Notes to Condensed Consolidated Financial Statements (unaudited)
The accompanying unaudited condensed consolidated financial statements of Merck & Co., Inc. (Merck or the Company) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck’s Form 10-K filed on February 27, 2019.
The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair statement of these interim statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to the current presentation.
Recently Adopted Accounting Standards
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases (ASU 2016-02) and subsequently issued several updates to the new guidance (ASC 842 or new guidance). The new guidance requires that lessees recognize a right-of-use asset and a lease liability 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 previous operating leases), while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to previous capital leases). The Company adopted the new standard on January 1, 2019 using a modified retrospective approach. Merck elected the transition method that allows for application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company also elected available practical expedients. Upon adoption, the Company recognized
$1.1 billion
of additional assets and related liabilities on its consolidated balance sheet (see Note 7). The adoption of the new guidance did not impact the Company’s consolidated statements of income or cash flows.
Recently Issued Accounting Standards Not Yet Adopted
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, including adoption in any interim period. 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.
In April 2018, the FASB issued new guidance on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the capitalization of such costs, aligning it with the accounting for costs associated with developing or obtaining internal-use software. The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In November 2018, the FASB issued new guidance for collaborative arrangements intended to reduce diversity in practice by clarifying whether certain transactions between collaborative arrangement participants should be accounted for under revenue recognition guidance (ASC 606). The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. The new guidance is to be applied on a retrospective basis through a cumulative-effect adjustment directly to retained earnings. The Company does not anticipate the adoption of this standard will have a material effect on its consolidated financial statements.
|
|
|
|
2.
|
Acquisitions, Research Collaborations and License Agreements
|
The Company continues to pursue acquisitions and the 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.
In July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
of patients with cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly PT2977), is a novel oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of
$1.05 billion
in cash; additionally, former Peloton shareholders will be eligible to receive up to an additional
$1.15 billion
contingent upon successful achievement of future regulatory and sales-based milestones. The acquisition will be accounted for as an acquisition of an asset.
On April 1, 2019, Merck acquired Antelliq Corporation (Antelliq), a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck paid
$2.3 billion
to acquire all outstanding shares of Antelliq and spent
$1.3 billion
to repay Antelliq’s debt. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Antelliq is as follows:
|
|
|
|
|
|
|
|
($ in millions)
|
April 1, 2019
|
|
Cash and cash equivalents
|
$
|
31
|
|
|
Accounts receivable
|
73
|
|
|
Inventories
|
97
|
|
|
Property, plant and equipment
|
62
|
|
|
Identifiable intangible assets (useful lives ranging from 18-24 years)
(1)
|
2,689
|
|
|
Deferred income tax liabilities
|
(563
|
)
|
|
Other assets and liabilities, net
|
(81
|
)
|
|
Total identifiable net assets
|
2,308
|
|
|
Goodwill
(2)
|
1,343
|
|
|
Consideration transferred
|
$
|
3,651
|
|
|
|
|
|
(1)
|
The estimated fair values of identifiable intangible assets relate primarily to trade names and were determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of
11.5%
. Actual cash flows are likely to be different than those assumed.
|
|
|
|
|
(2)
|
The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Animal Health segment. The goodwill is not deductible for tax purposes.
|
The Company’s results for the second quarter of 2019 include two months of activity for Antelliq. The Company incurred
$47 million
of transaction costs directly related to the acquisition of Antelliq, consisting largely of advisory fees, which are reflected in
Selling, general and administrative
expenses in the second quarter of 2019.
Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation
in vivo
approaches to enable the body’s immune system to fight disease, for
$301 million
in cash. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets for in-process research and development (IPR&D) of
$156 million
, cash of
$83 million
and other net assets of
$31 million
. The excess of the consideration transferred over the fair value of net assets acquired of
$31 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. Actual cash flows are likely to be different than those assumed.
In June 2018, Merck acquired Viralytics Limited (Viralytics), an Australian publicly traded company focused on oncolytic immunotherapy treatments for a range of cancers, for AUD
502 million
(
$378 million
). The transaction provided Merck with full rights to
Cavatak
(V937, formerly CVA21), Viralytics’s investigational oncolytic immunotherapy.
Cavatak
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.
Cavatak
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
Cavatak
combination in melanoma, prostate, lung and bladder cancers. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of
$34 million
(primarily cash) at the acquisition date and
Research and development
expenses of
$344 million
in the second quarter and first
six
months of 2018 related to the transaction. There are no future contingent payments associated with the acquisition.
In March 2018, Merck and Eisai Co., Ltd. (Eisai) entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai (see Note 3).
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
3. 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 PLC (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 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
and Imfinzi. 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. 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 are 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. AstraZeneca is the principal on Lynparza sales transactions. Merck records its share of Lynparza product sales, net of cost of sales and commercialization costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the collaboration as part of
Research and development
costs. 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
in 2017 and will make payments of up to
$750 million
over a multi-year period for certain license options (of which
$250 million
was paid in December 2017,
$400 million
was paid in December 2018 and
$100 million
is expected to be paid in December 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 option payments. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.
In the second quarter of 2019, Merck determined it was probable that annual sales of Lynparza in the future would trigger a
$300 million
sales-based milestone payment from Merck to AstraZeneca. Accordingly, in the second quarter of 2019, Merck recorded a
$300 million
liability and a corresponding increase to the intangible asset related to Lynparza and also recognized
$52 million
of cumulative amortization expense within
Cost of sales
. Prior to 2019, Merck accrued sales-based milestone payments aggregating
$700 million
related to Lynparza. Of these amounts,
$250 million
has been paid to AstraZeneca. Potential future sales-based milestone payments of
$3.1 billion
have not yet been accrued as they are not deemed by the Company to be probable at this time.
In April 2019, Lynparza received regulatory approval in the European Union (EU) as a monotherapy for the treatment of certain adult patients with advanced breast cancer, triggering a
$30 million
capitalized milestone payment from Merck to AstraZeneca. In June 2019, Lynparza received regulatory approval in the EU as a monotherapy for the maintenance treatment of certain adult patients with
BRCA
-mutated advanced ovarian cancer, triggering a
$30 million
capitalized milestone payment from Merck to AstraZeneca. In 2018, Lynparza received regulatory approvals triggering capitalized milestone payments of
$140 million
in the aggregate from Merck to AstraZeneca. Potential future regulatory milestone payments of
$1.7 billion
remain under the agreement.
The asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was
$1.0 billion
at
June 30, 2019
and is included in
Other Assets
on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Summarized financial information related to this collaboration is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Alliance revenue
|
$
|
111
|
|
|
$
|
44
|
|
|
$
|
190
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
73
|
|
|
24
|
|
|
92
|
|
|
36
|
|
|
Selling, general and administrative
|
33
|
|
|
9
|
|
|
59
|
|
|
16
|
|
|
Research and development
|
33
|
|
|
42
|
|
|
78
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Receivables from AstraZeneca included in
Other current assets
|
|
|
|
|
$
|
105
|
|
|
$
|
52
|
|
|
Payables to AstraZeneca included in
Accrued and other current liabilities
(2)
|
|
|
|
|
605
|
|
|
405
|
|
|
Payables to AstraZeneca included in
Other Noncurrent Liabilities
(3)
|
|
|
|
|
300
|
|
|
250
|
|
(1)
Represents amortization of capitalized milestone payments.
(2)
Includes accrued milestone and license option payments.
(3)
Includes accrued milestone payments.
Eisai
In March 2018, Merck and Eisai announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Merck’s anti-PD-1 therapy,
Keytruda
. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share gross profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development, including for studies evaluating Lenvima as monotherapy, are shared equally by the two companies and reflected in
Research and development
costs.
Under the agreement, Merck made an upfront payment to Eisai of
$750 million
and will make payments of up to
$650 million
for certain option rights through 2021 (of which
$325 million
was paid in March 2019,
$200 million
is expected to be paid in March 2020 and
$125 million
is expected to be paid in March 2021). The Company recorded an aggregate charge of
$1.4 billion
in
Research and development
expenses in the first quarter of 2018 related to the upfront payment and future option payments. In addition, the agreement provides for Eisai to receive up to
$385 million
associated with the achievement of certain clinical and regulatory milestones and up to
$3.97 billion
for the achievement of milestones associated with sales of Lenvima.
In the first quarter of 2019, Merck determined it was probable that annual sales of Lenvima in the future would trigger
$282 million
of sales-based milestone payments from Merck to Eisai. Accordingly, in the first quarter of 2019, Merck recorded
$282 million
of liabilities and corresponding increases to the intangible asset related to Lenvima and also recognized
$35 million
of cumulative amortization expense within
Cost of sales
. Merck previously accrued sales-based milestone payments aggregating
$268 million
related to Lenvima in 2018. Of these amounts,
$50 million
has been paid to Eisai. Potential future sales-based milestone payments of
$3.42 billion
have not yet been accrued as they are not deemed by the Company to be probable at this time.
In 2018, Lenvima received regulatory approvals triggering capitalized milestone payments of
$250 million
in the aggregate from Merck to Eisai. Potential future regulatory milestone payments of
$135 million
remain under the agreement.
The asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was
$687 million
at
June 30, 2019
and is included in
Other Assets
on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Summarized financial information related to this collaboration is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Alliance revenue
|
$
|
97
|
|
|
$
|
35
|
|
|
$
|
171
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
23
|
|
|
1
|
|
|
74
|
|
|
1
|
|
|
Selling, general and administrative
|
19
|
|
|
2
|
|
|
38
|
|
|
2
|
|
|
Research and development
(2)
|
62
|
|
|
36
|
|
|
109
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Receivables from Eisai included in
Other current assets
|
|
|
|
|
$
|
98
|
|
|
$
|
71
|
|
|
Payables to Eisai included in
Accrued and other current liabilities
(3)
|
|
|
|
|
709
|
|
|
375
|
|
|
Payables to Eisai included in
Other Noncurrent Liabilities
(3)
|
|
|
|
|
125
|
|
|
543
|
|
(1)
Represents amortization of capitalized milestone payments.
(2)
Amount for the first
six
months of 2018 includes the upfront payment and future option payments.
(3)
Includes accrued milestone and option payments.
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, which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies have 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. Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.
