
aggregate charge of $2.35 billion in Research and development expenses in 2017 related to the upfront payment and
future license options payments. In addition, Merck will pay AstraZeneca up to an additional $6.15 billion contingent
upon successful achievement of future regulatory and sales-based milestones for total aggregate consideration of up
to $8.5 billion.

Capital Expenditures

Capital expenditures were $1.9 billion in 2017, $1.6 billion in 2016 and $1.3 billion in 2015. Expenditures
in the United States were $1.2 billion in 2017, $1.0 billion in 2016 and $879 million in 2015. Merck plans to invest
approximately $12.0 billion over five years in capital projects including approximately $8.0 billion in the United States.

Depreciation expense was $1.5 billion in 2017, $1.6 billion in 2016 and $1.6 billion in 2015 of which $1.0
billion, $1.0 billion and $1.1 billion, respectively, applied to locations in the United States. Total depreciation expense
in 2017, 2016 and 2015 included accelerated depreciation of $60 million, $227 million and $174 million, respectively,
associated with restructuring activities (see Note 5 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

2017

2016

2015

6,152
27.8%
0.3:1

13,410

10,550

26.0%
0.4:1

26.0%
0.5:1

The decline in working capital in 2017 as compared with 2016 primarily reflects the reclassification of $3.0
billion of notes due in the first half of 2018 from long-term debt to short-term debt, $1.85 billion of upfront and option
payments related to the formation of the AstraZeneca collaboration discussed above, as well as $810 million paid to
redeem debt in connection with tender offers discussed below.

Cash provided by operating activities was $6.4 billion in 2017, $10.4 billion in 2016 and $12.5 billion in
2015. The decline in cash provided by operating activities in 2017 reflects a $2.8 billion payment related to the settlement
of certain federal income tax issues (see Note 16 to the consolidated financial statements), payments of $1.85 billion
related to the formation of a collaboration with AstraZeneca (see Note 4 to the consolidated financial statements), and
a $625 million payment made by the Company related to the settlement of worldwide Keytruda patent litigation (see
Note 11 to the consolidated financial statements). Cash provided by operating activities in 2016 reflects a net payment
of approximately $680 million to fund the Vioxx shareholder class action litigation settlement not covered by insurance
proceeds. Cash provided by operating activities continues to be the Company’s primary source of funds to finance
operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders.

Cash provided by investing activities was $2.7 billion in 2017 compared with a use of cash in investing
activities of $3.2 billion in 2016. The change was driven primarily by lower purchases of securities and other investments,
higher proceeds from the sales of securities and other investments and a lower use of cash for the acquisitions of
businesses. 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 The StayWell Company LLC.

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Cash used in financing activities was $10.0 billion in 2017 compared with $9.0 billion in 2016. The increase
in cash used in financing activities was driven primarily by proceeds from the issuance of debt in 2016, as well as
higher purchases of treasury stock and lower proceeds from the exercise of stock options in 2017, partially offset by
lower payments on debt in 2017. 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 2015, lower payments on debt, lower purchases of treasury stock and higher proceeds from the exercise
of stock options.

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 15 to the consolidated financial statements).

At December 31, 2017, the total of worldwide cash and investments was $20.6 billion, including $8.5 billion
of cash, cash equivalents and short-term investments, and $12.1 billion of long-term investments. A substantial majority
of cash and investments are held by foreign subsidiaries that, prior to the enactment of the TCJA, would have been
subject to significant tax payments if such cash and investments were repatriated in the form of dividends. In accordance
with the TCJA, the Company has recorded a provisional amount for taxes on unremitted earnings through December
31, 2017 that were previously deemed to be indefinitely reinvested outside of the United States (see Note 16 to the
consolidated financial statements). As a result of the TCJA, repatriation of foreign earnings in the future will have little
to no incremental U.S. tax consequences.

The Company’s contractual obligations as of December 31, 2017 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
Unrecognized tax benefits (3)
Transition tax related to the enactment of

the TCJA (4)
Operating leases

Total

2018

2,226

3,074
21,400
8,206
67

5,057
852
40,882

715

3,074
—
675
67

545
255
5,331

2019—2020
892

2021—2022
478

Thereafter
141
$

—
3,200
1,200
—

853
301
6,446

—
4,589
1,011
—

1,194
158
7,430

—
13,611
5,320
—

2,465
138
21,675

(1) Includes future inventory purchases the Company has committed to in connection with certain divestitures.
(2) In January 2018, $1.0 billion of notes matured and were repaid.
(3) As of December 31, 2017, the Company’s Consolidated Balance Sheet reflects liabilities for unrecognized tax benefits, interest and penalties of
$2.1 billion, including $67 million 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 2018 cannot
be made.

(4) In connection with the enactment of the TCJA, the Company is required to pay a one-time transition tax, which the Company has elected to pay

over a period of eight years as permitted under the TCJA (see Note 16 to the consolidated financial statements).

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 related to collaborative arrangements and
acquisitions. Contingent milestone payments are not considered contractual obligations as they are contingent upon
the successful achievement of developmental, regulatory approval and commercial milestones. At December 31, 2017,
the Company has $635 million of accrued milestone payments related to collaborations with Pfizer, Bayer and
AstraZeneca (see Note 4 to the consolidated financial statements), as well as in connection with certain licensing
arrangements, that are payable in 2018. In addition, at December 31, 2017, the Company has $315 million of current
liabilities for contingent consideration related to business acquisitions expected to be paid in 2018 (see Note 6 to the
consolidated financial statements). Also excluded from research and development obligations are potential future
funding commitments of up to approximately $60 million for investments in research venture capital funds. Loans
payable and current portion of long-term debt reflects $73 million of long-dated notes that are subject to repayment at
the option of the holders. Required funding obligations for 2018 relating to the Company’s pension and other
postretirement benefit plans are not expected to be material. However, the Company currently anticipates contributing

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approximately $60 million to its U.S. pension plans, $150 million to its international pension plans and $25 million to
its other postretirement benefit plans during 2018.

In November 2017, the Company launched tender offers for certain outstanding notes and debentures. The
Company paid $810 million in aggregate consideration (applicable purchase price together with accrued interest) to
redeem $585 million principal amount of debt that was validly tendered in connection with the tender offers.

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 used the net proceeds of the offering of $1.1 billion for general corporate purposes.

The Company has a $6.0 billion, five-year credit facility that matures in June 2022. 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).

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 2017, the Board of Directors declared a quarterly dividend of $0.48 per share on the Company’s
common stock that was paid in January 2018. In January 2018, the Board of Directors declared a quarterly dividend
of $0.48 per share on the Company’s common stock for the second quarter of 2018 payable in April 2018.

In November 2017, 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 in open-market transactions, block transactions, on or off an exchange, or in privately negotiated transactions.
The Company purchased $4.0 billion of its common stock (67 million shares) for its treasury during 2017. As
of December 31, 2017, the Company’s share repurchase authorization was $11.0 billion, which includes $1.0 billion
in authorized repurchases remaining under a program announced in March 2015. The Company purchased $3.4 billion
and $4.2 billion of its common stock during 2016 and 2015, respectively, under 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.

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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 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 $400 million and $538 million at December 31, 2017
and 2016, 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 each local subsidiary in order to mitigate
the effects 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, 2017 and 2016, Income before taxes would have declined by
approximately $92 million and $26 million in 2017 and 2016, respectively. 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. 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. During 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, the Company determined it was unlikely that all outstanding
net monetary assets would be settled at the CENCOEX rate. Accordingly, during 2015, the Company recorded charges
of $876 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 and recorded additional
exchange losses of $138 million in the aggregate reflecting the ongoing effect of translating transactions and net
monetary assets consistent with these rates.

