10-K 1 mrk1231201310k.htm FORM 10-K MRK 12.31.2013 10K

As filed with the Securities and Exchange Commission on February 27, 2014
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________________________
FORM 10-K
(MARK ONE)
 
ý
Annual Report Pursuant to Section 13 or 15(d)
 
 
of the Securities Exchange Act of 1934
 
 
For the Fiscal Year Ended December 31, 2013
or
 
o
Transition Report Pursuant to Section 13 or 15(d)
 
 
of the Securities Exchange Act of 1934
 
 
For the transition period from                  to                 
Commission File No. 1-6571
_________________________________
Merck & Co., Inc.
One Merck Drive
Whitehouse Station, N. J. 08889-0100
(908) 423-1000
Incorporated in New Jersey
 
I.R.S. Employer
Identification No. 22-1918501
Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange
on which Registered
Common Stock ($0.50 par value)
 
New York Stock Exchange
Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2014: 2,940,622,461.
Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2013 based on closing price on June 30, 2013: $135,893,000,000.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý      No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o      No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý      No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý      No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer
ý
        Accelerated filer    
o
Non-accelerated filer
o
Smaller reporting company
o
 
 
(Do not check if a smaller reporting company)        
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o      No  ý
Documents Incorporated by Reference:
Document
 
Part of Form 10-K
Proxy Statement for the Annual Meeting of
Shareholders to be held May 27, 2014, to be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report
 
Part III


Table of Contents
 
 
 
Page
Item 1.
Item 1A.
 
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
 
(a)
 
 
 
 
 
(b)
Item 9.
Item 9A.
 
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
 


PART I
 
Item 1.
Business.
Merck & Co., Inc. (“Merck” or the “Company”) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are comprised of four operating segments, which are the Pharmaceutical, Animal Health, Consumer Care and Alliances segments, and one reportable segment, which is the Pharmaceutical segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Additionally, the Company has consumer care operations that develop, manufacture and market over-the-counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets, as well as club stores and specialty channels. The Company was incorporated in New Jersey in 1970.
For financial information and other information about the Company’s segments, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” below.
All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted. All other trademarks or services marks are those of their respective owners.
Product Sales
Sales of the Company’s top pharmaceutical products, as well as total sales of animal health and consumer care products, were as follows:
($ in millions)
2013
 
2012
 
2011
Total Sales
$
44,033

 
$
47,267

 
$
48,047

Pharmaceutical
37,437

 
40,601

 
41,289

Januvia
4,004

 
4,086

 
3,324

Zetia
2,658

 
2,567

 
2,428

Remicade
2,271

 
2,076

 
2,667

Gardasil
1,831

 
1,631

 
1,209

Janumet
1,829

 
1,659

 
1,363

Isentress
1,643

 
1,515

 
1,359

Vytorin
1,643

 
1,747

 
1,882

Nasonex
1,335

 
1,268

 
1,286

ProQuad/M-M-R II/Varivax
1,306

 
1,273

 
1,202

Singulair
1,196

 
3,853

 
5,479

Animal Health
3,362

 
3,399

 
3,253

Consumer Care
1,894

 
1,952

 
1,840

Other Revenues(1)
1,340

 
1,315

 
1,665

(1) 
Other revenues are primarily comprised of alliance revenue, miscellaneous corporate revenues and third-party manufacturing sales. On October 1, 2013, the Company divested a substantial portion of its third-party manufacturing sales.