In the first quarter of 2018, Merck made a
$350 million
sales-based milestone payment to Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. In the second quarter of 2018, Merck determined it was probable that annual worldwide sales of Adempas in the future would trigger a
$375 million
sales-based milestone payment from Merck to Bayer; accordingly, Merck recorded a
$375 million
liability and a corresponding increase to the intangible asset related to Adempas and also recognized
$106 million
of cumulative amortization expense within
Cost of sales
. There is an additional
$400 million
potential future sales-based milestone payment that has not yet been accrued as it is not deemed by the Company to be probable at this time.
The intangible asset balance related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments) was
$956 million
at
June 30, 2019
and is included in
Other Intangibles, Net
on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2027 as supported by projected future cash flows, subject to impairment testing.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Summarized financial information related to this collaboration is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net product sales recorded by Merck
|
$
|
53
|
|
|
$
|
47
|
|
|
$
|
100
|
|
|
$
|
90
|
|
|
Merck’s profit share from sales in Bayer’s marketing territories
|
51
|
|
|
28
|
|
|
94
|
|
|
53
|
|
|
Total sales
|
104
|
|
|
75
|
|
|
194
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
(1)
|
29
|
|
|
132
|
|
|
58
|
|
|
159
|
|
|
Selling, general and administrative
|
11
|
|
|
10
|
|
|
20
|
|
|
17
|
|
|
Research and development
|
32
|
|
|
28
|
|
|
62
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Receivables from Bayer included in
Other current assets
|
|
|
|
|
$
|
41
|
|
|
$
|
32
|
|
|
Payables to Bayer included in
Other Noncurrent Liabilities
(2)
|
|
|
|
|
375
|
|
|
375
|
|
(1)
Includes amortization of intangible assets.
(2)
Represents accrued milestone payment.
Merck recently approved a new global restructuring program (2019 Restructuring Program) as part of a worldwide initiative focused primarily on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring programs. The Company will continue to evaluate its global footprint and overall operating model, which could result in the identification of additional actions over time. The actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately
$800 million
to
$1.2 billion
. The Company estimates that approximately
55%
of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately
45%
of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects to record charges of approximately
$500 million
in 2019 related to the program. Actions under previous global restructuring programs have been substantially completed.
The Company recorded total pretax costs of
$159 million
and
$235 million
in the
second
quarter of
2019
and
2018
, respectively, and
$346 million
and
$339 million
for the first
six
months of 2019 and 2018, respectively, related to restructuring program activities. For segment reporting, restructuring charges are unallocated expenses.
The following tables summarize the charges related to restructuring program activities by type of cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
($ in millions)
|
Separation
Costs
|
|
Accelerated
Depreciation
|
|
Other
|
|
Total
|
|
Separation
Costs
|
|
Accelerated
Depreciation
|
|
Other
|
|
Total
|
|
Cost of sales
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
1
|
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
98
|
|
|
$
|
1
|
|
|
$
|
99
|
|
|
Selling, general and administrative
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
|
Research and development
|
—
|
|
|
2
|
|
|
1
|
|
|
3
|
|
|
—
|
|
|
2
|
|
|
1
|
|
|
3
|
|
|
Restructuring costs
|
25
|
|
|
—
|
|
|
34
|
|
|
59
|
|
|
153
|
|
|
—
|
|
|
59
|
|
|
212
|
|
|
|
$
|
25
|
|
|
$
|
98
|
|
|
$
|
36
|
|
|
$
|
159
|
|
|
$
|
153
|
|
|
$
|
132
|
|
|
$
|
61
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2018
|
|
($ in millions)
|
Separation
Costs
|
|
Accelerated
Depreciation
|
|
Other
|
|
Total
|
|
Separation
Costs
|
|
Accelerated
Depreciation
|
|
Other
|
|
Total
|
|
Cost of sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
Selling, general and administrative
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
Research and development
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
(3
|
)
|
|
8
|
|
|
5
|
|
|
Restructuring costs
|
200
|
|
|
—
|
|
|
28
|
|
|
228
|
|
|
255
|
|
|
—
|
|
|
68
|
|
|
323
|
|
|
|
$
|
200
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
235
|
|
|
$
|
255
|
|
|
$
|
(2
|
)
|
|
$
|
86
|
|
|
$
|
339
|
|
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
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 the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are 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
2019
and
2018
includes asset abandonment, shut-down and other related costs, as well as pretax gains and losses resulting from sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 11) and share-based compensation.
The following table summarizes the charges and spending relating to restructuring program activities for the
six
months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Separation
Costs
|
|
Accelerated
Depreciation
|
|
Other
|
|
Total
|
|
Restructuring reserves January 1, 2019
|
$
|
443
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
$
|
534
|
|
|
Expense
|
153
|
|
|
132
|
|
|
61
|
|
|
346
|
|
|
(Payments) receipts, net
|
(126
|
)
|
|
—
|
|
|
(77
|
)
|
|
(203
|
)
|
|
Non-cash activity
|
—
|
|
|
(132
|
)
|
|
(2
|
)
|
|
(134
|
)
|
|
Restructuring reserves June 30, 2019
(1)
|
$
|
470
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
$
|
543
|
|
|
|
|
|
(1)
|
The remaining cash outlays are expected to be substantially completed by the end of 2023.
|
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.
Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than
two years
into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts and purchased collar options.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or
Other comprehensive income
(
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 unrealized gains or losses on these contracts is recorded in
Accumulated other comprehensive income
(
AOCI
) and reclassified into
Sales
when the hedged anticipated revenue is recognized. 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 Condensed Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
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 Condensed 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 also uses 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. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within
OCI
and remain in
AOCI
until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded component). Changes in fair value of the excluded components are recognized in
OCI
. The Company recognizes in earnings the initial value of the excluded component on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed 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
.
The effects of the Company’s net investment hedges on
OCI
and the Consolidated Statement of Income are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income
(1)
|
|
Amount of Pretax (Gain) Loss Recognized in
Other (income) expense, net
for Amounts Excluded from Effectiveness Testing
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net Investment Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
17
|
|
|
$
|
(12
|
)
|
|
$
|
7
|
|
|
$
|
(14
|
)
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
|
$
|
(15
|
)
|
|
$
|
(3
|
)
|
|
Euro-denominated notes
|
28
|
|
|
(271
|
)
|
|
(2
|
)
|
|
(92
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(1)
No amounts were reclassified from AOCI into income related to the sale of a subsidiary.
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
June 30, 2019
, the Company was a party to
19
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.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
($ in millions)
|
Par Value of Debt
|
|
Number of Interest Rate Swaps Held
|
|
Total Swap Notional Amount
|
|
1.85% notes due 2020
|
1,250
|
|
|
5
|
|
|
1,250
|
|
|
3.875% notes due 2021
|
1,150
|
|
|
5
|
|
|
1,150
|
|
|
2.40% notes due 2022
|
1,000
|
|
|
4
|
|
|
1,000
|
|
|
2.35% notes due 2022
|
1,250
|
|
|
5
|
|
|
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 along with the offsetting fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.
The table below presents the location of amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount of Hedged Liabilities
|
|
Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
|
|
($ in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Balance Sheet Line Item in which Hedged Item is Included
|
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt
|
$
|
1,244
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
Long-Term Debt
|
3,406
|
|
|
4,560
|
|
|
11
|
|
|
(82
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
Fair Value of Derivative
|
|
U.S. Dollar
Notional
|
|
Fair Value of Derivative
|
|
U.S. Dollar
Notional
|
|
($ in millions)
|
Balance Sheet Caption
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Other Assets
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
2,150
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate swap contracts
|
Accrued and other current liabilities
|
—
|
|
|
6
|
|
|
1,250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest rate swap contracts
|
Other Noncurrent Liabilities
|
—
|
|
|
2
|
|
|
1,250
|
|
|
—
|
|
|
81
|
|
|
4,650
|
|
|
Foreign exchange contracts
|
Other current assets
|
168
|
|
|
—
|
|
|
6,389
|
|
|
263
|
|
|
—
|
|
|
6,222
|
|
|
Foreign exchange contracts
|
Other Assets
|
49
|
|
|
—
|
|
|
2,790
|
|
|
75
|
|
|
—
|
|
|
2,655
|
|
|
Foreign exchange contracts
|
Accrued and other current liabilities
|
—
|
|
|
13
|
|
|
1,252
|
|
|
—
|
|
|
7
|
|
|
774
|
|
|
Foreign exchange contracts
|
Other Noncurrent Liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
89
|
|
|
|
|
$
|
231
|
|
|
$
|
21
|
|
|
$
|
15,081
|
|
|
$
|
338
|
|
|
$
|
89
|
|
|
$
|
14,390
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
6,665
|
|
|
$
|
116
|
|
|
$
|
—
|
|
|
$
|
5,430
|
|
|
Foreign exchange contracts
|
Accrued and other current liabilities
|
—
|
|
|
63
|
|
|
4,982
|
|
|
—
|
|
|
71
|
|
|
9,922
|
|
|
|
|
$
|
70
|
|
|
$
|
63
|
|
|
$
|
11,647
|
|
|
$
|
116
|
|
|
$
|
71
|
|
|
$
|
15,352
|
|
|
|
|
$
|
301
|
|
|
$
|
84
|
|
|
$
|
26,728
|
|
|
$
|
454
|
|
|
$
|
160
|
|
|
$
|
29,742
|
|
As noted above, the Company records its derivatives on a gross basis in the Condensed 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
($ in millions)
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
|
Gross amounts recognized in the consolidated balance sheet
|
$
|
301
|
|
|
$
|
84
|
|
|
$
|
454
|
|
|
$
|
160
|
|
|
Gross amounts subject to offset in master netting arrangements not offset in the consolidated
balance sheet
|
(69
|
)
|
|
(69
|
)
|
|
(121
|
)
|
|
(121
|
)
|
|
Cash collateral received
|
(32
|
)
|
|
—
|
|
|
(107
|
)
|
|
—
|
|
|
Net amounts
|
$
|
200
|
|
|
$
|
15
|
|
|
$
|
226
|
|
|
$
|
39
|
|
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
Other (income) expense, net
(1)
|
|
Other comprehensive income (loss)
|
|
Sales
|
|
Other (income) expense, net
(1)
|
|
Other comprehensive income (loss)
|
|
|
Three Months Ended June 30,
|
|
Three Months Ended June 30,
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded
|
$
|
11,760
|
|
|
$
|
10,465
|
|
|
$
|
140
|
|
|
(48
|
)
|
|
$
|
(16
|
)
|
|
$
|
(62
|
)
|
|
22,575
|
|
|
$
|
20,502
|
|
|
$
|
327
|
|
|
$
|
(340
|
)
|
|
$
|
183
|
|
|
$
|
62
|
|
|
(Gain) loss on fair value hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
—
|
|
|
—
|
|
|
55
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|
(77
|
)
|
|
—
|
|
|
—
|
|
|
Derivatives designated as hedging instruments
|
—
|
|
|
—
|
|
|
(45
|
)
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(68
|
)
|
|
84
|
|
|
—
|
|
|
—
|
|
|
Impact of cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of income (loss) recognized in
OCI
on derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
264
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
84
|
|
|
Increase (decrease) in
Sales
as a result of
AOCI
reclassifications
|
75
|
|
|
(73
|
)
|
|
—
|
|
|
—
|
|
|
(75
|
)
|
|
73
|
|
|
119
|
|
|
(166
|
)
|
|
—
|
|
|
—
|
|
|
(119
|
)
|
|
166
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain recognized in
Other (income) expense, net
on derivatives
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
Amount of loss recognized in
OCI
on derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(2
|
)
|
(1)
Interest expense is a component of
Other (income) expense, net.
