Joint Ventures and Other Equity Method Affiliates

Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates and was comprised of the following:



Years Ended December 31	2014		2013		2012
AstraZeneca LP ⁽¹⁾	$	192	$	352	$	621
Other ⁽²⁾	65		52		21
	$	257	$	404	$	642


⁽¹⁾	As noted below, as of July 1, 2014, the Company no longer records equity income from AZLP.


⁽²⁾	Includes results from Sanofi Pasteur MSD.

AstraZeneca LP

In 1982, Merck entered into an agreement with Astra AB (“Astra”) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (“AMI”), in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra’s new prescription medicines in the United States.

In 1998, Merck and Astra completed the restructuring of the ownership and operations of the joint venture whereby Merck acquired Astra’s interest in AMI, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the “Partnership”), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (“AZLP”) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights.

Merck earned revenue based on sales of KBI products and such revenue was $463 million, $920 million and $915 million in 2014, 2013 and 2012, respectively, primarily relating to sales of Nexium, as well as Prilosec. In addition, Merck earned certain Partnership returns, which were recorded in Equity income from affiliates, as reflected in the table above. Such returns included a priority return provided for in the Partnership Agreement, a preferential return representing Merck’s share of undistributed AZLP GAAP earnings, and a variable return related to the Company’s 1% limited partner interest.

On June 30, 2014, AstraZeneca exercised its option to purchase Merck’s interest in KBI for $419 million in cash. Of this amount, $327 million reflects an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price, which is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018, was deferred and is being recognized over time in Other (income) expense, net as the contingency is eliminated as sales occur. During 2014, $140 million of the deferred revenue was recognized in Other (income) expense, net. The remaining exercise price of $91 million primarily represents a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. Merck recognized the $91 million as a gain in 2014 within Other (income) expense, net. As a result of AstraZeneca’s option exercise, the Company’s remaining interest in AZLP was redeemed. Accordingly, the Company also recognized a non-cash gain of approximately $650 million in 2014 within Other (income) expense, net resulting from the retirement of $2.4 billion of KBI preferred stock (see Note 11), the elimination of the Company’s $1.4 billion investment in AZLP and a $340 million reduction of goodwill. This transaction resulted in a net tax benefit of $517 million in 2014 primarily reflecting the reversal of deferred taxes on the AZLP investment balance.

As a result of AstraZeneca exercising its option, as of July 1, 2014, the Company no longer records equity income from AZLP and supply sales to AZLP have terminated.

Summarized financial information for AZLP is as follows:



Years Ended December 31	2014 ⁽¹⁾		2013		2012
Sales	$	2,205	$	4,611	$	4,694
Materials and production costs	1,044		2,222		2,177
Other expense, net	604		1,175		1,312
Income before taxes ⁽²⁾	557		1,214		1,205



December 31	2013
Current assets	$	4,832
Noncurrent assets	182
Current liabilities	3,958

⁽¹⁾ Includes results through the June 30, 2014 termination date.

⁽²⁾Merck’s partnership returns from AZLP were generally contractually determined as noted above and were not based on a percentage of income from AZLP, other than with respect to Merck’s 1% limited partnership interest.

Sanofi Pasteur MSD

In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.1 billion for 2014, $1.2 billion for 2013 and $1.1 billion for 2012.

Investments in affiliates accounted for using the equity method, including the above joint ventures, totaled $337 million at December 31, 2014 and $1.6 billion at December 31, 2013. These amounts are reported in Other assets. Amounts due from the above joint ventures included in Deferred income taxes and other current assets were $45 million at December 31, 2014 and $277 million at December 31, 2013.

Summarized information for those affiliates (excluding AZLP disclosed separately above) is as follows:



Years Ended December 31	2014		2013		2012
Sales	$	1,370	$	1,326	$	1,295
Materials and production costs	577		581		573
Other expense, net	641		691		705
Income before taxes	152		54		17



December 31	2014		2013
Current assets	$	1,819	$	1,486
Noncurrent assets	208		149
Current liabilities	469		456
Noncurrent liabilities	129		154