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Pharmaceutical
The Company’s pharmaceutical products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Certain of the products within the Company’s franchises are as follows:
Primary Care and Women’s Health
Cardiovascular: Zetia (ezetimibe) (marketed as Ezetrol outside the United States); and Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States), cholesterol modifying medicines.
Diabetes and Obesity: Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of type 2 diabetes.
Respiratory: Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms; Singulair (montelukast), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis; Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate), a combination medicine for the treatment of asthma; and Asmanex Twisthaler (mometasone furoate inhalation powder), an inhaled corticosteroid for first-line maintenance treatment of asthma in patients 4 years of age and older.
Women’s Health and Endocrine: NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive ring; Fosamax (alendronate sodium) for the treatment and prevention of osteoporosis; Follistim AQ (follitropin beta injection), a fertility treatment; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant; and Cerazette (desogestrel), a progestin only oral contraceptive.
Other: Arcoxia (etoricoxib) for the treatment of arthritis and pain, which the Company markets outside the United States; and Avelox (moxifloxacin), a broad-spectrum fluoroquinolone antibiotic for the treatment of certain respiratory and skin infections, which the Company only markets in the United States.
Hospital and Specialty
Immunology: Remicade (infliximab) and Simponi (golimumab) for the treatment of inflammatory diseases, which the Company markets in Europe, Russia and Turkey.
Infectious Disease: Isentress (raltegravir), an antiretroviral therapy for use in combination therapy for the treatment of HIV-1 infection; Cancidas (caspofungin acetate), an anti-fungal product; PegIntron (peginterferon alpha-2b), a treatment for chronic hepatitis C; Invanz (ertapenem sodium) for the treatment of certain infections; Victrelis (boceprevir), a treatment for chronic hepatitis C; and Noxafil (posaconazole) for the prevention of invasive fungal infections.
Oncology: Temodar (temozolomide) (marketed as Temodal outside the United States), a treatment for certain types of brain tumors; and Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting.
Other: Cosopt (dorzolamide hydrochloride-timolol maleate ophthalmic solution), which the Company markets outside the United States, and Trusopt (dorzolamide hydrochloride ophthalmic solution), ophthalmic products; Bridion (sugammadex sodium injection), a medication for the reversal of certain muscle relaxants used during surgery; and Integrilin (eptifibatide), a treatment for patients with acute coronary syndrome.
Diversified Brands
Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), treatments for hypertension; Primaxin (imipenem and cilastatin sodium), an anti-bacterial product; Zocor (simvastatin), a statin for modifying cholesterol; Propecia (finasteride), a product for the treatment of male pattern hair loss; Clarinex (desloratadine), a non-sedating antihistamine; Remeron (mirtazapine), an antidepressant; Claritin Rx (loratadine) for treatment of seasonal outdoor allergies and year-round indoor allergies; Proscar (finasteride), a urology product for the treatment of symptomatic benign prostate enlargement; and Maxalt (rizatriptan benzoate), a product for acute treatment of migraine.
Vaccines
Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant), a vaccine to help prevent certain diseases caused by four types of human papillomavirus (“HPV”); ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps,

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rubella and varicella; M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella); Zostavax (Zoster Vaccine Live), a vaccine to help prevent shingles (herpes zoster); Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease; and RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children.
Animal Health
The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. Principal products in this segment include:
Livestock Products: Nuflor antibiotic range for use in cattle and swine; Bovilis/Vista vaccine lines for infectious diseases in cattle; Banamine bovine and swine anti-inflammatory; Estrumate for the treatment of fertility disorders in cattle; Regumate/Matrix fertility management for swine and horses; Resflor combination broad-spectrum antibiotic and non-steroidal anti-inflammatory drug for bovine respiratory disease; Zuprevo for bovine respiratory disease; Zilmax and Revalor to improve production efficiencies in beef cattle; M+Pac swine pneumonia vaccine; and Porcilis vaccine line for infectious diseases in swine.
Poultry Products: Nobilis/Innovax, vaccine lines for poultry; and Paracox and Coccivac coccidiosis vaccines.
Companion Animal Products: Nobivac vaccine lines for flexible dog and cat vaccination; Otomax/Mometamax/Posatex ear ointments for acute and chronic otitis; Caninsulin/Vetsulin diabetes mellitus treatment for dogs and cats; Panacur/Safeguard broad-spectrum anthelmintic (de-wormer) for use in many animals; and Activyl/Scalibor/Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.
Aquaculture Products: Slice parasiticide for sea lice in salmon; Aquavac/Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor antibiotic for farm-raised fish.
Consumer Care
The Consumer Care segment develops, manufactures and markets over-the-counter, foot care and sun care products. Principal products in this segment include:
Over-the-Counter Products: Claritin non-drowsy antihistamines; MiraLAX for relief of occasional constipation; Coricidin HBP decongestant-free cold/flu medicine for people with high blood pressure; Afrin nasal decongestant spray; Zegerid OTC treatment for frequent heartburn; and Oxytrol For Women, a treatment for overactive bladder in women.
Foot Care: Dr. Scholl’s foot care products; Lotrimin topical antifungal products; and Tinactin topical antifungal products and foot and sneaker odor/wetness products.
Sun Care: Coppertone sun care lotions, sprays and dry oils.
For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
Joint Ventures
AstraZeneca LP
In 1982, Merck entered into an agreement with Astra AB (“Astra”) to develop and market Astra products in the United States. In 1994, Merck and Astra formed an equally owned joint venture that developed and marketed most of Astra’s new prescription medicines in the United States including Prilosec (omeprazole), the first in a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.
In 1998, Merck and Astra restructured the joint venture whereby Merck acquired Astra’s interest in the joint venture, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership named 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.