The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Derivative Pretax (Gain) Loss Recognized in Income
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
($ in millions)
|
Income Statement Caption
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
(1)
|
Other (income) expense, net
|
|
$
|
2
|
|
|
$
|
(195
|
)
|
|
$
|
120
|
|
|
$
|
(167
|
)
|
|
Foreign exchange contracts
(2)
|
Sales
|
|
(6
|
)
|
|
(14
|
)
|
|
4
|
|
|
(5
|
)
|
(1)
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.
(2)
These derivative contracts serve as economic hedges of forecasted transactions.
At
June 30, 2019
, the Company estimates
$76 million
of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from
AOCI
to
Sales
. The amount ultimately reclassified to
Sales
may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Investments in Debt and Equity Securities
Information on investments in debt and equity securities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
($ in millions)
|
Gains
|
|
Losses
|
|
Gains
|
|
Losses
|
|
|
Corporate notes and bonds
|
$
|
2,666
|
|
|
$
|
36
|
|
|
$
|
(2
|
)
|
|
$
|
2,700
|
|
|
$
|
4,985
|
|
|
$
|
3
|
|
|
$
|
(68
|
)
|
|
$
|
4,920
|
|
|
Asset-backed securities
|
789
|
|
|
4
|
|
|
(1
|
)
|
|
792
|
|
|
1,285
|
|
|
1
|
|
|
(11
|
)
|
|
1,275
|
|
|
U.S. government and agency securities
|
575
|
|
|
10
|
|
|
—
|
|
|
585
|
|
|
895
|
|
|
2
|
|
|
(5
|
)
|
|
892
|
|
|
Foreign government bonds
|
41
|
|
|
—
|
|
|
—
|
|
|
41
|
|
|
167
|
|
|
—
|
|
|
(1
|
)
|
|
166
|
|
|
Mortgage-backed securities
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Total debt securities
|
$
|
4,076
|
|
|
$
|
50
|
|
|
$
|
(3
|
)
|
|
$
|
4,123
|
|
|
$
|
7,340
|
|
|
$
|
6
|
|
|
$
|
(85
|
)
|
|
$
|
7,261
|
|
|
Publicly traded equity securities
(1)
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
Total debt and publicly traded equity securities
|
|
|
|
|
|
|
|
|
|
$
|
4,879
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,717
|
|
(1)
Unrealized net (losses) gains recognized in
Other (income) expense, net
on equity securities still held at
June 30, 2019
were
$(39) million
and
$7 million
, for the
second
quarter of
2019
and
2018
, respectively, and were
$75 million
and
$50 million
for the first
six
months of
2019
and
2018
, respectively.
At
June 30, 2019
, the Company also had
$465 million
of equity investments without readily determinable fair values included in
Other Assets
. During the first
six
months of
2019
, the Company recognized unrealized gains of
$4 million
on certain of these equity investments recorded in
Other (income) expense, net
based on favorable observable price changes from transactions involving similar investments of the same investee. In addition, during the first
six
months of 2019, the Company recognized unrealized losses of
$10 million
in
Other (income) expense, net
related to certain of these investments based on unfavorable observable price changes. Since January 1, 2018, cumulative unrealized gains and cumulative unrealized losses based on observable prices changes for investments in equity investments without readily determinable fair values were
$172 million
and
$21 million
, respectively.
Available-for-sale debt securities included in
Short-term investments
totaled
$398 million
at
June 30, 2019
. Of the remaining debt securities,
$3.4 billion
mature within five years. At
June 30, 2019
and
December 31, 2018
, 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.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Fair Value Measurements Using
|
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
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
|
|
($ in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
$
|
—
|
|
|
$
|
2,660
|
|
|
$
|
—
|
|
|
$
|
2,660
|
|
|
$
|
—
|
|
|
$
|
4,835
|
|
|
$
|
—
|
|
|
$
|
4,835
|
|
|
Asset-backed securities
(1)
|
—
|
|
|
788
|
|
|
—
|
|
|
788
|
|
|
—
|
|
|
1,253
|
|
|
—
|
|
|
1,253
|
|
|
U.S. government and agency securities
|
—
|
|
|
508
|
|
|
—
|
|
|
508
|
|
|
—
|
|
|
731
|
|
|
—
|
|
|
731
|
|
|
Foreign government bonds
|
—
|
|
|
41
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
166
|
|
|
—
|
|
|
166
|
|
|
Publicly traded equity securities
|
228
|
|
|
—
|
|
|
—
|
|
|
228
|
|
|
147
|
|
|
—
|
|
|
—
|
|
|
147
|
|
|
|
228
|
|
|
3,997
|
|
|
—
|
|
|
4,225
|
|
|
147
|
|
|
6,985
|
|
|
—
|
|
|
7,132
|
|
|
Other assets
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
58
|
|
|
19
|
|
|
—
|
|
|
77
|
|
|
55
|
|
|
106
|
|
|
—
|
|
|
161
|
|
|
Corporate notes and bonds
|
—
|
|
|
40
|
|
|
—
|
|
|
40
|
|
|
—
|
|
|
85
|
|
|
—
|
|
|
85
|
|
|
Mortgage-backed securities
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
|
Asset-backed securities
(1)
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
Publicly traded equity securities
|
528
|
|
|
—
|
|
|
—
|
|
|
528
|
|
|
309
|
|
|
—
|
|
|
—
|
|
|
309
|
|
|
|
586
|
|
|
68
|
|
|
—
|
|
|
654
|
|
|
364
|
|
|
221
|
|
|
—
|
|
|
585
|
|
|
Derivative assets
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased currency options
|
—
|
|
|
158
|
|
|
—
|
|
|
158
|
|
|
—
|
|
|
213
|
|
|
—
|
|
|
213
|
|
|
Forward exchange contracts
|
—
|
|
|
129
|
|
|
—
|
|
|
129
|
|
|
—
|
|
|
241
|
|
|
—
|
|
|
241
|
|
|
Interest rate swaps
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
301
|
|
|
—
|
|
|
301
|
|
|
—
|
|
|
454
|
|
|
—
|
|
|
454
|
|
|
Total assets
|
$
|
814
|
|
|
$
|
4,366
|
|
|
$
|
—
|
|
|
$
|
5,180
|
|
|
$
|
511
|
|
|
$
|
7,660
|
|
|
$
|
—
|
|
|
$
|
8,171
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
753
|
|
|
$
|
753
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
788
|
|
|
$
|
788
|
|
|
Derivative liabilities
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
—
|
|
|
73
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
74
|
|
|
—
|
|
|
74
|
|
|
Interest rate swaps
|
—
|
|
|
8
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
81
|
|
|
—
|
|
|
81
|
|
|
Written currency options
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
160
|
|
|
—
|
|
|
160
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
84
|
|
|
$
|
753
|
|
|
$
|
837
|
|
|
$
|
—
|
|
|
$
|
160
|
|
|
$
|
788
|
|
|
$
|
948
|
|
|
|
|
|
(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.
|
|
|
|
|
(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 the first
six
months of
2019
. As of
June 30, 2019
,
Cash and cash equivalents
of
$6.7 billion
included
$5.9 billion
of cash equivalents (which would be considered Level 2 in the fair value hierarchy).
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Contingent Consideration
Summarized information about the changes in liabilities for contingent consideration is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
Fair value January 1
|
$
|
788
|
|
|
$
|
935
|
|
|
Changes in estimated fair value
(1)
|
50
|
|
|
122
|
|
|
Additions
|
—
|
|
|
8
|
|
|
Payments
|
(85
|
)
|
|
(235
|
)
|
|
Fair value June 30
(2)
|
$
|
753
|
|
|
$
|
830
|
|
(1)
Recorded in
Cost of sales, Research and development
expenses, and
Other (income) expense, net
. Includes cumulative translation adjustments.
(2)
Balance at
June 30, 2019
includes
$114 million
recorded as a current liability for amounts expected to be paid within the next 12 months.
The payments of contingent consideration in both periods include payments related to liabilities recorded in connection with the 2016 termination of the Sanofi-Pasteur MSD joint venture. The payments of contingent consideration in the first
six
months of 2018 also include
$175 million
related to the achievement of a clinical development milestone for MK-7264 (gefapixant), a program obtained in connection with the acquisition of Afferent Pharmaceuticals.
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
June 30, 2019
, was
$28.6 billion
compared with a carrying value of
$26.6 billion
and at
December 31, 2018
, was
$25.6 billion
compared with a carrying value of
$25.1 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. 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.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. Cash received by the Company from various counterparties was
$32 million
and
$107 million
at
June 30, 2019
and
December 31, 2018
, respectively. The obligation to return such collateral is recorded in
Accrued and other current liabilities
.