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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.

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.

At December 31, 2017, 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.

($ 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

2017

Number of
Interest Rate
Swaps Held

Total Swap
Notional Amount

1,000

1,250

1,150

1,000

1,250

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 both December 31, 2017 and 2016 would have positively affected the net aggregate market value of these
instruments by $1.3 billion. A one percentage point decrease at December 31, 2017 and 2016 would have negatively
affected the net aggregate market value by $1.5 billion and $1.6 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

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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 and Dispositions

To determine whether transactions should be accounted for as acquisitions (or disposals) of assets or
businesses, the Company makes certain judgments, which include assessment of the inputs, processes, and outputs
associated with the acquired set of activities. 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.

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. 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.

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

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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.

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 asset acquisition 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 and
contingent consideration is not recognized at the acquisition date.

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
completion of all performance obligations. Domestically, sales discounts are issued to customers at the point-of-sale,
through an intermediary wholesaler (known as chargebacks), or 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 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 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 customer discounts. There were no material

adjustments to estimates associated with the aggregate customer discount provision in 2017, 2016 or 2015.

Summarized information about changes in the aggregate 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

2017

2016

2,945
10,938
(223)
(11,109)
2,551

2,798
9,831
(169)
(9,515)
2,945

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

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and other current liabilities were $198 million and $2.4 billion, respectively, at December 31, 2017 and were $196
million and $2.7 billion, respectively, at December 31, 2016.

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 2.1% in 2017, 1.4% in
2016 and 1.5% in 2015.

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.

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 both December 31, 2017 and 2016 were $80
million.

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 11 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.

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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
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 2017, and are estimated at $56 million in the aggregate for the years 2018
through 2022. In management’s opinion, the liabilities for all environmental matters that are probable and reasonably
estimable have been accrued and totaled $82 million and $83 million at December 31, 2017 and 2016, 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 $63 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 $312 million in 2017, $300 million in 2016 and $299 million in 2015. At December 31, 2017, there was
$469 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 plans totaled $201 million in 2017, $144 million in 2016 and $277
million in 2015. Net periodic benefit (credit) for other postretirement benefit plans was $(60) million in 2017, $(88)
million in 2016 and $(24) million in 2015. 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 loss amortization. The increase in net periodic benefit
(credit) for other postretirement benefit plans in 2017 and 2016 as compared with 2015 is largely attributable to changes
in retiree medical benefits approved by the Company in December 2015, partially offset by lower returns on plan assets.

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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 3.20% to 3.80% at December 31, 2017, compared with a range of
3.40% to 4.30% at December 31, 2016.

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, current market conditions and 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 2018, the expected rate of return for
the Company’s U.S. pension and other postretirement benefit plans will range from 7.70% to 8.30%, compared to a
range of 8.00% to 8.75% in 2017. The decrease is primarily due to a modest shift in asset allocation.

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
postretirement benefit plans is allocated 35% to 55% in U.S. equities, 20% to 35% in international equities, 20% to
35% 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 had an estimated $77 million favorable (unfavorable) impact on the Company’s net periodic benefit cost in 2017.
A reasonably possible change of plus (minus) 25 basis points in the expected rate of return assumption, with other
assumptions held constant, would have had an estimated $44 million favorable (unfavorable) impact on Merck’s net
periodic benefit cost in 2017. Required funding obligations for 2018 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 Accumulated Other Comprehensive Income (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

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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
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 initially 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

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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 16 to the consolidated financial
statements).

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.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 2 to the 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, or negative variations of any of the
foregoing. 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

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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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Item 8.

Financial Statements and Supplementary Data.

(a)

Financial Statements

The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 2017 and 2016, 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, 2017, the notes to consolidated financial statements, and the report dated
February 27, 2018 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 on derivatives, net of reclassifications
Net unrealized loss on investments, net of reclassifications
Benefit plan net gain (loss) and prior service credit (cost), net of amortization
Cumulative translation adjustment

2017
$ 40,122

2016
$ 39,807

2015
$ 39,498

12,775
9,830
10,208
776
12
33,601
6,521
4,103
2,418
24
2,394

0.88

0.87

13,891
9,762
10,124
651
720
35,148
4,659
718
3,941
21
3,920

1.42

1.41

14,934
10,313
6,704
619
1,527
34,097
5,401
942
4,459
17
4,442

1.58

1.56

2017

2016

2015

2,394

3,920

4,442

(446)
(58)
419
401
316
2,710

(66)
(44)
(799)
(169)
(1,078)
2,842

(126)
(70)
579
(208)
175
4,617

Comprehensive Income Attributable to Merck & Co., Inc.

The accompanying notes are an integral part of these consolidated financial statements.

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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 $210 in 2017

and $195 in 2016)

Inventories (excludes inventories of $1,187 in 2017 and $1,117 in 2016

classified in Other assets - see Note 7)

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 2017 and 2016

Other paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less treasury stock, at cost:

880,491,914 shares in 2017 and 828,372,200 shares in 2016

Total Merck & Co., Inc. stockholders’ equity
Noncontrolling Interests
Total equity

2017

2016

6,092
2,406

6,873

5,096
4,299
24,766
12,125

365
11,726
14,649
2,301
29,041
16,602
12,439
18,284
14,183
6,075
$ 87,872

3,057
3,102
10,427
708
1,320
18,614
21,353
2,219
11,117

6,515
7,826

7,018

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
$ 95,377

568
2,807
10,274
2,239
1,316
17,204
24,274
5,077
8,514

1,788
39,902
41,350
(4,910)
78,130

1,788
39,939
44,133
(5,226)
80,634

43,794
34,336
233
34,569
$ 87,872

40,546
40,088
220
40,308
$ 95,377

The accompanying notes are an integral part of this consolidated financial statement.

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Consolidated Statement of Equity
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)

Balance January 1, 2015

Net income attributable to Merck & Co., Inc.

Other comprehensive income, net of taxes

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 taxes

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

Net income attributable to Merck & Co., Inc.

Other comprehensive income, net of taxes

Cash dividends declared on common stock ($1.89 per share)

Treasury stock shares purchased

Acquisition of Vallée S.A.

Net income attributable to noncontrolling interests

Distributions attributable to noncontrolling interests

Share-based compensation plans and other

Balance December 31, 2017

Common
Stock

Other
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Treasury
Stock

Non-
controlling
Interests

Total

$1,788

$40,423

$ 46,021

(4,323) $(35,262) $

144

$ 48,791

—

(20)

—

(181)

4,442

—

(5,115)

—

175

—

(4,186)

—

914

1,788

40,222

45,348

(4,148)

(38,534)

—

(283)

3,920

—

(5,135)

—

(1,078)

—

(3,434)

—

1,422

1,788

39,939

44,133

(5,226)

(40,546)

—

(37)

2,394

—

(5,177)

—

316

—

(4,014)

—

766

—

(55)

(15)

—

124

(16)

—

220

—

(18)

—

4,442

175

(5,115)

(4,186)

(75)

(15)

733

44,767

3,920

(1,078)

(5,135)

(3,434)

124

(16)

1,139

40,308

2,394

316

(5,177)

(4,014)

(18)

729

$ 1,788

$39,902

$ 41,350

(4,910) $(43,794) $

233

$ 34,569

The accompanying notes are an integral part of this consolidated financial statement.