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The Company earns certain Partnership returns as well as ongoing revenue based on sales of KBI products. The Partnership returns include a priority return provided for in the Partnership Agreement, a preferential return representing the Company’s share of undistributed Partnership AZLP generally accepted accounting principles (“GAAP”) earnings, and a variable return related to the Company’s 1% limited partner interest.
In 2014, AstraZeneca has the option to purchase Merck’s interest in KBI based in part on the value of Merck’s interest in Nexium and Prilosec. AstraZeneca’s option is exercisable between March 1, 2014 and April 30, 2014. If AstraZeneca chooses to exercise this option, the closing date is expected to be June 30, 2014. Under the amended agreement, AstraZeneca will make a payment to Merck upon closing of $327 million, reflecting an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018. The exercise price will also include an additional amount equal to a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. The Company believes that it is likely that AstraZeneca will exercise its option in 2014. If AstraZeneca exercises its option, the Company will no longer record equity income from AZLP and supply sales to AZLP will terminate. In addition, the Company will recognize a non-cash pretax gain of approximately $700 million.
Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) formed a joint venture to market human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the then-existing European Union (“EU”) and the European Free Trade Association. Merck and Sanofi Pasteur contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Mérieux MSD, S.N.C. (now Sanofi Pasteur MSD, S.N.C.). The joint venture maintains a presence, directly or through affiliates or branches, in Belgium, Italy, Germany, Spain, France, Austria, Ireland, Sweden, Portugal, the Netherlands, Switzerland and the United Kingdom and through distributors in the rest of its territory.
Licenses
In 1998, a subsidiary of Schering-Plough Corporation (“Schering-Plough”) entered into a licensing agreement with Centocor Ortho Biotech Inc. (“Centocor”), a Johnson & Johnson (“J&J”) company, to market Remicade, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi, a fully human monoclonal antibody. The Company has exclusive marketing rights to both products throughout Europe, Russia and Turkey. In December 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade and Simponi, extending the Company’s rights to exclusively market Remicade to match the duration of the Company’s exclusive marketing rights for Simponi. In addition, Schering-Plough and Centocor agreed to share certain development costs relating to Simponi’s auto-injector delivery system. On October 6, 2009, the European Commission (“EC”) approved Simponi as a treatment for rheumatoid arthritis and other immune system disorders in two presentations — a novel auto-injector and a prefilled syringe. As a result, the Company’s marketing rights for both products extend for 15 years from the first commercial sale of Simponi in the EU following the receipt of pricing and reimbursement approval within the EU. All profits derived from Merck’s exclusive distribution of the two products in these countries are equally divided between Merck and J&J.
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, and generic drug and consumer and animal health care manufacturers. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent positions are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the recognition of an impairment charge with respect to intangible assets