No
cash collateral was advanced by the Company to counterparties as of
June 30, 2019
or
December 31, 2018
.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Inventories consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
June 30, 2019
|
|
December 31, 2018
|
|
Finished goods
|
$
|
1,750
|
|
|
$
|
1,658
|
|
|
Raw materials and work in process
|
5,388
|
|
|
5,004
|
|
|
Supplies
|
202
|
|
|
194
|
|
|
Total (approximates current cost)
|
7,340
|
|
|
6,856
|
|
|
(Decrease) increase to LIFO costs
|
(29
|
)
|
|
1
|
|
|
|
$
|
7,311
|
|
|
$
|
6,857
|
|
|
Recognized as:
|
|
|
|
|
Inventories
|
$
|
5,847
|
|
|
$
|
5,440
|
|
|
Other assets
|
1,464
|
|
|
1,417
|
|
Amounts recognized as
Other assets
are comprised almost entirely of raw materials and work in process inventories. At
June 30, 2019
and
December 31, 2018
, these amounts included
$1.3 billion
and
$1.4 billion
, respectively, of inventories not expected to be sold within one year. In addition, these amounts included
$118 million
and
$7 million
at
June 30, 2019
and
December 31, 2018
, respectively, of inventories produced in preparation for product launches.
|
|
|
|
7.
|
Loans Payable, Long-Term Debt and Leases
|
Long-Term Debt
In March 2019, the Company issued
$5.0 billion
principal amount of senior unsecured notes consisting of
$750 million
of
2.90%
notes due 2024,
$1.75 billion
of
3.40%
notes due 2029,
$1.0 billion
of
3.90%
notes due 2039, and
$1.5 billion
of
4.00%
notes due 2049. The Company used the net proceeds from the offering of
$5.0 billion
for general corporate purposes, including the repayment of outstanding commercial paper borrowings.
Leases
As discussed in Note 1, on January 1, 2019, Merck adopted new guidance for the accounting and reporting of leases. The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. As permitted under the transition guidance in ASC 842, the Company elected a package of practical expedients which, among other provisions, allowed the Company to carry forward historical lease classifications. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial.
Under ASC 842 transition guidance, Merck elected the hindsight practical expedient to determine the lease term for existing leases, which permits companies to consider available information prior to the effective date of the new guidance as to the actual or likely exercise of options to extend or terminate the lease. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of
eight years
, which include options to extend the leases for up to
four years
where applicable. Vehicle leases are generally in effect for
four years
. The Company has made an accounting policy election not to record short-term leases (leases with an initial term of 12 months or less) on the balance sheet; however, Merck currently has no short-term leases.
Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments. As a practical expedient, the Company has made an accounting policy election not to separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.
Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Operating lease cost was
$82 million
and
$165 million
for the
second
quarter and first
six
months of 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was
$65 million
and
$138 million
for the
second
quarter and first
six
months of 2019, respectively.
Supplemental balance sheet information related to operating leases is as follows:
|
|
|
|
|
|
|
|
($ in millions)
|
June 30, 2019
|
|
Assets
|
|
|
Other Assets
(1)
|
$
|
1,063
|
|
|
Liabilities
|
|
|
Accrued and other current liabilities
|
$
|
241
|
|
|
Other Noncurrent Liabilities
|
752
|
|
|
|
$
|
993
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
7.5
|
|
|
Weighted-average discount rate
|
3.4
|
%
|
(1)
Includes prepaid leases that have no related lease liability.
Maturities of operating leases liabilities are as follows:
|
|
|
|
|
|
|
|
($ in millions)
|
June 30, 2019
|
|
2019 (excluding the six months ended June 30, 2019)
|
$
|
138
|
|
|
2020
|
232
|
|
|
2021
|
172
|
|
|
2022
|
146
|
|
|
2023
|
98
|
|
|
Thereafter
|
339
|
|
|
Total lease payments
|
1,125
|
|
|
Less: imputed interest
|
(132
|
)
|
|
|
$
|
993
|
|
As of
June 30, 2019
, the Company had entered into additional real estate operating leases that had not yet commenced. The obligations associated with these leases totaled
$127 million
, of which
$72 million
related to a lease that commenced in July 2019 and has a lease term of
10
years.
As of December 31, 2018, prior to the adoption of ASC 842, the minimum aggregate rental commitments under noncancellable leases were as follows: 2019,
$188 million
; 2020,
$198 million
; 2021,
$150 million
; 2022,
$134 million
; 2023,
$84 million
and thereafter,
$243 million
.
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
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
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
June 30, 2019
, approximately
3,900
cases have been filed and either are pending or conditionally dismissed (as noted below) against Merck in either federal or state court. Plaintiffs in the vast majority of these cases generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of
Fosamax
.
In March 2011, Merck submitted a Motion to Transfer to the Judicial Panel on Multidistrict Litigation (JPML) seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. All federal cases involving allegations of Femur Fracture have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL). In the only bellwether case tried to date in the Femur Fracture MDL,
Glynn v. Merck
, the jury returned a verdict in Merck’s favor. In addition, in June 2013, the Femur Fracture MDL court granted Merck’s motion for judgment as a matter of law in the
Glynn
case and held that the plaintiff’s failure to warn claim was preempted by federal law.
In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the
Glynn
case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately
650
cases on preemption grounds. Plaintiffs in approximately
515
of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In March 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. Merck filed a petition for a writ of certiorari to the U.S. Supreme Court in August 2017 seeking review of the Third Circuit’s decision. In December 2017, the Supreme Court invited the Solicitor General to file a brief in the case expressing the views of the United States, and in May 2018, the Solicitor General submitted a brief stating that the Third Circuit’s decision was wrongly decided and recommended that the Supreme Court grant Merck’s cert petition. The Supreme Court granted Merck’s petition in June 2018, and an oral argument before the Supreme Court was held on January 7, 2019. On May 20, 2019, the Supreme Court issued its opinion and decided that the Third Circuit had incorrectly concluded that the issue of preemption should be resolved by a jury, and accordingly vacated the judgment of the Third Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the Supreme Court’s opinion. The Third Circuit has requested, by August 6, 2019, ten page letters from each side addressing two specific issues central to the appeal.
Accordingly, as of
June 30, 2019
,
11
cases were actively pending in the Femur Fracture MDL, and approximately
1,060
cases have either been dismissed without prejudice or administratively closed pending final resolution by the Supreme Court of the appeal of the Femur Fracture MDL court’s preemption order.
As of
June 30, 2019
, approximately
2,555
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 cases to be reviewed through fact discovery. Merck has continued to select additional cases to be reviewed through fact discovery from 2016 to the present.
As of
June 30, 2019
, approximately
275
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.
Additionally, there are
four
Femur Fracture cases pending in other state courts.
Discovery is presently stayed in the Femur Fracture MDL and in the state court cases in California. Merck 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
June 30, 2019
, Merck is aware of approximately
1,350
product users alleging that
Januvia
and/or
Janumet
caused the development of pancreatic cancer and other injuries.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Most claims have been filed in multidistrict litigation before the U.S. District Court for the Southern District of California (MDL). Outside of the MDL, the majority of claims have been filed in coordinated proceedings before 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 federal preemption.
Plaintiffs appealed in both forums. In November 2017, the U.S. Court of Appeals for the Ninth Circuit vacated the judgment and remanded for further discovery, which is ongoing. In November 2018, the California state appellate court reversed and remanded on similar grounds. In March 2019, the parties in the MDL and the California coordinated proceeding agreed to coordinate and adopt a schedule for completing discovery on general causation and preemption issues and for renewing summary judgment and
Daubert
motions. Under the stipulated case management schedule, the filing deadline for
Daubert
and summary judgment motions will take place in May 2020.
As of
June 30, 2019
,
seven
product users have claims pending against Merck in state courts other than California, including Illinois. In June 2017, the Illinois trial court denied Merck’s motion for summary judgment based on federal preemption. Merck appealed, and the Illinois appellate court affirmed in December 2018. Merck filed a petition for leave to appeal to the Illinois Supreme Court in February 2019. In April 2019, the Illinois Supreme Court stayed consideration of the pending petition to appeal until the United States Supreme Court issued its opinion in
Merck Sharp & Dohme Corp. v. Albrecht
, No. 17-290. Merck filed the opinion in
Albrecht
with the Illinois Supreme Court in June 2019. The petition for leave to appeal remains pending.
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.
Governmental Proceedings
In the fall of 2018, the Company received a records subpoena from the U.S. Attorney’s Office for the District of Vermont (VT USAO) pursuant to Section 248 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) relating to an investigation of potential health care offenses. The subpoena sought information relating to any actual or potential business relationship or arrangement Merck has had with Practice Fusion, Inc. (PFI), a cloud-based, electronic health records (EHR) company that was acquired by Allscripts in January 2018. The Company cooperated with the government and responded to that subpoena. Subsequently, on May 21, 2019, Merck received a second records subpoena from the VT USAO that broadened the government’s information request by seeking information relating to Merck’s relationship with any EHR company. Shortly thereafter, the VT USAO served a Civil Investigation Demand (CID) upon Merck similarly seeking information on the Company’s relationships with EHR vendors. The CID explains that the government is conducting a False Claims Act investigation concerning whether Merck and/or PFI submitted claims to federal healthcare programs that violate the Federal Anti-Kickback Statute. Merck is cooperating with the government’s investigation.
On April 15, 2019, Merck received a set of investigative interrogatories from the California Attorney General’s Office pursuant to its investigation of conduct and agreements that allegedly affected or delayed competition to Lantus in the insulin market. The interrogatories seek information concerning Merck’s development of an insulin glargine product, and its subsequent termination, as well as Merck’s patent litigation against Sanofi S.A. concerning Lantus and the resolution of that litigation. Merck is cooperating with the California Attorney General’s investigation.
As previously disclosed, the Company’s subsidiaries in China have, in the past, 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.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Commercial and Other Litigation
Zetia
Antitrust Litigation
As previously disclosed, Merck, MSD, Schering Corporation and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action and opt-out lawsuits filed in 2018 on behalf of direct and indirect purchasers of
Zetia
alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Rebecca Beach Smith in the Eastern District of Virginia. In December 2018, the court denied the Merck Defendants’ motions to dismiss or stay the direct purchaser putative class actions pending bilateral arbitration. On February 6, 2019, the magistrate judge issued a report and recommendation recommending that the district judge grant in part and deny in part defendants’ motions to dismiss on non-arbitration issues. On February 20, 2019, defendants and retailer opt-out plaintiffs filed objections to the report and recommendation. The parties await a decision from the district judge. Trial is currently scheduled to begin on September 30, 2020.
Merck KGaA Litigation
As previously disclosed, 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), historically 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, India, Australia, Singapore, Hong Kong, and China alleging, among other things, unfair competition, trademark infringement and/or corporate name infringement. In the UK, Australia, Singapore, Hong Kong, and India, KGaA also alleges breach of the parties’ coexistence agreement. The litigation is ongoing in the United States with no trial date set, and also ongoing in numerous jurisdictions outside of the United States; the Company is defending those suits in each jurisdiction.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the U.S. Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. 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.