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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
Provisional charge for one-time transition tax related to the enactment of U.S. tax legislation
Charge for future payments related to AstraZeneca collaboration license options
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
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
Acquisition of Cubist Pharmaceuticals, Inc., net of cash acquired
Acquisitions of other businesses, net of cash acquired
Dispositions of businesses, net of cash divested
Other
Net Cash Provided by (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
Proceeds from exercise of stock options
Other
Net Cash Used in Financing Activities
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

2017

2016

2015

2,418

3,941

4,459

4,637
646
5,347
500
—
—
—
(42)
2
(2,621)
312
269

297
(145)
254
(922)
(3,291)
(123)
(1,091)
6,447

(1,888)
(10,739)
15,664
—
(396)
—
38
2,679

(26)
(1,103)
—
(4,014)
(5,167)
499
(195)
(10,006)
457
(423)
6,515
6,092

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)
—
482
(3,210)

—
(2,386)
1,079
(3,434)
(5,124)
939
(118)
(9,044)
(131)
(2,009)
8,524
6,515

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
(7,598)
(146)
316
221
(4,758)

(1,540)
(2,906)
7,938
(4,186)
(5,117)
485
(61)
(5,387)
(1,310)
1,083
7,441
8,524

The accompanying notes are an integral part of this consolidated financial statement.

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Notes to Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)

1. Nature of Operations

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 generally
recognized at fair value. If fair value 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
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.

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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 at
the point-of-sale, through an intermediary wholesaler (known as chargebacks), or 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 $198 million and $2.4 billion, respectively, at December 31, 2017 and
$196 million and $2.7 billion, respectively, at December 31, 2016.

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. This interpretation allows companies
to recognize revenue for sales of vaccines into U.S. government stockpiles even though these sales might not meet the
criteria for revenue recognition under other accounting guidance.

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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 $1.5 billion in 2017, $1.6 billion in 2016 and $1.6 billion in 2015.

Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. The
Company recorded advertising and promotion expenses of $2.2 billion, $2.1 billion and $2.1 billion in 2017, 2016 and
2015, 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 $449 million
and $452 million, net of accumulated amortization at December 31, 2017 and 2016, 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 initially 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 8). 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.

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,

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at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either
expense or income) recorded in earnings.

Research and Development — Research and development is expensed as incurred. 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.

Collaborative Arrangements — Merck has entered into collaborative arrangements that provide the
Company with varying rights to develop, produce and market products together with its collaborative partners. Cost
reimbursements between the collaborative partners are recognized as incurred and included in Materials and production
costs, Marketing and administrative expenses and Research and development expenses based on the underlying nature
of the related activities subject to reimbursement. When Merck is the principal on sales transactions with third parties,
the Company recognizes sales, materials and production costs and marketing and administrative expenses on a gross
basis. The Company records profit sharing amounts received from its collaborative partners as alliance revenue (within
Sales) and profit sharing amounts it pays to its collaborative partners within Materials and production costs. Terms of
the collaboration agreements may require the Company to make payments based upon the achievement of certain
developmental, regulatory approval or commercial milestones. Upfront and milestone payments payable by Merck to
collaborative partners prior to regulatory approval are expensed as incurred and included in Research and development
expenses. Payments due to collaborative partners upon or subsequent to regulatory approval are capitalized and
amortized over the estimated useful life of the corresponding intangible asset to Materials and production costs provided
that future cash flows support the amounts capitalized. Sales-based milestones payable by Merck to collaborative
partners are accrued when probable of being achieved and capitalized, subject to cumulative amortization catch-up.
The amortization catch-up is calculated either from the time of the first regulatory approval for indications that were
unapproved at the time the collaboration was formed, or from time of the formation of the collaboration for approved
products. The related intangible asset that is recognized is amortized to Materials and production costs over its remaining
useful life, subject to impairment testing.

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.

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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
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 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. 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 new standard will be effective as of January 1, 2018 and will be adopted using
the modified retrospective method. The Company anticipates recording a cumulative-effect adjustment upon adoption
increasing Retained earnings by $5 million in 2018. The adoption of the new guidance will also result in some additional
disclosures.

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. The new standard will be effective as of January 1, 2018 and will be adopted using a modified retrospective
approach. The Company anticipates recording a cumulative-effect adjustment upon adoption increasing Retained
earnings by $8 million in 2018.

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 new standard is effective as of January 1, 2018
and will be adopted using a retrospective application. The Company does not anticipate any changes to the presentation
of its Consolidated Statement of Cash Flows as a result of adopting the new standard.

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 new standard will be effective as of January 1, 2018 and will be
adopted using a modified retrospective approach. The Company anticipates recording a cumulative-effect adjustment
upon adoption increasing Retained earnings by approximately $60 million in 2018 with a corresponding increase to
deferred tax assets, subject to finalization.

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 new standard is effective as of January 1,
2018 and will be adopted using a retrospective application. The adoption of the new guidance will not have a material
effect on the Company’s Consolidated Statement of Cash Flows.

In March 2017, the FASB amended the guidance related to net periodic benefit cost for defined benefit plans
that requires entities to (1) disaggregate the current service cost component from the other components of net benefit
cost and present it with other employee compensation costs in the income statement within operations if such a subtotal

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is presented; (2) present the other components of net benefit cost separately in the income statement and outside of
income from operations; and (3) only capitalize the service cost component when applicable. Entities must use a
retrospective transition method to adopt the requirement for separate presentation in the income statement of service
costs and other components and a prospective transition method to adopt the requirement to limit the capitalization of
benefit costs to the service cost component. The Company will utilize a practical expedient that permits it to use the
amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the
estimation basis for applying the retrospective presentation requirements. The new standard is effective as of January
1, 2018. Net periodic benefit cost (credit) other than service cost was approximately $(510) million and $(530) million
for the years ended December 31, 2017 and 2016, respectively, (see Note 14). Upon adoption, these amounts will be
reclassified to Other (income) expense, net from their current classification within Materials and production costs,
Marketing and administrative expenses and Research and development costs.

In May 2017, the FASB issued guidance clarifying when to account for a change to the terms or conditions
of a share-based payment award as a modification. Under the new guidance, modification accounting is required only
if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of
the change in terms or conditions. The new standard is effective as of January 1, 2018 and will be applied to future
share-based payment award modifications should they occur.

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
and will be adopted using a modified retrospective approach which will require application of the new guidance at the
beginning of the earliest comparative period presented. Early adoption is permitted. The Company is currently evaluating
the impact of adoption on its consolidated financial statements.

In August 2017, the FASB issued new guidance on hedge accounting that is intended to more closely align
hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and
increase transparency as to the scope and results of hedging programs. The new guidance makes more financial and
nonfinancial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements,
and changes how companies assess effectiveness. The new guidance is effective for interim and annual periods beginning
in 2019 on a modified retrospective basis. Early application is permitted in any interim period. The Company intends
to early adopt this guidance as of January 1, 2018 on a modified retrospective basis. The Company anticipates recording
a cumulative-effect adjustment upon adoption decreasing Retained earnings by $11 million in 2018.The adoption of
the new guidance will result in some additional disclosures.

In February 2018, the FASB issued new guidance to address a narrow-scope financial reporting issue that
arose as a consequence of the TCJA. Existing guidance requires that deferred tax liabilities and assets be adjusted for
a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that
includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of
items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather
than in net income), such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items
within accumulated other comprehensive income do not reflect the appropriate tax rate (the difference is referred to as
stranded tax effects). The new guidance allows for a reclassification of these amounts to retained earnings thereby
eliminating these stranded tax effects. The new guidance is effective for interim and annual periods in 2019. 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.
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 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 is currently evaluating the impact of adoption on its consolidated financial statements.

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In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill
impairment test. Under the new guidance, impairment charges are recognized to the extent the carrying amount of a
reporting unit exceeds its fair value with certain limitations. The new guidance is effective for interim and annual
periods in 2020. Early adoption is permitted. The Company does not anticipate that the adoption of the new guidance
will have a material effect on its consolidated financial statements.