4

associated with certain products. Competitive pressures have intensified as pressures in the industry have grown. The effect on operations of competitive factors and patent disputes cannot be predicted.
Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as joint ventures and licenses, and has been refining its sales and marketing efforts to further address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements, even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the Company’s products in that therapeutic category.
The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by competitors.
The Company’s consumer care operations face competition from other consumer health care businesses as well as retailers who carry their own private label brands. The Company’s competitive position is affected by several factors, including regulatory and legislative issues, scientific and technological advances, the quality and price of the Company’s products, promotional efforts and the growth of lower cost private label brands.
Health Care Environment
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, the United States enacted major health care reform legislation in 2010, which began to be implemented in 2010. Various insurance market reforms have advanced and will continue through full implementation in 2014. The law is expected to expand access to health care to about 32 million Americans by the end of the decade who did not previously have insurance coverage. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $280 million, $210 million and $150 million was recorded by Merck as a reduction to revenue in 2013, 2012 and 2011, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual health care reform fee. The total annual industry fee was $2.8 billion in 2013 and will be $3.0 billion in 2014. The fee is assessed on each company in proportion to its share of sales to certain government programs, such as Medicare and Medicaid. The Company recorded $151 million, $190 million and $162 million of costs within Marketing and administrative expenses in 2013, 2012 and 2011, respectively, for the annual health care reform fee. The full impact of U.S. health care reform cannot be predicted at this time.
The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups, federal and state exchanges, and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act of 2010. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures.
In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative proposals that have been debated but not enacted. These types of revenue

5

generating or cost saving proposals include additional direct price controls in the Medicare prescription drug program (Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reduction proposals that would directly or indirectly affect the Company.
Efforts toward health care cost containment remain intense in several European countries. Many countries have continued to announce and execute austerity measures, which include the implementation of pricing actions to reduce prices of generic and patented drugs and mandatory switches to generic drugs. While the Company is taking steps to mitigate the impact in these countries, the austerity measures continued to negatively affect the Company’s revenue performance in 2013 and the Company anticipates the austerity measures will continue to negatively affect revenue performance in 2014. In addition, a majority of countries attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, including the Company’s. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines. Furthermore, the government can order repricings for classes of drugs if it determines that it is appropriate under applicable rules.
Certain markets outside of the United States have also implemented cost management strategies, such as health technology assessments, which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement.
The Company’s focus on and share of revenue from emerging markets has increased. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures, such as compulsory licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access challenges will continue in 2014 to varying degrees in the emerging markets.
Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care, including medicines.
Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health care environment and market forces.
Government Regulation
The pharmaceutical industry is subject to regulation by regional, country, state and local agencies around the world. Governmental regulation and legislation tend to focus on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement, especially related to the pricing of products.
Of particular importance is the U.S. Food and Drug Administration (the “FDA”), which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription

6

pharmaceuticals. In many cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States.
The EU has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. The Company’s policies and procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company’s business.
The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment. (See “Research and Development” below for a discussion of the regulatory approval process.)
Access to Medicines
As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that it has an important role to play in helping to improve access to its products around the world. The Company’s efforts in this regard are wide-ranging and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines. In 2011, Merck announced that it would launch “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Through this initiative, Merck is leveraging its scientific and business expertise to help make proven solutions more widely available, develop new technologies and improve public and policymaker awareness of these issues.
Merck has also in the past provided funds to the Merck Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health. One of these partnerships is the African Comprehensive HIV/AIDS Partnership in Botswana, a collaboration with the government of Botswana that was renewed in 2010 and supports Botswana’s response to HIV/AIDS through a comprehensive and sustainable approach to HIV prevention, care, treatment, and support.
Privacy and Data Protection
The Company is subject to a number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the Company’s business, including recently enacted laws and regulations in the United States, Europe, Asia and Latin America, and increased enforcement and litigation activity in the United States and other developed markets.
Distribution
The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccines are sold primarily to physicians, wholesalers, physician distributors and government entities. The Company’s professional representatives communicate the effectiveness, safety and value of the Company’s pharmaceutical and vaccine products to health care professionals in private practice, group practices, hospitals and managed care organizations. The Company sells its animal health products to veterinarians, distributors and animal producers. The Company’s over-the-counter, foot care and sun care products are sold through wholesale and retail drug, food chain and mass merchandiser outlets, as well as club stores and specialty channels.
Raw Materials
Raw materials and supplies, which are generally available from multiple sources, are purchased worldwide and are normally available in quantities adequate to meet the needs of the Company’s business.