Inegy
—
The patents protecting
Inegy
in Europe expired; supplemental protection certificates (SPCs) in many European countries expired in April 2019. The Company filed actions for patent infringement seeking damages against those companies that launched generic products before April 2019.
Januvia, Janumet, Janumet XR
— In February 2019, Par Pharmaceutical, Inc. (Par Pharmaceutical) filed suit against the Company in the U.S. District Court for the District of New Jersey, seeking a declaratory judgment of invalidity of a patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026. In response, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of
Januvia
,
Janumet
, and
Janumet XR
following expiration of key patent protection in 2022, but prior to the expiration of the later-granted patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026, and a later granted patent owned by the Company covering the
Janumet
formulation which expires in 2028. Par Pharmaceutical dismissed its case in the U.S. District Court for the District of New Jersey against the Company and will litigate the action in the U.S. District Court for the District of Delaware. The Company filed a patent infringement lawsuit against Mylan Pharmaceuticals Inc. and Mylan Inc. (Mylan) in the Northern District of West Virginia. The Company has a pending, unopposed motion before the Judicial Panel of Multidistrict Litigation to transfer the Company’s lawsuit against Mylan to the U.S. District Court for the District of Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district. The U.S. District Court for the District of Delaware has scheduled the lawsuits for a single 3-day trial on invalidity issues beginning October 4, 2021. The Court will schedule separate 1-day trials on infringement issues if necessary.
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.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
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
June 30, 2019
and
December 31, 2018
of approximately
$260 million
and
$245 million
, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Common Stock
|
Other
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Loss
|
Treasury Stock
|
Non-
Controlling
Interests
|
Total
|
|
($ and shares in millions except per share amounts)
|
Shares
|
Par Value
|
Shares
|
Cost
|
|
Balance at April 1, 2018
|
3,577
|
|
$
|
1,788
|
|
$
|
39,874
|
|
$
|
41,107
|
|
$
|
(5,060
|
)
|
885
|
|
$
|
(44,041
|
)
|
$
|
233
|
|
$
|
33,901
|
|
|
Net income attributable to Merck & Co., Inc.
|
—
|
|
—
|
|
—
|
|
1,707
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,707
|
|
|
Other comprehensive loss, net of taxes
|
—
|
|
—
|
|
—
|
|
—
|
|
(62
|
)
|
—
|
|
—
|
|
—
|
|
(62
|
)
|
|
Cash dividends declared on common stock ($0.48 per share)
|
—
|
|
—
|
|
—
|
|
(1,291
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,291
|
)
|
|
Treasury stock shares purchased
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
27
|
|
(1,596
|
)
|
—
|
|
(1,596
|
)
|
|
Share-based compensation plans and other
|
—
|
|
—
|
|
(133
|
)
|
—
|
|
—
|
|
(5
|
)
|
236
|
|
—
|
|
103
|
|
|
Net income attributable to noncontrolling interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9
|
|
9
|
|
|
Distributions attributable to noncontrolling interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5
|
)
|
(5
|
)
|
|
Balance at June 30, 2018
|
3,577
|
|
$
|
1,788
|
|
$
|
39,741
|
|
$
|
41,523
|
|
$
|
(5,122
|
)
|
907
|
|
$
|
(45,401
|
)
|
$
|
237
|
|
$
|
32,766
|
|
|
Balance at April 1, 2019
|
3,577
|
|
$
|
1,788
|
|
$
|
38,768
|
|
$
|
44,065
|
|
$
|
(5,346
|
)
|
994
|
|
$
|
(51,736
|
)
|
$
|
131
|
|
$
|
27,670
|
|
|
Net income attributable to Merck & Co., Inc.
|
—
|
|
—
|
|
—
|
|
2,670
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,670
|
|
|
Other comprehensive loss, net of taxes
|
—
|
|
—
|
|
—
|
|
—
|
|
(16
|
)
|
—
|
|
—
|
|
—
|
|
(16
|
)
|
|
Cash dividends declared on common stock ($0.55 per share)
|
—
|
|
—
|
|
—
|
|
(1,440
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,440
|
)
|
|
Treasury stock shares purchased
|
—
|
|
—
|
|
1,000
|
|
—
|
|
—
|
|
24
|
|
(2,235
|
)
|
—
|
|
(1,235
|
)
|
|
Share-based compensation plans and other
|
—
|
|
—
|
|
(284
|
)
|
—
|
|
—
|
|
(8
|
)
|
401
|
|
—
|
|
117
|
|
|
Net loss attributable to noncontrolling interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(26
|
)
|
(26
|
)
|
|
Other changes in noncontrolling ownership interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(3
|
)
|
(3
|
)
|
|
Balance at June 30, 2019
|
3,577
|
|
$
|
1,788
|
|
$
|
39,484
|
|
$
|
45,295
|
|
$
|
(5,362
|
)
|
1,010
|
|
$
|
(53,570
|
)
|
$
|
102
|
|
$
|
27,737
|
|
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Common Stock
|
Other
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Loss
|
Treasury Stock
|
Non-
Controlling
Interests
|
Total
|
|
($ and shares in millions except per share amounts)
|
Shares
|
Par Value
|
Shares
|
Cost
|
|
Balance at January 1, 2018
|
3,577
|
|
$
|
1,788
|
|
$
|
39,902
|
|
$
|
41,350
|
|
$
|
(4,910
|
)
|
880
|
|
$
|
(43,794
|
)
|
$
|
233
|
|
$
|
34,569
|
|
|
Net income attributable to Merck & Co., Inc.
|
—
|
|
—
|
|
—
|
|
2,443
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,443
|
|
|
Adoption of new accounting standards
|
—
|
|
—
|
|
—
|
|
322
|
|
(274
|
)
|
—
|
|
—
|
|
—
|
|
48
|
|
|
Other comprehensive income, net of taxes
|
—
|
|
—
|
|
—
|
|
—
|
|
62
|
|
—
|
|
—
|
|
—
|
|
62
|
|
|
Cash dividends declared on common stock ($0.96 per share)
|
—
|
|
—
|
|
—
|
|
(2,592
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,592
|
)
|
|
Treasury stock shares purchased
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
37
|
|
(2,162
|
)
|
—
|
|
(2,162
|
)
|
|
Share-based compensation plans and other
|
—
|
|
—
|
|
(161
|
)
|
—
|
|
—
|
|
(10
|
)
|
555
|
|
—
|
|
394
|
|
|
Net income attributable to noncontrolling interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
14
|
|
14
|
|
|
Distributions attributable to noncontrolling interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(10
|
)
|
(10
|
)
|
|
Balance at June 30, 2018
|
3,577
|
|
$
|
1,788
|
|
$
|
39,741
|
|
$
|
41,523
|
|
$
|
(5,122
|
)
|
907
|
|
$
|
(45,401
|
)
|
$
|
237
|
|
$
|
32,766
|
|
|
Balance at January 1, 2019
|
3,577
|
|
$
|
1,788
|
|
$
|
38,808
|
|
$
|
42,579
|
|
$
|
(5,545
|
)
|
985
|
|
$
|
(50,929
|
)
|
$
|
181
|
|
$
|
26,882
|
|
|
Net income attributable to Merck & Co., Inc.
|
—
|
|
—
|
|
—
|
|
5,585
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5,585
|
|
|
Other comprehensive income, net of taxes
|
—
|
|
—
|
|
—
|
|
—
|
|
183
|
|
—
|
|
—
|
|
—
|
|
183
|
|
|
Cash dividends declared on common stock ($1.10 per share)
|
—
|
|
—
|
|
—
|
|
(2,869
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,869
|
)
|
|
Treasury stock shares purchased
|
—
|
|
—
|
|
1,000
|
|
—
|
|
—
|
|
38
|
|
(3,325
|
)
|
—
|
|
(2,325
|
)
|
|
Share-based compensation plans and other
|
—
|
|
—
|
|
(324
|
)
|
—
|
|
—
|
|
(13
|
)
|
684
|
|
—
|
|
360
|
|
|
Net loss attributable to noncontrolling interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(79
|
)
|
(79
|
)
|
|
Balance at June 30, 2019
|
3,577
|
|
$
|
1,788
|
|
$
|
39,484
|
|
$
|
45,295
|
|
$
|
(5,362
|
)
|
1,010
|
|
$
|
(53,570
|
)
|
$
|
102
|
|
$
|
27,737
|
|
On October 25, 2018, the Company entered into accelerated share repurchase (ASR) agreements with two third-party financial institutions (Dealers). Under the ASR agreements, Merck agreed to purchase
$5 billion
of Merck’s common stock, in total, with an initial delivery of
56.7 million
shares of Merck’s common stock, based on the then-current market price, made by the Dealers to Merck, and payments of
$5 billion
made by Merck to the Dealers on October 29, 2018, which were funded with existing cash and investments, as well as short-term borrowings. The payments to the Dealers were recorded as reductions to shareholders’ equity, consisting of a
$4 billion
increase in treasury stock, which reflected the value of the initial
56.7 million
shares received on October 29, 2018, and a
$1 billion
decrease in other-paid-in capital, which reflected the value of the stock held back by the Dealers pending final settlement. Upon settlement of the ASR agreements in April 2019, Merck received an additional
7.7 million
shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program, less a negotiated discount, bringing the total shares received by Merck under this program to
64.4 million
. The receipt of the additional shares was reflected as an increase to treasury stock and an increase to other-paid-in capital in the second quarter of 2019.
|
|
|
|
10.
|
Share-Based Compensation Plans
|
The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant.
The following table provides the amounts of share-based compensation cost recorded in the Condensed Consolidated Statement of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Pretax share-based compensation expense
|
$
|
111
|
|
|
$
|
90
|
|
|
$
|
204
|
|
|
$
|
170
|
|
|
Income tax benefit
|
(15
|
)
|
|
(13
|
)
|
|
(28
|
)
|
|
(28
|
)
|
|
Total share-based compensation expense, net of taxes
|
$
|
96
|
|
|
$
|
77
|
|
|
$
|
176
|
|
|
$
|
142
|
|
During the first
six
months of
2019
, the Company granted
6 million
RSUs with a weighted-average grant date fair value of
$76.31
per RSU and during the first
six
months of
2018
granted
7 million
RSUs with a weighted-average grant date fair value of
$58.15
per RSU. During the first
six
months of
2019
, the Company granted
609 thousand
PSUs with a weighted-average
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
grant date fair value of
$90.50
per PSU and during the first
six
months of
2018
granted
855 thousand
PSUs with a weighted-average grant date fair value of
$56.70
per PSU.