3. Acquisitions, Divestitures, Research Collaborations and License Agreements

The Company continues to pursue the acquisition of businesses and establishment of 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 arrangements, 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.

Recently Announced Transaction

2017 Transactions

In October 2017, Merck acquired Rigontec GmbH (Rigontec). Rigontec is a leader in accessing the retinoic
acid-inducible gene I pathway, part of the innate immune system, as a novel and distinct approach in cancer
immunotherapy to induce both immediate and long-term anti-tumor immunity. Rigontec’s lead candidate, RGT100, is
currently in Phase I development evaluating treatment in patients with various tumors. Under the terms of the agreement,
Merck made an upfront cash payment of €119 million ($140 million) and may make additional contingent payments
of up to €349 million (of which €184 million are related to the achievement of research milestones and regulatory
approvals and €165 million are related to the achievement of commercial targets). The transaction was accounted for
as an acquisition of an asset and the upfront payment is reflected within Research and development expenses in 2017.

In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop

and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types (see Note 4).

In March 2017, Merck acquired 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 acquired 93.5% of the shares of Vallée for $358 million. Of the total purchase price, $176 million was placed
into escrow pending resolution of certain contingent items. The transaction was accounted for as an acquisition of a
business. Merck recognized intangible assets of $291 million related to currently marketed products, net deferred tax
liabilities of $93 million, other net assets of $14 million and noncontrolling interest of $25 million. In addition, the
Company recorded liabilities of $37 million for contingencies identified at the acquisition date and corresponding
indemnification assets of $37 million, representing the amounts to be reimbursed to Merck if and when the contingent
liabilities are paid. The excess of the consideration transferred over the fair value of net assets acquired of $171 million
was recorded as goodwill. The goodwill was allocated to the Animal Health segment and 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. The probability-adjusted future net cash flows of each product were discounted
to present value utilizing a discount rate of 15.5%. Actual cash flows are likely to be different than those assumed. The
intangible assets related to currently marketed products are being amortized over their estimated useful lives of 15

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years. In the fourth quarter of 2017, Merck acquired an additional 4.5% interest in Vallée for $18 million, which reduced
noncontrolling interest related to Vallée.

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 for the treatment of refractory, chronic 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. 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 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. The asset’s probability-adjusted future
net cash flows were 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.

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 costs 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 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
contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair value of

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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 discounted to present value also using a discount rate of 10.5%. Actual cash flows are likely to be different than
those assumed. In July 2017, Merck made a $100 million payment as a result of the achievement of a clinical development
milestone, which was accrued for at estimated fair value at the time of acquisition as noted above.

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 potential future additional payments 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
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

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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. 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 each
asset’s underlying patent. The net cash flows were 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 8).

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

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$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
39,584
4,640
1.65
1.63

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.

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. Collaborative Arrangements

Merck has entered into collaborative arrangements that provide the Company with varying rights to develop,
produce and market products together with its collaborative partners. Both parties in these arrangements are active
participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the
collaboration. Merck’s more significant collaborative arrangements are discussed below.

AstraZeneca

In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop
and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types. Lynparza is an oral poly (ADP-
ribose) polymerase (PARP) inhibitor currently approved for certain types of ovarian and breast cancer. The companies
are jointly developing and commercializing Lynparza, both as monotherapy and in combination trials with other potential
medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with
their respective PD-1 and PD-L1 medicines, Keytruda (pembrolizumab) and Imfinzi (durvalumab). The companies
will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK,
part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications
including thyroid cancer. Under the terms of the agreement, AstraZeneca and Merck will share the development and
commercialization costs for Lynparza and selumetinib monotherapy and non-PD-L1/PD-1 combination therapy
opportunities.

Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination
therapies will be shared equally. Merck will fund all development and commercialization costs of Keytruda in
combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of
Imfinzi in combination with Lynparza or selumetinib. AstraZenca is currently the principal on Lynparza sales
transactions. Merck is recording its share of product sales of Lynparza, net of costs of sales and commercialization
costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the

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collaboration as part of Research and development expenses. Reimbursements received from AstraZeneca for research
and development expenses are recognized as reductions to Research and development costs.

As part of the agreement, Merck made an upfront payment to AstraZeneca of $1.6 billion and is making
payments of $750 million over a multi-year period for certain license options ($250 million was paid in December
2017, $400 million will be paid in 2018 and $100 million will be paid in 2019). The Company recorded an aggregate
charge of $2.35 billion in Research and development expenses in 2017 related to the upfront payment and future license
options payments. In addition, Merck will pay AstraZeneca up to an additional $6.15 billion contingent upon successful
achievement of future regulatory milestones of $2.05 billion and sales-based milestones of $4.1 billion for total aggregate
consideration of up to $8.5 billion.

During the fourth quarter of 2017, based on the performance of Lynparza since the formation of the
collaboration, Merck determined it was probable that annual sales of Lynparza in the future would exceed $250 million,
which would trigger a $100 million sales-based milestone payment from Merck to AstraZeneca upon achievement of
the sales milestone. Accordingly, in the fourth quarter of 2017, Merck recorded a $100 million liability and a
corresponding intangible asset and also recognized $4 million of cumulative amortization expense within Materials
and production costs. The remaining intangible asset will be amortized over its remaining estimated useful life of 11
years, subject to impairment testing. The remaining $4.0 billion of potential future sales-based milestone payments
have not yet been accrued as they are not deemed by the Company to be probable at this time.

Also, in January 2018, Lynparza received approval in the United States for the treatment of certain patients
with metastatic breast cancer, triggering a $70 million milestone payment from Merck to AstraZeneca. This milestone
payment will be capitalized and amortized over the remaining useful life of Lynparza.

Summarized information related to this collaboration is as follows:

Year Ended December 31
Alliance revenues (net of commercialization costs)

Materials and production costs
Marketing and administrative expenses
Research and development expenses

Receivables from AstraZeneca
Payables to AstraZeneca

2017

4
1
2,419

12
643

Expenses do not include all amounts attributed to activities related to the collaboration, rather only the amounts relating to payments between
partners. Amounts in materials and production costs include amortization of related intangible assets.

Bayer AG

In 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 equally share costs and profits from the collaboration and implemented 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
by Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. Under the agreement,
Bayer leads commercialization of Adempas in the Americas, while Merck leads commercialization in the rest of the
world. For vericiguat and other potential opt-in products, Bayer will lead commercialization 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. In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck
territories, including Japan, continued in 2017.

In 2016, the Company determined it was probable that annual sales of Adempas would exceed $500 million
triggering a $350 million payment from Merck to Bayer. Accordingly, in 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 is being amortized over its then-

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remaining estimated useful life, subject to impairment testing. In 2017, annual sales of Adempas exceeded $500 million
triggering the $350 million milestone payment from Merck to Bayer, which will be paid in the first quarter of 2018.
There are $775 million of additional potential future sales-based milestone payments that have not yet been accrued
as they are not deemed by the Company to be probable at this time.

Summarized information related to this collaboration is as follows:

Years Ended December 31
Net product sales recorded by Merck
Merck’s profit share of sales in Bayer's marketing territories
Total sales

Materials and production costs
Marketing and administrative expenses
Research and development expenses

Receivables from Bayer
Payables to Bayer

2017

2016

2015

149
151
300

99
27
96

33
352

88
81
169

133
26
45

—
353

—
30
30

67
3
3

5. Restructuring

The Company recorded total pretax costs of $927 million in 2017, $1.1 billion in 2016 and $1.1 billion in
2015 related to restructuring program activities. Since inception of the programs through December 31, 2017, Merck
has recorded total pretax accumulated costs of approximately $13.5 billion and eliminated approximately 43,350
positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The
Company estimates that approximately two-thirds of the cumulative pretax costs are 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. While the Company has substantially completed
the actions under these programs, approximately $500 million of additional pretax costs are expected to be incurred in
2018 relating to anticipated employee separations and remaining asset-related costs.