7

Patents, Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of material importance in the Company’s marketing of its products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products or the uses of products. Protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.
The Food and Drug Administration Modernization Act includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. Current U.S. patent law provides additional patent term under Patent Term Restoration for periods when the patented product was under regulatory review by the FDA.
Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key U.S. patent protection (including Patent Term Restoration and Pediatric Exclusivity) for major marketed products:
Product
Year of Expiration (in the U.S.)(1)
Asmanex
2014 (use)/2018 (formulation)
Dulera
2014 (use)/2017(formulation)/2020 (combination)
Integrilin
2014 (compound)/2015 (use/formulation)
Nasonex(2)
2014 (use/formulation)/2018(formulation)
Emend
2015
Follistim AQ
2015
PegIntron
2015 (conjugates)/2020 (Mature IFN-alpha)
Invanz
2016 (compound)/2017 (composition)
Zostavax
2016 (use)
Zetia(3)/Vytorin/Liptruzet
2017
NuvaRing
2018 (delivery system)
Emend for Injection
2019
Noxafil
2019
RotaTeq
2019
Intron A
2020
Recombivax
2020 (method of making/vectors)
Januvia/Janumet/Janumet XR
2022 (compound)/2026 (salt)
Zioptan
2022 (with pending Patent Term Restoration)
Isentress
2023
Victrelis
2024 (with pending Patent Term Restoration)
Gardasil
2028
(1) 
Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
(2) 
By agreement, Apotex, a generic manufacturer, has been granted rights under Merck’s Nasonex use patent in the United States. In addition, a district court decision (upheld on appeal to the Court of Appeals for the Federal Circuit) found that Apotex’s proposed generic product would not infringe on Merck’s Nasonex formulation patent. Thus, if Apotex’s application is approved by the FDA, it can enter the market in the United States with a generic version of Nasonex.
(3) 
By agreement, a generic manufacturer may launch a generic version of Zetia in the United States in December 2016.
While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in the United States and certain other countries, market exclusivity that may be available under relevant law. The effect of product patent expiration on pharmaceutical products also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries.

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By agreement, Apotex Inc. and Apotex Corp. (collectively, “Apotex”) has been granted rights under Merck’s Nasonex use patent in the United States. In addition, a district court decision (upheld on appeal to the Court of Appeals for the Federal Circuit) found that Apotex’s proposed generic product would not infringe Merck’s Nasonex formulation patent. Thus, if Apotex’s application is approved by the FDA, it can enter the market in the United States with a generic version of Nasonex. The Company anticipates that sales of Nasonex in the United States will decline significantly after these patent expiries and generic entry.
Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by an increase in the number of incentives for and use of generic products. Additionally, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties.
The Company has the following key U.S. patent protection for drug candidates under review in the United States by the FDA. Additional patent term may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity. 
Under Review
Currently Anticipated
Year of Expiration (in the U.S.)
MK-8962 (corifollitropin alfa injection)
2018 (formulation/use)
MK-8616 (sugammadex sodium injection)(1)
2021
MK-5348 (vorapaxar)
2024
MK-7243 (Timothy grass pollen allergen extract)
2026 (use)
MK-3641 (short ragweed pollen allergen extract)
2026 (use)
V503 (HPV vaccine (9 valent))
2028
MK-4305 (suvorexant)(2)
2029
(1) 
In September 2013, Merck received a Complete Response Letter (“CRL”) from the FDA for the resubmission of the New Drug Application for sugammadex sodium injection (MK-8616). To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing a New Drug Application resubmission with the FDA in 2014.
(2) 
In June 2013, Merck received a CRL from the FDA for suvorexant (MK-4305). In February 2014, the Company resubmitted its New Drug Application to the FDA.
The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development: 
Phase 3 Drug Candidate
Currently Anticipated
Year of Expiration (in the U.S.)
V212 (inactivated varicella zoster virus (“VZV”) vaccine)
2016 (use)
V419 (pediatric hexavalent combination vaccine)
2020 (method of making/vectors)
MK-0822 (odanacatib)
2024
MK-8109 (vintafolide)
2024
MK-0859 (anacetrapib)
2027
MK-3222 (tildrakizumab)
2028 (composition)
MK-3415A (actoxumab/bezlotoxumab)
2028
MK-3475
2028
MK-3102 (omarigliptin)
2030
MK-8931
2030
MK-8835 (ertugliflozin)
2031
Unless otherwise noted, the patents in the above charts are compound patents. Each patent is subject to any future patent term restoration of up to five years and six month pediatric market exclusivity, either or both of which may be available. In addition, depending on the circumstances surrounding any final regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved; the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five