During the first
six
months of
2019
, the Company granted
3 million
stock options with a weighted-average exercise price of
$80.00
per option and during the first
six
months of
2018
granted
3 million
stock options with a weighted-average exercise price of
$57.72
per option. The weighted-average fair value of options granted during the first
six
months of
2019
and
2018
was
$10.63
and
$8.19
per option, respectively, and was determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
Expected dividend yield
|
3.2
|
%
|
|
3.4
|
%
|
|
Risk-free interest rate
|
2.4
|
%
|
|
2.8
|
%
|
|
Expected volatility
|
18.7
|
%
|
|
19.1
|
%
|
|
Expected life (years)
|
5.9
|
|
|
6.1
|
|
At
June 30, 2019
, there was
$800 million
of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted-average period of
2.2 years
. For segment reporting, share-based compensation costs are unallocated expenses.
|
|
|
|
11.
|
Pension and Other Postretirement Benefit Plans
|
The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. The net periodic benefit cost of such plans consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
($ in millions)
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
Service cost
|
$
|
74
|
|
|
$
|
60
|
|
|
$
|
85
|
|
|
$
|
58
|
|
|
$
|
144
|
|
|
$
|
120
|
|
|
$
|
168
|
|
|
$
|
125
|
|
|
Interest cost
|
113
|
|
|
44
|
|
|
107
|
|
|
45
|
|
|
228
|
|
|
89
|
|
|
215
|
|
|
91
|
|
|
Expected return on plan assets
|
(205
|
)
|
|
(107
|
)
|
|
(211
|
)
|
|
(108
|
)
|
|
(411
|
)
|
|
(214
|
)
|
|
(425
|
)
|
|
(221
|
)
|
|
Amortization of unrecognized prior service credit
|
(12
|
)
|
|
(3
|
)
|
|
(13
|
)
|
|
(3
|
)
|
|
(25
|
)
|
|
(6
|
)
|
|
(25
|
)
|
|
(7
|
)
|
|
Net loss amortization
|
35
|
|
|
16
|
|
|
56
|
|
|
21
|
|
|
70
|
|
|
31
|
|
|
112
|
|
|
43
|
|
|
Termination benefits
|
3
|
|
|
1
|
|
|
7
|
|
|
—
|
|
|
5
|
|
|
1
|
|
|
17
|
|
|
—
|
|
|
Curtailments
|
—
|
|
|
—
|
|
|
5
|
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
3
|
|
|
(1
|
)
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
4
|
|
|
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
36
|
|
|
$
|
16
|
|
|
$
|
12
|
|
|
$
|
21
|
|
|
$
|
66
|
|
|
$
|
34
|
|
The Company provides medical benefits, principally to its eligible U.S. retirees and similar benefits to their dependents, through its other postretirement benefit plans. The net credit of such plans consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
24
|
|
|
$
|
28
|
|
|
Interest cost
|
18
|
|
|
18
|
|
|
35
|
|
|
35
|
|
|
Expected return on plan assets
|
(18
|
)
|
|
(21
|
)
|
|
(36
|
)
|
|
(41
|
)
|
|
Amortization of unrecognized prior service credit
|
(21
|
)
|
|
(21
|
)
|
|
(43
|
)
|
|
(42
|
)
|
|
Termination benefits
|
—
|
|
|
1
|
|
|
—
|
|
|
2
|
|
|
Curtailments
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(6
|
)
|
|
|
$
|
(10
|
)
|
|
$
|
(11
|
)
|
|
$
|
(21
|
)
|
|
$
|
(24
|
)
|
In connection with restructuring actions (see Note 4), termination charges were recorded on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring actions, curtailments and settlements were recorded on pension and other postretirement benefit plans as reflected in the tables above.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
The components of net periodic benefit cost (credit) other than the service cost component are included in
Other (income) expense, net
(see Note 12), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in
Restructuring costs
if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions as noted above.
|
|
|
|
12.
|
Other (Income) Expense, Net
|
Other (income) expense, net, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Interest income
|
$
|
(75
|
)
|
|
$
|
(81
|
)
|
|
$
|
(164
|
)
|
|
$
|
(165
|
)
|
|
Interest expense
|
233
|
|
|
194
|
|
|
442
|
|
|
379
|
|
|
Exchange losses
|
27
|
|
|
71
|
|
|
128
|
|
|
77
|
|
|
Income from investments in equity securities, net
(1)
|
(58
|
)
|
|
(153
|
)
|
|
(32
|
)
|
|
(178
|
)
|
|
Net periodic defined benefit plan (credit) cost other than service cost
|
(140
|
)
|
|
(130
|
)
|
|
(281
|
)
|
|
(265
|
)
|
|
Other, net
|
153
|
|
|
51
|
|
|
234
|
|
|
(188
|
)
|
|
|
$
|
140
|
|
|
$
|
(48
|
)
|
|
$
|
327
|
|
|
$
|
(340
|
)
|
|
|
|
|
(1)
|
Includes net realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investments funds.
|
The higher exchange losses in the first
six
months of 2019 reflect losses on forward exchange contracts related to the acquisition of Antelliq.
Other, net (as reflected in the table above) in the second quarter and first
six
months of 2019 includes
$78 million
and
$162 million
of goodwill impairment charges related to certain businesses in the Healthcare Services segment. Other, net in the first
six
months of 2018 includes a
$115 million
gain on the settlement of certain patent litigation.
Interest paid for the
six
months ended
June 30, 2019
and
2018
was
$356 million
and
$341 million
, respectively.
The effective income tax rates of
18.9%
and
17.8%
for the
second
quarter of
2019
and
2018
, respectively, and
13.0%
and
28.4%
for the first
six
months of 2019 and 2018, respectively, reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective income tax rate for the first
six
months of 2019 reflects the favorable impact of a
$360 million
net tax benefit related to the settlement of certain federal income tax matters (discussed below). The effective income tax rate for the first
six
months of 2018 reflects the unfavorable impact of a
$1.4 billion
pretax charge recorded in connection with the formation of a collaboration with Eisai for which no tax benefit was recognized.
In the first quarter of 2019, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2012-2014 U.S. federal income tax returns. As a result, the Company was required to make a payment of
$107 million
. The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a
$360 million
net tax benefit in the first
six
months of 2019. This net benefit reflects reductions in reserves for unrecognized tax benefits for tax positions relating to the years that were under examination, partially offset by additional reserves for tax positions not previously reserved for.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
The calculations of earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ and shares in millions except per share amounts)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income attributable to Merck & Co., Inc.
|
$
|
2,670
|
|
|
$
|
1,707
|
|
|
$
|
5,585
|
|
|
$
|
2,443
|
|
|
Average common shares outstanding
|
2,574
|
|
|
2,683
|
|
|
2,579
|
|
|
2,689
|
|
|
Common shares issuable
(1)
|
14
|
|
|
13
|
|
|
17
|
|
|
13
|
|
|
Average common shares outstanding assuming dilution
|
2,588
|
|
|
2,696
|
|
|
2,596
|
|
|
2,702
|
|
|
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
|
$
|
1.04
|
|
|
$
|
0.64
|
|
|
$
|
2.17
|
|
|
$
|
0.91
|
|
|
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
|
$
|
1.03
|
|
|
$
|
0.63
|
|
|
$
|
2.15
|
|
|
$
|
0.90
|
|
|
|
|
|
(1)
|
Issuable primarily under share-based compensation plans.
|
For the
second
quarter of
2019
and
2018
,
3 million
and
13 million
, respectively, and for the first
six
months of
2019
and
2018
,
4 million
and
15 million
, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.
|
|
|
|
15.