For segment reporting, restructuring charges are unallocated expenses.

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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, 2017
Materials and production
Marketing and administrative
Research and development
Restructuring costs

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

— $
—
—
552
552

— $
—
—
216
216

— $
—
—
208
208

52
2
6
—
60

77
8
142
—
227

78
59
37
—
174

86
—
5
224
315

104
87
—
435
626

283
19
15
411
728

138
2
11
776
927

181
95
142
651
1,069

361
78
52
619
1,110

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 2,450 in 2017, 2,625 in 2016 and 3,770 in 2015.

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 is recording
accelerated depreciation over the revised useful life 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 2017, 2016 and 2015 includes $267 million, $409 million and $550 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 14) and share-based compensation. Other
activity also reflects net pretax losses resulting from sales of facilities and related assets of $6 million in 2017, $151
million in 2016 and $117 million in 2015.

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The following table summarizes the charges and spending relating to restructuring program activities:

Restructuring reserves January 1, 2016
Expenses
(Payments) receipts, net
Non-cash activity
Restructuring reserves December 31, 2016
Expenses
(Payments) receipts, net
Non-cash activity
Restructuring reserves December 31, 2017 (1)

Separation
Costs

592
216
(413)
—
395
552
(328)
—
619

Accelerated
Depreciation
$

Other

Total

53
626
(347)
(186)
146
315
(394)
61
128

645
1,069
(760)
(413)
541
927
(722)
1
747

— $
227
—
(227)
—
60
—
(60)
— $

(1) The remaining cash outlays are expected to be substantially completed by the end of 2020.

6. Financial Instruments

Derivative Instruments and Hedging Activities

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 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.

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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 losses of $520 million in 2017, and pretax gains of $193 million in
2016 and $304 million in 2015 from the euro-denominated notes.

Interest Rate Risk Management

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

2017

Number of
Interest Rate
Swaps Held

Total Swap
Notional Amount

1,000

1,250

1,150

1,000

1,250

1,000

550

1,250

1,150

1,000

1,250

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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:

2017

Fair Value of
Derivative

Balance Sheet Caption

Asset

Liability

2016

Fair Value of
Derivative

Asset

Liability

U.S. Dollar
Notional

Derivatives Designated as
Hedging Instruments

Interest rate swap contracts

Other assets

— $

550

— $

2,700

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

Accrued and other current
liabilities

—

1,000

4,650

4,216

1,936

2,014

—

616

129

—

3,500

6,063

2,075

127

14,386

765

14,398

— $

3,778

230

— $

8,210

—

130

217

7,431

11,209

25,595

—

230

995

103

134

2,931

11,141

25,539

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

2017

2016

Asset

Liability

Asset

Liability

130

217

995

134

(94)
(3)

(94)
—

(131)
(529)

123

335

(131)
—

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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

2017

2016

2015

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)

43
(48)

28
(29)

(14)
7

Derivatives designated in foreign currency cash flow hedging relationships

Foreign exchange contracts

Amount of gain reclassified from AOCI to Sales
Amount of loss (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 recognized in Sales

(138)
561

(311)
(210)

(724)
(526)

—
—

110
(3)

(1)
2

132
—

(4)
(10)

(461)
(1)

(1) There was $5 million, $1 million and $7 million of ineffectiveness on the hedge during 2017, 2016 and 2015, 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, 2017, the Company estimates $184 million of pretax net unrealized losses 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.

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Investments in Debt and Equity Securities

Information on investments in debt and equity securities at December 31 is as follows:

2017

2016

Fair
Value

Amortized
Cost

Gross Unrealized

Gains

Losses

Fair
Value

Amortized
Cost

Gross Unrealized

Gains

Losses

Corporate notes and bonds

9,806

9,837

U.S. government and agency securities

Asset-backed securities

Foreign government bonds

Mortgage-backed securities

Commercial paper

Equity securities

2,042

1,542

733

626

159

275

2,059

1,548

739

634

159

265

15,183

15,241

—

(40) $

10,577

10,601

(17)

(7)

(6)

(9)

—

(6)

2,232

1,376

519

796

4,330

349

2,244

1,380

521

801

4,330

281

(85) $

20,179

20,158

—

(39)

(13)

(5)

(2)

(6)

—

(3)

(68)

Available-for-sale debt securities included in Short-term investments totaled $2.4 billion at December 31,
2017. Of the remaining debt securities, $11.1 billion mature within five years. At December 31, 2017 and 2016, 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.

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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:

Assets

Investments

Fair Value Measurements Using

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

2017

2016

Corporate notes and bonds

— $

9,678

— $

9,678

— $

10,389

— $ 10,389

U.S. government and agency

securities

Asset-backed securities (1)

Foreign government bonds

Mortgage-backed securities (1)

Commercial paper

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

—

104

172

—

171

—

1,767

1,476

732

547

159

—

14,359

207

128

—

481

130

—

1,835

1,476

732

547

159

104

14,531

207

128

171

652

130

—

201

230

—

148

—

1,890

1,257

518

628

4,330

—

19,012

313

188

168

119

—

789

644

331

995

—

1,919

1,257

518

628

4,330

201

19,242

313

188

168

119

148

937

644

331

995

343

14,970

— $ 15,313

378

20,796

— $ 21,174

— $

935

— $

891

—

— $

162

—

217

—

162

—

217

—

935

1,152

— $

134

—

134

891

$ 1,025

(1) 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.

(2) Investments included in other assets are restricted as to use, primarily for the payment of benefits under employee benefit plans.
(3) 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 2017. As of December 31, 2017, Cash and
cash equivalents of $6.1 billion include $5.2 billion of cash equivalents (which would be 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:

2017

2016

Fair value January 1
Changes in estimated fair value (1)
Additions
Payments
Fair value December 31 (2)
(1) Recorded in Research and development expenses, Materials and production costs and Other (income) expense, net. Includes cumulative translation

590
(407)
733
(25)
891

891
141
3
(100)
935

adjustments.

(2) Includes $315 million recorded as a current liability for amounts expected to be paid within the next 12 months.

The changes in the estimated fair value of contingent consideration in 2017 primarily relate to changes in
the liabilities recorded in connection with the termination of the SPMSD joint venture and the clinical progression of
a program related to the Afferent acquisition. The changes in the estimated fair value of contingent consideration 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 8). The additions to contingent consideration reflected in the table
above in 2016 relate to the termination of the SPMSD joint venture (see Note 9) and the acquisitions of IOmet and
Afferent (see Note 3). The payments of contingent consideration in 2017 relate to the achievement of a clinical milestone
in connection with the acquisition of IOmet (see Note 3) and in 2016 relate to the first commercial sale of Zerbaxa in
the European Union.

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,
2017, was $25.6 billion compared with a carrying value of $24.4 billion and at December 31, 2016, was $25.7 billion
compared with a carrying value of $24.8 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 global economic conditions, including the volatility associated with international sovereign economies, and
associated impacts on the financial markets and its business. As of December 31, 2017, the Company’s total net accounts
receivable outstanding for more than one year were approximately $130 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. and Zuellig Pharma Ltd. (Asia Pacific), which represented, in
aggregate, approximately 40% of total accounts receivable at December 31, 2017. 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

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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
of December 31, 2017 and 2016, the Company had received cash collateral of $3 million and $529 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, 2017 or 2016.