9

years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.
For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely.
Royalty income in 2013 on patent and know-how licenses and other rights amounted to $339 million. Merck also incurred royalty expenses amounting to $1.3 billion in 2013 under patent and know-how licenses it holds.
Research and Development
The Company’s business is characterized by the introduction of new products or new uses for existing products through a strong research and development program. Approximately 12,300 people are employed in the Company’s research activities. Research and development expenses were $7.5 billion in 2013, $8.2 billion in 2012, and $8.5 billion in 2011 (which included restructuring costs in all years, as well as $279 million, $200 million and $587 million of in-process research and development impairment charges in 2013, 2012 and 2011, respectively). The Company prioritizes its research and development efforts and focus on candidates that it believes represent breakthrough science that will make a difference for patients and payers, with an increased emphasis on externally sourced programs.
The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. Further, Merck has moved to diversify its portfolio through a collaboration on the development of biosimilars, which have the potential to harness the market opportunity presented by biological medicine patent expiries by delivering high quality biosimilars to enhance access for patients worldwide. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a renewed focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company is evaluating certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential. In January 2014, the Company entered into an agreement to divest its Sirna Therapeutics, Inc. subsidiary and related RNAi technology assets.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, insomnia, neurodegenerative diseases, osteoporosis, respiratory diseases and women’s health.
In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through preclinical tests and controlled clinical evaluation. Before a new drug or vaccine may be marketed in the United States, recorded data on preclinical and clinical experience are included in the New Drug Application (“NDA”) for a drug or the Biologics License Application (“BLA”) for a vaccine or biologic submitted to the FDA for the required approval.
Once the Company’s scientists discover a new small molecule compound or biologics molecule that they believe has promise to treat a medical condition, the Company commences preclinical testing with that compound. Preclinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable preclinical data, the Company will initiate clinical testing in accordance with established regulatory requirements. The clinical testing begins with Phase 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans.

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If favorable, additional, larger Phase 2 studies are initiated to determine the efficacy of the compound in the affected population, define appropriate dosing for the compound, as well as identify any adverse effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 trials, if satisfactory, the Company submits regulatory filings with the appropriate regulatory agencies around the world to have the product candidate approved for marketing. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed.
Vaccine development follows the same general pathway as for drugs. Preclinical testing focuses on the vaccine’s safety and ability to elicit a protective immune response (immunogenicity). Pre-marketing vaccine clinical trials are typically done in three phases. Initial Phase 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies. Also during this stage, the proposed manufacturing facility undergoes a pre-approval inspection during which production of the vaccine as it is in progress is examined in detail.
In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, the FDA determines if the application is sufficiently complete to permit a substantive review. The FDA also assesses, at that time, whether the application will be granted a priority review or standard review. Pursuant to the Prescription Drug User Fee Act V, the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, the FDA will generally act upon the application within those timelines, unless a major amendment has been submitted (either at the Company’s own initiative or the FDA’s request) to the pending application. If this occurs, the FDA may extend the review period to allow for review of the new information, but by no more than three months. Extensions to the review period are communicated to the Company. The FDA can act on an application either by issuing an approval letter or by issuing a CRL stating that the application will not be approved in its present form and describing all deficiencies that the FDA has identified. Should the Company wish to pursue an application after receiving a CRL, it can resubmit the application with information that addresses the questions or issues identified by the FDA in order to support approval. Resubmissions are subject to review period targets, which vary depending on the underlying submission type and the content of the resubmission.
The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced review staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review.
The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new chemical compounds and