|
Other Comprehensive Income (Loss)
|
Changes in
AOCI
by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
($ in millions)
|
Derivatives
|
|
Investments
|
|
Employee
Benefit
Plans
|
|
Cumulative
Translation
Adjustment
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Balance April 1, 2018, net of taxes
|
$
|
(201
|
)
|
|
$
|
(167
|
)
|
|
$
|
(3,095
|
)
|
|
$
|
(1,597
|
)
|
|
$
|
(5,060
|
)
|
|
Other comprehensive income (loss) before reclassification adjustments, pretax
|
265
|
|
|
(17
|
)
|
|
(1
|
)
|
|
(301
|
)
|
|
(54
|
)
|
|
Tax
|
(56
|
)
|
|
—
|
|
|
1
|
|
|
(60
|
)
|
|
(115
|
)
|
|
Other comprehensive income (loss) before reclassification adjustments, net of taxes
|
209
|
|
|
(17
|
)
|
|
—
|
|
|
(361
|
)
|
|
(169
|
)
|
|
Reclassification adjustments, pretax
|
72
|
|
(1)
|
20
|
|
(2)
|
40
|
|
(3)
|
—
|
|
|
132
|
|
|
Tax
|
(15
|
)
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
(25
|
)
|
|
Reclassification adjustments, net of taxes
|
57
|
|
|
20
|
|
|
30
|
|
|
—
|
|
|
107
|
|
|
Other comprehensive income (loss), net of taxes
|
266
|
|
|
3
|
|
|
30
|
|
|
(361
|
)
|
|
(62
|
)
|
|
Balance June 30, 2018, net of taxes
|
$
|
65
|
|
|
$
|
(164
|
)
|
|
$
|
(3,065
|
)
|
|
$
|
(1,958
|
)
|
|
$
|
(5,122
|
)
|
|
Balance April 1, 2019, net of taxes
|
$
|
118
|
|
|
$
|
4
|
|
|
$
|
(3,541
|
)
|
|
$
|
(1,927
|
)
|
|
$
|
(5,346
|
)
|
|
Other comprehensive income (loss) before reclassification adjustments, pretax
|
10
|
|
|
55
|
|
|
—
|
|
|
(25
|
)
|
|
40
|
|
|
Tax
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
6
|
|
|
4
|
|
|
Other comprehensive income (loss) before reclassification adjustments, net of taxes
|
8
|
|
|
55
|
|
|
—
|
|
|
(19
|
)
|
|
44
|
|
|
Reclassification adjustments, pretax
|
(76
|
)
|
(1)
|
(11
|
)
|
(2)
|
14
|
|
(3)
|
—
|
|
|
(73
|
)
|
|
Tax
|
16
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
13
|
|
|
Reclassification adjustments, net of taxes
|
(60
|
)
|
|
(11
|
)
|
|
11
|
|
|
—
|
|
|
(60
|
)
|
|
Other comprehensive income (loss), net of taxes
|
(52
|
)
|
|
44
|
|
|
11
|
|
|
(19
|
)
|
|
(16
|
)
|
|
Balance June 30, 2019, net of taxes
|
$
|
66
|
|
|
$
|
48
|
|
|
$
|
(3,530
|
)
|
|
$
|
(1,946
|
)
|
|
$
|
(5,362
|
)
|
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
($ in millions)
|
Derivatives
|
|
Investments
|
|
Employee
Benefit
Plans
|
|
Cumulative
Translation
Adjustment
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Balance January 1, 2018, net of taxes
|
$
|
(108
|
)
|
|
$
|
(61
|
)
|
|
$
|
(2,787
|
)
|
|
$
|
(1,954
|
)
|
|
$
|
(4,910
|
)
|
|
Other comprehensive income (loss) before reclassification adjustments, pretax
|
84
|
|
|
(133
|
)
|
|
(2
|
)
|
|
18
|
|
|
(33
|
)
|
|
Tax
|
(18
|
)
|
|
1
|
|
|
4
|
|
|
(122
|
)
|
|
(135
|
)
|
|
Other comprehensive income (loss) before reclassification adjustments, net of taxes
|
66
|
|
|
(132
|
)
|
|
2
|
|
|
(104
|
)
|
|
(168
|
)
|
|
Reclassification adjustments, pretax
|
164
|
|
(1)
|
36
|
|
(2)
|
81
|
|
(3)
|
—
|
|
|
281
|
|
|
Tax
|
(34
|
)
|
|
—
|
|
|
(17
|
)
|
|
—
|
|
|
(51
|
)
|
|
Reclassification adjustments, net of taxes
|
130
|
|
|
36
|
|
|
64
|
|
|
—
|
|
|
230
|
|
|
Other comprehensive income (loss), net of taxes
|
196
|
|
|
(96
|
)
|
|
66
|
|
|
(104
|
)
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of ASU 2018-02
|
(23
|
)
|
|
1
|
|
|
(344
|
)
|
|
100
|
|
|
(266
|
)
|
|
Adoption of ASU 2016-01
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2018, net of taxes
|
$
|
65
|
|
|
$
|
(164
|
)
|
|
$
|
(3,065
|
)
|
|
$
|
(1,958
|
)
|
|
$
|
(5,122
|
)
|
|
Balance January 1, 2019, net of taxes
|
$
|
166
|
|
|
$
|
(78
|
)
|
|
$
|
(3,556
|
)
|
|
$
|
(2,077
|
)
|
|
$
|
(5,545
|
)
|
|
Other comprehensive income (loss) before reclassification adjustments, pretax
|
(3
|
)
|
|
131
|
|
|
(1
|
)
|
|
131
|
|
|
258
|
|
|
Tax
|
1
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
7
|
|
|
Other comprehensive income (loss) before reclassification adjustments, net of taxes
|
(2
|
)
|
|
131
|
|
|
5
|
|
|
131
|
|
|
265
|
|
|
Reclassification adjustments, pretax
|
(124
|
)
|
(1)
|
(5
|
)
|
(2)
|
28
|
|
(3)
|
—
|
|
|
(101
|
)
|
|
Tax
|
26
|
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
19
|
|
|
Reclassification adjustments, net of taxes
|
(98
|
)
|
|
(5
|
)
|
|
21
|
|
|
—
|
|
|
(82
|
)
|
|
Other comprehensive income (loss), net of taxes
|
(100
|
)
|
|
126
|
|
|
26
|
|
|
131
|
|
|
183
|
|
|
Balance June 30, 2019, net of taxes
|
$
|
66
|
|
|
$
|
48
|
|
|
$
|
(3,530
|
)
|
|
$
|
(1,946
|
)
|
|
$
|
(5,362
|
)
|
|
|
|
|
(1)
|
Relates to foreign currency cash flow hedges that were reclassified from
AOCI
to
Sales
.
|
|
|
|
|
(2)
|
Represents net realized (gains) losses on the sales of available-for-sale debt securities that were reclassified from
AOCI
to
Other (income) expense, net
.
|
|
|
|
|
(3)
|
Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note 11).
|
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 and Animal Health segments are the only reportable segments.
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. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. A large component of pediatric and adolescent vaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. During 2019, as a result of changes to the Company’s internal reporting structure, certain costs that were previously included in the Pharmaceutical segment are now being included as part of non-segment expenses within Merck Research Laboratories. Prior period Pharmaceutical segment profits have been recast to reflect these changes on a comparable basis.
The Animal Health segment discovers, develops, manufactures and markets animal health products, including pharmaceutical and vaccine products, for the prevention, treatment and control of disease in all major livestock and companion animal species, which the Company sells to veterinarians, distributors and animal producers.
The 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 Alliances segment primarily includes activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018.
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Sales of the Company’s products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
($ in millions)
|
U.S.
|
|
Int’l
|
|
Total
|
|
U.S.
|
|
Int’l
|
|
Total
|
|
U.S.
|
|
Int’l
|
|
Total
|
|
U.S.
|
|
Int’l
|
|
Total
|
|
Pharmaceutical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keytruda
|
$
|
1,498
|
|
|
$
|
1,136
|
|
|
$
|
2,634
|
|
|
$
|
959
|
|
|
$
|
707
|
|
|
$
|
1,667
|
|
|
$
|
2,782
|
|
|
$
|
2,121
|
|
|
$
|
4,903
|
|
|
$
|
1,797
|
|
|
$
|
1,333
|
|
|
$
|
3,131
|
|
|
Emend
|
67
|
|
|
54
|
|
|
121
|
|
|
89
|
|
|
59
|
|
|
148
|
|
|
130
|
|
|
107
|
|
|
237
|
|
|
168
|
|
|
105
|
|
|
273
|
|
|
Alliance revenue - Lynparza
|
66
|
|
|
45
|
|
|
111
|
|
|
31
|
|
|
13
|
|
|
44
|
|
|
116
|
|
|
74
|
|
|
190
|
|
|
55
|
|
|
22
|
|
|
76
|
|
|
Alliance revenue - Lenvima
|
54
|
|
|
43
|
|
|
97
|
|
|
19
|
|
|
16
|
|
|
35
|
|
|
104
|
|
|
67
|
|
|
171
|
|
|
19
|
|
|
16
|
|
|
35
|
|
|
Vaccines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gardasil/Gardasil
9
|
456
|
|
|
430
|
|
|
886
|
|
|
302
|
|
|
306
|
|
|
608
|
|
|
818
|
|
|
906
|
|
|
1,724
|
|
|
682
|
|
|
586
|
|
|
1,269
|
|
|
ProQuad/M-M-R
II
/Varivax
|
500
|
|
|
174
|
|
|
675
|
|
|
356
|
|
|
70
|
|
|
426
|
|
|
843
|
|
|
328
|
|
|
1,171
|
|
|
668
|
|
|
150
|
|
|
818
|
|
|
RotaTeq
|
104
|
|
|
68
|
|
|
172
|
|
|
99
|
|
|
57
|
|
|
156
|
|
|
258
|
|
|
125
|
|
|
383
|
|
|
250
|
|
|
99
|
|
|
349
|
|
|
Pneumovax
23
|
123
|
|
|
47
|
|
|
170
|
|
|
122
|
|
|
71
|
|
|
193
|
|
|
248
|
|
|
107
|
|
|
355
|
|
|
234
|
|
|
137
|
|
|
372
|
|
|
Vaqta
|
38
|
|
|
20
|
|
|
58
|
|
|
42
|
|
|
23
|
|
|
65
|
|
|
67
|
|
|
39
|
|
|
105
|
|
|
60
|
|
|
42
|
|
|
101
|
|
|
Hospital Acute Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridion
|
129
|
|
|
149
|
|
|
278
|
|
|
95
|
|
|
145
|
|
|
240
|
|
|
248
|
|
|
285
|
|
|
533
|
|
|
175
|
|
|
269
|
|
|
444
|
|
|
Noxafil
|
100
|
|
|
93
|
|
|
193
|
|
|
87
|
|
|
100
|
|
|
188
|
|
|
191
|
|
|
192
|
|
|
383
|
|
|
168
|
|
|
195
|
|
|
363
|
|
|