7. 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

2017

2016

1,334
4,703
201
6,238
45
6,283

5,096
1,187

1,304
4,222
155
5,681
302
5,983

4,866
1,117

Inventories valued under the LIFO method comprised approximately $2.2 billion and $2.3 billion of
inventories at December 31, 2017 and 2016, respectively. Amounts recognized as Other assets are comprised almost
entirely of raw materials and work in process inventories. At December 31, 2017 and 2016, these amounts included
$1.1 billion and $1.0 billion, respectively, of inventories not expected to be sold within one year. In addition, these
amounts included $80 million at both December 31, 2017 and 2016, of inventories produced in preparation for product
launches.

8. Goodwill and Other Intangibles

The following table summarizes goodwill activity by segment:

Balance January 1, 2016
Acquisitions
Impairments
Other (1)
Balance December 31, 2016 (2)
Acquisitions
Impairments
Other (1)
Balance December 31, 2017 (2)

Pharmaceutical
15,862
$
207
—
6
16,075
—
—
(9)
16,066

All Other
1,861
275
(47)
(2)
2,087
177
(38)
(8)
2,218

Total
17,723
482
(47)
4
18,162
177
(38)
(17)
18,284

(1) Other includes cumulative translation adjustments on goodwill balances and certain other adjustments.
(2) Accumulated goodwill impairment losses at December 31, 2017 and 2016 were $225 million and $187 million, respectively.

In 2016, the additions to goodwill in the Pharmaceutical segment resulted primarily from the acquisitions
of Afferent and IOmet (see Note 3). The additions to goodwill within other non-reportable segments in 2017 primarily
relate to the acquisition of Vallée, which is part of the Animal Health segment (see Note 3), and in 2016 relate to the
acquisition of StayWell, which is part of the Healthcare Services segment (see Note 3). The impairments of goodwill
within other non-reportable segments in 2017 and 2016 relate to certain businesses within the Healthcare Services
segment.

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Other intangibles at December 31 consisted of:

Products and product rights
IPR&D
Tradenames
Other

Gross
Carrying
Amount
$ 46,693
1,194
209
2,035
$ 50,131

2017

Accumulated
Amortization
34,950
$
—
97
901
35,948

Net
$ 11,743
1,194
112
1,134
$ 14,183

Gross
Carrying
Amount
$ 46,269
1,653
215
1,947
$ 50,084

2016

Accumulated
Amortization
31,919
$
—
89
771
32,779

Net
14,350
1,653
126
1,176
17,305

Acquired intangibles include products and product rights, tradenames and patents, which are initially
recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their
estimated useful lives. Some of the Company’s more significant acquired intangibles related to marketed products
(included in product and product rights above) at December 31, 2017 include Zerbaxa, $3.0 billion; Sivextro, $879
million; Zetia, $756 million; Implanon/Nexplanon $529 million; Dificid, $478 million; Gardasil/Gardasil 9, $468
million; Vytorin, $375 million; Bridion, $320 million; and Simponi, $226 million. The Company recognized an
intangible asset related to Adempas as a result of a collaboration with Bayer (see Note 4) that had a carrying value of
$894 million at December 31, 2017 reflected in “Other” in the table above.

During 2017, 2016 and 2015, the Company recorded impairment charges related to marketed products and
other intangibles of $58 million, $347 million and $45 million, respectively, within Material and production costs.
During 2017, the Company recorded an intangible asset impairment charge of $47 million related to Intron A, a treatment
for certain types of cancers. Sales of Intron A are being adversely affected by the availability of new therapeutic options.
In 2017, sales of Intron A in the United States eroded more rapidly than previously anticipated by the Company, which
led to changes in the cash flow assumptions for Intron A. These revisions to cash flows indicated that
the Intron A intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company utilized
market participant assumptions to determine its best estimate of the fair value of the intangible asset related to Intron
A that, when compared with its related carrying value, resulted in the impairment charge noted above. The intangible
asset value for Intron A at December 31, 2017 was $13 million. The remaining charges in 2017 relate to the impairment
of customer relationship, tradename and developed technology intangibles for certain businesses in the Healthcare
Services segment. 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
returned 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.

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Company for the treatment of adult patients with chronic HCV infection. As a result of this decision, the Company
recorded an IPR&D impairment charge to write-off the remaining intangible asset related to uprifosbuvir. The Company
had previously recorded an impairment charge for uprifosbuvir in 2016 as described below. The IPR&D impairment
charges in 2017 also include a charge of $226 million to write-off the intangible asset related to verubecestat, an
investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1),
resulting from a decision in February 2018 to stop a Phase 3 study evaluating verubecestat in people with prodromal
Alzheimer’s disease. The decision to stop the study followed a recommendation by the external Data Monitoring
Committee (eDMC), which assessed overall benefit/risk during an interim safety analysis. The eDMC concluded that
it was unlikely that positive benefit/risk could be established if the trial continued.

During 2016, the Company recorded $3.6 billion of IPR&D impairment charges. Of this amount, $2.9 billion
relates to the clinical development program for uprifosbuvir, a nucleotide prodrug that was being evaluated for the
treatment of HCV. The Company determined that 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 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, was returned to the
licensor. The remaining IPR&D impairment charges in 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 6).

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 $3.2 billion
in 2017, $3.8 billion in 2016 and $4.8 billion in 2015. The estimated aggregate amortization expense for each of the
next five years is as follows: 2018, $2.8 billion; 2019, $1.5 billion; 2020, $1.2 billion; 2021, $1.1 billion; 2022, $1.1
billion.

9. 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) and certain investment funds. Equity
income from affiliates was $42 million in 2017, $86 million in 2016 and $205 million in 2015 and is included in Other
(income) expense, net (see Note 15).

Investments in affiliates accounted for using the equity method totaled $767 million at December 31, 2017

and $715 million at December 31, 2016.

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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 and $923 million for 2015.

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 that were previously sold by the joint venture through December 31, 2024, which the Company determined
had a fair value of $416 million on the date of 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 that were previously sold by the joint venture 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.

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
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 (1)

(1) Recorded in Other (income) expense, net.

936
133
(221)
(147)
47
748
(392)
(183)
173
(77)
96

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 related 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 did not record the $302 million estimated fair value
of contingent future royalties to be received from Sanofi on the sale of Sanofi products, but rather is recognizing such
amounts 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.

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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
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. Merck earned revenue based on sales of KBI products and earned certain Partnership returns from AZLP.

On June 30, 2014, AstraZeneca exercised its option to purchase Merck’s interest in KBI (and redeem Merck’s
remaining interest in AZLP). A portion of the exercise price, which is subject to a true-up in 2018 based on actual sales
of Nexium and Prilosec from closing in 2014 to June 2018, was deferred and recognized as income as the contingency
was eliminated as sales occurred. Once the deferred income amount was fully recognized, in 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 income
of $232 million, $98 million and $182 million in 2017, 2016 and 2015, respectively, in Other (income) expense, net
related to these amounts. The receivable from AstraZeneca was $325 million at December 31, 2017.