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products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (“MAA”) with the European Medicines Agency (“EMA”). After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.
Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the Pharmaceutical Medical Devices Agency in Japan, Health Canada, Agencia Nacional de Vigilancia in Brazil, Korea Food and Drug Administration in South Korea, and Therapeutic Goods Administration in Australia. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.
Research and Development Update
The Company currently has several candidates under regulatory review in the United States or internationally.
MK-5348, vorapaxar, is an investigational anti-thrombotic medicine under review by the FDA and EMA. Merck is seeking approval of vorapaxar for the reduction of atherothrombotic events, when added to standard of care, in patients with a history of heart attack and no history of stroke or transient ischemic attack. In January 2014, the FDA’s Cardiovascular and Renal Drugs Advisory Committee recommended approval of vorapaxar. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines.
V503, the Company’s nine-valent HPV vaccine in development to help protect against certain HPV-related diseases, is under review by the FDA. V503 incorporates antigens against five additional cancer-causing HPV types as compared with Gardasil. The Company anticipates submitting an MAA to the EMA in the first half of 2014.
MK-8962, corifollitropin alfa injection, is an investigational fertility treatment under review by the FDA for controlled ovarian stimulation in women participating in assisted reproductive technology. If approved, corifollitropin alfa would be the first sustained follicular stimulant for use in a fertility treatment regimen in the United States. Merck’s corifollitropin alfa is currently approved in more than 50 markets outside the United States, including the EU.
MK-7243, Grastek (Timothy Grass Pollen Allergen Extract), an investigational Timothy grass pollen allergy immunotherapy tablet (“AIT”), and MK-3641, Ragwitek (Short Ragweed Pollen Allergen Extract), an investigational ragweed pollen AIT, are both under review by the FDA. Grastek is the proposed trade name for MK-7243 and Ragwitek is the proposed trade name for MK-3641. MK-7243 and MK-3641 are investigational sublingual tablets designed to help treat the underlying cause of allergic rhinitis by generating an immune response to help protect allergic patients against effects triggered by the targeted allergen. Merck has partnered with ALK-Abello to develop its investigational sublingual allergy immunotherapy tablets for Timothy grass pollen, ragweed pollen and house dust mites in North America. In December 2013, the FDA’s Allergenic Products Advisory Committee had a positive discussion of MK-7243. In January 2014, the same Advisory Committee had a positive discussion of MK-3641. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines. Merck expects the FDA’s review for both MK-7243 and MK-3641 to be completed in the first half of 2014. In February 2014, the Company announced that Grastek received regulatory approval in Canada.
MK-4305, suvorexant, is an investigational insomnia medicine in a new class of medicines called orexin receptor antagonists for use in patients with difficulty falling or staying asleep. In July 2013, the Company announced that it had received a CRL from the FDA regarding the NDA for suvorexant. In the CRL, the FDA advised Merck that: (1) the efficacy of suvorexant has been established at doses of 10 mg to 40 mg in elderly and non-elderly adult patients; (2) 10 mg should be the starting dose for most patients and must be available before suvorexant can be approved; (3) 15 mg and 20 mg doses would be appropriate in patients in whom the 10 mg dose is well-tolerated but not effective; and (4), for patients taking concomitant moderate CYP3A4 inhibitors, a 5 mg dose would be necessary. In addition, the FDA determined that the safety data do not support the approval of suvorexant 30 mg and 40 mg. In February 2014, the Company resubmitted its NDA to the FDA. As previously disclosed, both FDA approval and a separate scheduling