Cubicin
|
22
|
|
|
45
|
|
|
67
|
|
|
48
|
|
|
46
|
|
|
94
|
|
|
64
|
|
|
91
|
|
|
155
|
|
|
95
|
|
|
97
|
|
|
192
|
|
|
Invanz
|
18
|
|
|
60
|
|
|
78
|
|
|
87
|
|
|
63
|
|
|
149
|
|
|
31
|
|
|
118
|
|
|
150
|
|
|
177
|
|
|
123
|
|
|
300
|
|
|
Primaxin
|
—
|
|
|
70
|
|
|
71
|
|
|
—
|
|
|
68
|
|
|
68
|
|
|
1
|
|
|
129
|
|
|
130
|
|
|
5
|
|
|
135
|
|
|
140
|
|
|
Cancidas
|
3
|
|
|
64
|
|
|
67
|
|
|
4
|
|
|
83
|
|
|
87
|
|
|
4
|
|
|
125
|
|
|
129
|
|
|
7
|
|
|
171
|
|
|
178
|
|
|
Immunology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simponi
|
—
|
|
|
214
|
|
|
214
|
|
|
—
|
|
|
233
|
|
|
233
|
|
|
—
|
|
|
422
|
|
|
422
|
|
|
—
|
|
|
464
|
|
|
464
|
|
|
Remicade
|
—
|
|
|
98
|
|
|
98
|
|
|
—
|
|
|
157
|
|
|
157
|
|
|
—
|
|
|
221
|
|
|
221
|
|
|
—
|
|
|
324
|
|
|
324
|
|
|
Neuroscience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belsomra
|
21
|
|
|
55
|
|
|
76
|
|
|
29
|
|
|
42
|
|
|
71
|
|
|
45
|
|
|
98
|
|
|
143
|
|
|
52
|
|
|
73
|
|
|
125
|
|
|
Virology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isentress/Isentress
HD
|
94
|
|
|
153
|
|
|
247
|
|
|
132
|
|
|
174
|
|
|
305
|
|
|
202
|
|
|
300
|
|
|
502
|
|
|
260
|
|
|
326
|
|
|
586
|
|
|
Zepatier
|
39
|
|
|
68
|
|
|
108
|
|
|
(10
|
)
|
|
123
|
|
|
113
|
|
|
72
|
|
|
149
|
|
|
221
|
|
|
(10
|
)
|
|
253
|
|
|
243
|
|
|
Cardiovascular
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zetia
|
6
|
|
|
150
|
|
|
156
|
|
|
8
|
|
|
218
|
|
|
226
|
|
|
6
|
|
|
290
|
|
|
296
|
|
|
25
|
|
|
505
|
|
|
531
|
|
|
Vytorin
|
3
|
|
|
73
|
|
|
76
|
|
|
3
|
|
|
152
|
|
|
155
|
|
|
6
|
|
|
167
|
|
|
174
|
|
|
11
|
|
|
311
|
|
|
322
|
|
|
Atozet
|
—
|
|
|
92
|
|
|
92
|
|
|
—
|
|
|
101
|
|
|
101
|
|
|
—
|
|
|
186
|
|
|
186
|
|
|
—
|
|
|
174
|
|
|
174
|
|
|
Adempas
|
—
|
|
|
104
|
|
|
104
|
|
|
—
|
|
|
75
|
|
|
75
|
|
|
—
|
|
|
194
|
|
|
194
|
|
|
—
|
|
|
143
|
|
|
143
|
|
|
Diabetes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Januvia
|
471
|
|
|
437
|
|
|
908
|
|
|
503
|
|
|
446
|
|
|
949
|
|
|
855
|
|
|
877
|
|
|
1,732
|
|
|
968
|
|
|
862
|
|
|
1,829
|
|
|
Janumet
|
166
|
|
|
366
|
|
|
533
|
|
|
209
|
|
|
377
|
|
|
585
|
|
|
333
|
|
|
730
|
|
|
1,063
|
|
|
401
|
|
|
729
|
|
|
1,129
|
|
|
Women’s Health
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NuvaRing
|
206
|
|
|
34
|
|
|
240
|
|
|
187
|
|
|
49
|
|
|
236
|
|
|
391
|
|
|
68
|
|
|
459
|
|
|
357
|
|
|
95
|
|
|
452
|
|
|
Implanon/Nexplanon
|
136
|
|
|
48
|
|
|
183
|
|
|
114
|
|
|
60
|
|
|
174
|
|
|
285
|
|
|
98
|
|
|
382
|
|
|
242
|
|
|
106
|
|
|
348
|
|
|
Diversified Brands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair
|
8
|
|
|
153
|
|
|
160
|
|
|
5
|
|
|
180
|
|
|
185
|
|
|
13
|
|
|
338
|
|
|
352
|
|
|
11
|
|
|
350
|
|
|
360
|
|
|
Cozaar/Hyzaar
|
6
|
|
|
103
|
|
|
109
|
|
|
7
|
|
|
118
|
|
|
125
|
|
|
10
|
|
|
202
|
|
|
213
|
|
|
14
|
|
|
231
|
|
|
245
|
|
|
Nasonex
|
(1
|
)
|
|
73
|
|
|
72
|
|
|
—
|
|
|
81
|
|
|
81
|
|
|
(2
|
)
|
|
170
|
|
|
168
|
|
|
2
|
|
|
201
|
|
|
203
|
|
|
Arcoxia
|
—
|
|
|
75
|
|
|
75
|
|
|
—
|
|
|
84
|
|
|
84
|
|
|
—
|
|
|
149
|
|
|
149
|
|
|
—
|
|
|
166
|
|
|
166
|
|
|
Follistim AQ
|
24
|
|
|
39
|
|
|
63
|
|
|
27
|
|
|
43
|
|
|
70
|
|
|
53
|
|
|
67
|
|
|
121
|
|
|
56
|
|
|
81
|
|
|
138
|
|
|
Other pharmaceutical
(1)
|
401
|
|
|
869
|
|
|
1,268
|
|
|
287
|
|
|
902
|
|
|
1,189
|
|
|
759
|
|
|
1,650
|
|
|
2,406
|
|
|
608
|
|
|
1,770
|
|
|
2,378
|
|
|
Total Pharmaceutical segment sales
|
4,758
|
|
|
5,702
|
|
|
10,460
|
|
|
3,841
|
|
|
5,442
|
|
|
9,282
|
|
|
8,933
|
|
|
11,190
|
|
|
20,123
|
|
|
7,557
|
|
|
10,644
|
|
|
18,201
|
|
|
Animal Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
145
|
|
|
526
|
|
|
671
|
|
|
107
|
|
|
526
|
|
|
633
|
|
|
261
|
|
|
1,021
|
|
|
1,282
|
|
|
231
|
|
|
1,055
|
|
|
1,286
|
|
|
Companion Animals
|
190
|
|
|
263
|
|
|
453
|
|
|
204
|
|
|
253
|
|
|
457
|
|
|
367
|
|
|
500
|
|
|
867
|
|
|
387
|
|
|
482
|
|
|
869
|
|
|
Total Animal Health segment sales
|
335
|
|
|
789
|
|
|
1,124
|
|
|
311
|
|
|
779
|
|
|
1,090
|
|
|
628
|
|
|
1,521
|
|
|
2,149
|
|
|
618
|
|
|
1,537
|
|
|
2,155
|
|
|
Other segment sales
(2)
|
47
|
|
|
—
|
|
|
48
|
|
|
56
|
|
|
—
|
|
|
56
|
|
|
86
|
|
|
—
|
|
|
87
|
|
|
140
|
|
|
—
|
|
|
140
|
|
|
Total segment sales
|
5,140
|
|
|
6,491
|
|
|
11,632
|
|
|
4,208
|
|
|
6,221
|
|
|
10,428
|
|
|
9,647
|
|
|
12,711
|
|
|
22,359
|
|
|
8,315
|
|
|
12,181
|
|
|
20,496
|
|
|
Other
(3)
|
4
|
|
|
125
|
|
|
128
|
|
|
54
|
|
|
(18
|
)
|
|
37
|
|
|
12
|
|
|
206
|
|
|
216
|
|
|
80
|
|
|
(74
|
)
|
|
6
|
|
|
|
$
|
5,144
|
|
|
$
|
6,616
|
|
|
$
|
11,760
|
|
|
$
|
4,262
|
|
|
$
|
6,203
|
|
|
$
|
10,465
|
|
|
$
|
9,659
|
|
|
$
|
12,917
|
|
|
$
|
22,575
|
|
|
$
|
8,395
|
|
|
$
|
12,107
|
|
|
$
|
20,502
|
|
U.S. plus international may not equal total due to rounding
.
|
|
|
|
(1)
|
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
|
|
|
|
|
(2)
|
Represents the non-reportable segments of Healthcare Services and Alliances.
|
|
|
|
|
(3)
|
Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales.
|
Notes to Condensed Consolidated Financial Statements (unaudited)
(continued)
Product sales are recorded net of the provision for discounts, including chargebacks, which are customer discounts that occur when a contracted customer purchases through an intermediary wholesale purchaser, and rebates that are 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. These discounts, in the aggregate, reduced U.S. sales by
$2.9 billion
and
$2.8 billion
for the three months ended
June 30, 2019
and
2018
, respectively, and by
$5.5 billion
and
$5.2 billion
for the
six
months ended
June 30, 2019
and
2018
, respectively.
Consolidated sales by geographic area where derived are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
United States
|
$
|
5,144
|
|
|
$
|
4,262
|
|
|
$
|
9,659
|
|
|
$
|
8,395
|
|
|
Europe, Middle East and Africa
|
3,163
|
|
|
3,144
|
|
|
6,265
|
|
|
6,334
|
|
|
Japan
|
921
|
|
|
855
|
|
|
1,720
|
|
|
1,592
|
|
|
China
|
763
|
|
|
559
|
|
|
1,509
|
|
|
1,045
|
|
|
Asia Pacific (other than Japan and China)
|
716
|
|
|
791
|
|
|
1,461
|
|
|
1,543
|
|
|
Latin America
|
658
|
|
|
594
|
|
|
1,219
|
|
|
1,126
|
|
|
Other
|
395
|
|
|
260
|
|
|
742
|
|
|
467
|
|
|
|
$
|
11,760
|
|
|
$
|
10,465
|
|
|
$
|
22,575
|
|
|
$
|
20,502
|
|
A reconciliation of segment profits to
Income before taxes
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Segment profits:
|
|
|
|
|
|
|
|
|
Pharmaceutical segment
|
$
|
7,115
|
|
|
$
|
5,975
|
|
|
$
|
13,690
|
|
|
$
|
11,914
|
|
|
Animal Health segment
|
405
|
|
|
450
|
|
|
820
|
|
|
864
|
|
|
Other segments
|
(2
|
)
|
|
26
|
|
|
—
|
|
|
88
|
|
|
Total segment profits
|
7,518
|
|
|
6,451
|
|
|
14,510
|
|
|
12,866
|
|
|
Other profits (losses)
|
94
|
|
|
(2
|
)
|
|
124
|
|
|
(89
|
)
|
|
Unallocated:
|
|
|
|
|
|
|
|
|
Interest income
|
75
|
|
|
81
|
|
|
164
|
|
|
165
|
|
|
Interest expense
|
(233
|
)
|
|
(194
|
)
|
|
(442
|
)
|
|
(379
|
)
|
|
Depreciation and amortization
|
(427
|
)
|
|
(332
|
)
|
|
(786
|
)
|
|
(682
|
)
|
|
Research and development
|
(2,093
|
)
|
|
(2,190
|
)
|
|
(3,935
|
)
|
|
(5,307
|
)
|
|
Amortization of purchase accounting adjustments
|
(378
|
)
|
|
(732
|
)
|
|
(775
|
)
|
|
(1,464
|
)
|
|
Restructuring costs
|
(59
|
)
|
|
(228
|
)
|
|
(212
|
)
|
|
(323
|
)
|
|
Other unallocated, net
|
(1,238
|
)
|
|
(768
|
)
|
|
(2,322
|
)
|
|
(1,355
|
)
|
|
|
$
|
3,259
|
|
|
$
|
2,086
|
|
|
$
|
6,326
|
|
|
$
|
3,432
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Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and administrative expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred in Merck Research Laboratories, the Company’s research and development division that focuses on human health-related activities, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to segments.
Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing sales.
Other unallocated, net includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value of liabilities for contingent consideration, and other miscellaneous income or expense items.