10. Loans Payable, Long-Term Debt and Other Commitments

Loans payable at December 31, 2017 included $3.0 billion of notes due in 2018 and $73 million of long-
dated notes that are subject to repayment at the option of the holder. Loans payable at December 31, 2016 included
$300 million of notes due in 2017, $267 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 0.85% and 0.40% for the years ended
December 31, 2017 and 2016, 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
4.15% notes due 2043
1.85% notes due 2020
2.35% notes due 2022
1.125% euro-denominated notes due 2021
1.875% euro-denominated notes due 2026
3.875% notes due 2021
2.40% notes due 2022
6.50% notes due 2033
Floating-rate notes due 2020
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
6.55% notes due 2037
5.75% notes due 2036
5.95% debentures due 2028
5.85% notes due 2039
6.40% debentures due 2028
6.30% debentures due 2026
Floating-rate borrowing due 2018
1.10% notes due 2018
1.30% notes due 2018
Other

2017

2016

2,488
1,973
1,744
1,260
1,237
1,232
1,220
1,185
1,178
1,140
993
729
699
591
587
585
489
415
338
306
270
250
135
—
—
—
309
$ 21,353

2,487
1,972
1,743
1,273
1,236
1,238
1,228
1,035
1,028
1,152
1,003
806
698
516
512
511
489
594
369
355
415
325
152
999
999
985
154
$ 24,274

Other (as presented in the table above) includes $300 million and $147 million at December 31, 2017 and
2016, respectively, of borrowings at variable rates that resulted in effective interest rates of 1.42% and 0.89% for 2017
and 2016, respectively.

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.

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, 2017, the Company was in compliance with these covenants.

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The aggregate maturities of long-term debt for each of the next five years are as follows: 2018, $3.0 billion;

2019, $1.3 billion; 2020, $1.9 billion; 2021, $2.3 billion; 2022, $2.2 billion.

Rental expense under operating leases, net of sublease income, was $327 million in 2017, $292 million in
2016 and $303 million in 2015. The minimum aggregate rental commitments under noncancellable leases are as follows:
2018, $255 million; 2019, $175 million; 2020, $126 million; 2021, $90 million; 2022, $68 million and thereafter, $138
million. The Company has no significant capital leases.

11. 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 governmental and 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.

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, 2017, approximately 4,085 cases are filed and pending against
Merck in either federal or state court. In approximately 15 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 4,070 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

101

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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 15 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. The Glynn decision was not appealed
by plaintiff.

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 appealed that decision to the U.S. Court of Appeals for the
Third Circuit (Third Circuit). The Femur Fracture MDL court also dismissed without prejudice another approximately
510 cases pending plaintiffs’ appeal of the preemption ruling to the Third Circuit. On March 22, 2017, the Third Circuit
issued a decision reversing the Femur Fracture MDL court’s preemption ruling and remanding the appealed cases back
to the Femur Fracture MDL court. On April 5, 2017, Merck filed a petition seeking a rehearing on the Third Circuit’s
March 22, 2017 decision, which was denied on April 24, 2017. Merck filed a petition for a writ of certiorari to the U.S.
Supreme Court on August 22, 2017, seeking review of the Third Circuit’s decision. On December 4, 2017, the Supreme
Court invited the Solicitor General to file a brief in the case expressing the views of the United States.

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
did not appeal the Femur Fracture MDL court’s findings with respect to the adequacy of the 2011 label change but did
appeal the dismissal of their case based on preemption grounds, and the Third Circuit subsequently reversed that
dismissal in its March 22, 2017 decision. In August 2014, Merck filed a motion requesting that the Femur Fracture
MDL 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. No plaintiffs responded to or appealed the
November 2014 show cause order.

As of December 31, 2017, approximately 530 cases were pending in the Femur Fracture MDL following
the reinstatement of the cases that had been on appeal to the Third Circuit. The 510 cases dismissed without prejudice
that were also pending the final resolution of the aforementioned appeal have not yet been reinstated.

As of December 31, 2017, approximately 2,750 cases alleging Femur Fractures have been filed in New
Jersey state court and are pending before Judge James Hyland 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 and 2017.

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As of December 31, 2017, approximately 280 cases alleging Femur Fractures have been filed and are pending
in California state court. All of the Femur Fracture cases filed in California state court have been coordinated before a
single judge in Orange County, California. 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 appealed that verdict to the California appellate court. Oral argument on plaintiff’s appeal in Galper was
held in November 2016 and, on April 24, 2017, the California appellate court issued a decision affirming the lower
court’s judgment in favor of Merck. 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, 2017, Merck is aware of approximately 1,235 product user claims 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).

In November 2015, the MDL and California State Court - in separate opinions - granted summary judgment
to defendants on grounds of preemption. Of the approximately 1,235 product user claims, these rulings resulted in the
dismissal of approximately 1,100 product user claims.

Plaintiffs appealed the MDL and California State Court preemption rulings. On November 28, 2017, the
U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) reversed the trial court’s ruling in the MDL and remanded
for further proceedings. The Ninth Circuit did not address the substance of defendants’ preemption argument but instead
ruled that the district court made various errors during discovery. Jurisdiction returned to U.S. District Court for the
Southern District of California on January 2, 2018. The preemption appeal in the California state court litigation has
been fully briefed, but the court has not yet scheduled oral argument.

As of December 31, 2017, seven product users have claims pending against Merck in state courts other than
California state court, including four active product user claims pending in Illinois state court. On June 30, 2017, the
Illinois trial court denied Merck’s motion for summary judgment on grounds of preemption. Merck sought permission
to appeal that order on an interlocutory basis and was granted a stay of proceedings in the trial court. On September
19, 2017, an intermediate appellate court in Illinois denied Merck’s petition for interlocutory review. On October 20,
2017, Merck filed a petition with the Illinois Supreme Court, seeking leave to appeal the appellate court’s denial. The
Illinois Supreme Court denied Merck’s petition for certiorari review and, instead, directed the appellate court to answer
the certified question. As a result, proceedings in the trial court remain stayed and trials for certain of the product users
in Illinois have been delayed.

In addition to the claims noted above, the Company has agreed 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, 2017, approximately 775 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 20 of the plaintiffs also allege that Propecia or Proscar has caused or can cause prostate cancer,

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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 Hyland in Middlesex County. In addition, there is one matter pending in state court in California, one
matter pending in state court in Ohio, and one matter on appeal in the Massachusetts Supreme Judicial Court. The
Company intends to defend against these lawsuits.

Governmental Proceedings

As previously disclosed, the Company has learned that the Prosecution Office of Milan, Italy is investigating
interactions between the Company’s Italian subsidiary, certain employees of the subsidiary and certain Italian health
care providers. The Company understands that this is part of a larger investigation involving engagements between
various health care companies and those health care providers. The Company is cooperating with the investigation.

As previously disclosed, the United Kingdom (UK) Competition and Markets Authority (CMA) issued a
Statement of Objections against the Company and MSD Sharp & Dohme Limited (MSD UK) on May 23, 2017. In the
Statement of Objections, the CMA alleges that MSD UK abused a dominant position through a discount program for
Remicade over the period from March 2015 to February 2016. The Company and MSD UK are contesting the CMA’s
allegations.

As previously disclosed, the Company has received an investigative subpoena from the California Insurance
Commissioner’s Fraud Bureau (Bureau) seeking information from January 1, 2007 to the present related to the pricing
and promotion of Cubicin. The Bureau is investigating whether Cubist Pharmaceuticals, Inc., which the Company
acquired in 2015, unlawfully induced the presentation of false claims for Cubicin to private insurers under the California
Insurance Code False Claims Act. The Company is cooperating with the investigation.

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 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’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.

As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary
investigation activities from competition and other governmental authorities in markets outside the United States. These
authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these
preliminary investigation activities may include site visits, formal or informal requests or demands for documents or
materials, inquiries or interviews and similar matters. Certain of these preliminary 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

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 DrugApplications (NDA). Putative class and non-class action suits were then

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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. In February 2016,
the 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.

As previously disclosed, 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. On April 5, 2017, the claims of the opt-outs were dismissed with prejudice
pursuant to a written settlement agreement with those parties. On May 15, 2017, Merck and the class executed a
settlement agreement, which received preliminary approval from the court on May 23, 2017. On October 5, 2017, the
court entered a Final Judgment and Order of Dismissal approving the settlement agreement with the direct purchaser
class and dismissing the claims of the class with prejudice.

Zetia Antitrust Litigation

In May 2010, Schering Corporation (Schering) and MSP Singapore Company LLC (MSP) settled patent
litigation with Glenmark Pharmaceuticals Inc., USA, and Glenmark Pharmaceuticals Ltd. (together, Glenmark) relating
to a generic version of Zetia, a pharmaceutical product containing ezetimibe used by patients with high cholesterol, for
which Glenmark had filed an abbreviated NDA. In January and February 2018, putative class action suits were filed
on behalf of direct and indirect purchasers of Zetia against Merck, MSD, Schering-Plough, Schering, MSP, and Glenmark
in the U.S. District Courts for the Eastern District of Virginia and the Eastern District of New York. These suits claim
violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. These
suits seek unspecified damages.

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. On August 1, 2017, plaintiffs filed their motion for class certification. This motion seeks to certify a Title VII
pay discrimination class and also seeks final collective action certification of plaintiffs’ Equal Pay Act claim. The parties
are currently engaged in motion practice before the court.

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

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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 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 appealed the decision, and the
appeal was heard in May 2017. In June 2017, the French appeals court held that certain of the activities by the Company
directed to France constituted unfair competition or trademark infringement and no further appeal was pursued. 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 was heard in June
2017. In November 2017, the UK Court of Appeals affirmed the decision on the co-existence agreement and remitted
for re-hearing issues of trade mark infringement, validity and the relief to which KGaA would be entitled.

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file abbreviated NDAs with the 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 currently involved in such patent infringement litigation in the United
States include 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.

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. In October 2017, the district court held the patent valid and infringed. Actavis has appealed
this decision. 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. In October 2017, the parties reached a settlement whereby Roxane can launch its generic version upon
expiry of the patent, or earlier under certain conditions. 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-patent
expiry approval to sell a generic version of Noxafil injection. In October 2016, the parties reached a settlement whereby
Par can launch its generic version in January 2023, or earlier under certain conditions.

Nasonex — Nasonex lost market exclusivity in the United States in 2016. Prior to that, in April 2015, the
Company filed a patent infringement lawsuit against Apotex Inc. and Apotex Corp. (Apotex) in respect of Apotex’s
marketed product that the Company believed was infringing. In January 2018, the Company and Apotex settled this
matter with Apotex agreeing to pay the Company $115 million plus certain other consideration.

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 appealed this decision. In October 2017, the appellate court reversed the district
court decision and found the patent to be valid. The case was remanded and the district court enjoined the defendant

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from marketing its generic version of NuvaRing until the patent expires. 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. Following the appellate reversal in the Allergan plc matter,
the defendant has agreed to be enjoined from marketing its generic version of NuvaRing until the patent expires.

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 of 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 April 2017, the parties reached a settlement pursuant
to which, in exchange for a lump sum, PDL dismissed its lawsuit with prejudice and granted the Company a fully paid-
up non-exclusive license to 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 (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 (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. In May 2017, the parties reached a settlement pursuant to which the Company dismissed its lawsuit with prejudice
and moved to terminate the IPR and Genentech and City of Hope granted the Company a fully paid-up non-exclusive
license to the Cabilly II and Cabilly III patent.

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
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 appealed the court’s decision. Gilead 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

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Gilead’s request, which Gilead appealed. A hearing on the combined appeals for this case was held on February 4,
2018. 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 opposed the European patent at the European Patent
Office (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 submitted post-trial motions, including on the issues of enhanced
damages and future royalties. Gilead submitted post-trial motions for judgment as a matter of law. A hearing on the
motions was held in September 2017. Also, in September 2017, the court denied the Company’s motion on enhanced
damages, granted its motion on prejudgment interest and deferred its motion on future royalties. In February 2018, the
court granted Gilead’s motion for judgment as a matter of law and found the patent was invalid for a lack of enablement.
The Company will appeal this decision. In Australia, the Company was initially unsuccessful and the Full Federal
Court affirmed the lower court decision. The Company has sought leave to appeal to the High Court of Australia for
further review. In Canada, the Company was initially unsuccessful and the Federal Court of Appeals affirmed the lower
court decision The Company sought leave to the Supreme Court of Canada for further review. In the UK and Norway,
the patent was held invalid and no further appeal was filed. The EPO opposition division revoked the European patent,
and the Company 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,
2017 and December 31, 2016 of approximately $160 million and $185 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 (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.

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In May 2015, the Environmental Protection Agency (EPA) conducted an air compliance evaluation of the
Company’s pharmaceutical manufacturing facility in Elkton, Virginia. As a result of the investigation, the Company
was issued a Notice of Noncompliance and Show Cause Notification relating to certain federally enforceable
requirements applicable to the Elkton facility. The Company has been advised by the EPA that enforcement action is
no longer being pursued.

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 $82 million and $83 million at December 31, 2017 and 2016, 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 $63 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.

12. 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:

2017

2016

2015

Common
Stock

Treasury
Stock

Common
Stock

Treasury
Stock

Common
Stock

Treasury
Stock

Balance January 1
Purchases of treasury stock
Issuances (1)
Balance December 31
(1) Issuances primarily reflect activity under share-based compensation plans.

3,577
—
—
3,577

828
67
(15)
880

3,577
—
—
3,577

796
60
(28)
828

3,577
—
—
3,577

739
75
(18)
796

13. 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. 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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At December 31, 2017, 118 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, subject to the terms
applicable to such awards. PSU awards generally vest after three years. Prior to 2018, RSU awards generally vested
after three years; beginning with awards granted in 2018, RSU awards will vest one-third each year over a three-year
period.

Total pretax share-based compensation cost recorded in 2017, 2016 and 2015 was $312 million, $300 million
and $299 million, respectively, with related income tax benefits of $57 million, $92 million and $93 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 2017, 2016 and 2015 was $63.88, $54.63 and
$59.73 per option, respectively. The weighted average fair value of options granted in 2017, 2016 and 2015 was $7.04,
$5.89 and $6.46 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)

2017

2016

2015

3.6%
2.0%
17.8%
6.1

3.8%
1.4%
19.6%
6.2

4.1%
1.7%
19.9%
6.2

Summarized information relative to stock option plan activity (options in thousands) is as follows:

Outstanding January 1, 2017
Granted
Exercised
Forfeited
Outstanding December 31, 2017
Exercisable December 31, 2017

Weighted
Average
Exercise
Price

$
$

44.47
63.88
43.38
51.78
46.77
42.54

Number
of Options
45,091
4,232
(11,512)
(1,537)
36,274
26,778

Weighted
Average
Remaining
Contractual
Term
(Years)

Aggregate
Intrinsic
Value

4.89
3.64

$
$

397
384

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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

2017

2016

2015

236
30
499

444
28
939

332
30
485

A summary of nonvested RSU and PSU activity (shares in thousands) is as follows:

Nonvested January 1, 2017
Granted
Vested
Forfeited
Nonvested December 31, 2017

RSUs

PSUs

Weighted
Average
Grant Date
Fair Value
57.19
$
63.85
58.13
58.22
59.32

Weighted
Average
Grant Date
Fair Value
59.24
$
63.62
62.71
60.24
60.03

Number
of Shares
1,744
1,008
(833)
(51)
1,868

Number
of Shares
13,266
5,014
(3,795)
(876)
13,609

At December 31, 2017, there was $469 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.

14. 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 (credit) for pension and other postretirement benefit plans consisted of

the following components:

Years Ended December 31

2017

U.S.

2016

International