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determination by the U.S. Drug Enforcement Administration are required before Merck can introduce suvorexant in the United States. Insomnia is a condition characterized by difficulty falling asleep and/or staying asleep. The Company has submitted a new drug application for suvorexant to the health authorities in Japan and is continuing with plans to seek approval for suvorexant in other countries around the world.
MK-8616, sugammadex sodium injection, is an investigational agent for the reversal of neuromuscular blockade induced by rocuronium or vecuronium (neuromuscular blocking agents). Neuromuscular blockade is used in anesthesiology to induce muscle relaxation during surgery. In September 2013, Merck announced that it had received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection. The FDA’s letter raised concerns about operational aspects of a hypersensitivity study that the agency had requested in 2008. To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing an NDA resubmission with the FDA in 2014. Sugammadex sodium injection is approved and has been launched in many countries outside of the United States where it is marketed as Bridion.
MK-8109, vintafolide, is an investigational cancer candidate under review by the EMA. As part of an exclusive license agreement with Endocyte, Inc. (“Endocyte”), Merck is responsible for the development and worldwide commercialization of vintafolide in oncology. The EMA accepted the MAA filings for vintafolide and Endocyte’s investigational companion diagnostic imaging agent, etarfolatide, for the targeted treatment of patients with folate-receptor positive platinum-resistant ovarian cancer in combination with pegylated liposomal doxorubicin. Both vintafolide and etarfolatide have been granted orphan drug status by the EC. Vintafolide is in Phase 3 development in the United States.
MK-7009, vaniprevir, is an investigational, oral twice-daily protease inhibitor for the treatment of chronic hepatitis C virus (“HCV”) infection under review in Japan.
In addition to the candidates under regulatory review, the Company has 12 drug candidates in Phase 3 development targeting a broad range of diseases. The Company anticipates filing an NDA or a BLA, as applicable, with the FDA with respect to several of these candidates in 2014.
MK-3475, an investigational anti-PD-1 immunotherapy, is currently being evaluated for the treatment of patients with advanced melanoma and other tumor types. In January 2014, the Company announced it has started a rolling submission to the FDA of a BLA for MK-3475 for patients with advanced melanoma who have previously been treated with ipilimumab. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Company expects to complete the application in the first half of 2014. In April 2013, Merck announced that MK-3475 received a Breakthrough Therapy designation for advanced melanoma from the FDA. As noted above, the designation of an investigational drug as a Breakthrough Therapy is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.
The MK-3475 clinical development program also includes studies across a broad range of cancer types including: bladder, colorectal, gastric, head and neck, melanoma, non-small cell lung, renal, triple negative breast and hematological malignancies. In addition, the Company has announced four collaborations with other pharmaceutical companies to evaluate novel combination regimens with MK-3475.
MK-0822, odanacatib, is an oral, once-weekly investigational treatment for patients with osteoporosis. Osteoporosis is a disease that reduces bone density and strength and results in an increased risk of bone fractures. Odanacatib is a cathepsin K inhibitor that selectively inhibits the cathepsin K enzyme. Cathepsin K is known to play a central role in the function of osteoclasts, which are cells that break down existing bone tissue, particularly the protein components of bone. Inhibition of cathepsin K is a novel approach to the treatment of osteoporosis. In July 2012, Merck announced an update on the Phase 3 trial assessing fracture risk reduction with odanacatib. The independent Data Monitoring Committee (the “DMC”) for the study completed its first planned interim analysis for efficacy and recommended that the study be closed early due to robust efficacy and a favorable benefit-risk profile. The DMC noted that safety issues remain in certain selected areas and made recommendations with respect to following up on them. On February 1, 2013, Merck announced that it had recently received and was reviewing safety and efficacy data from the Phase 3 trial. As a result of its review of this data, the Company concluded that review of additional data from the previously planned, ongoing extension study was warranted and that filing an application for approval with the FDA

13

should be delayed. As previously announced, the Company is conducting a blinded extension of the trial in approximately 8,200 women, which will provide additional safety and efficacy data. Merck continues to anticipate that it will file applications for approval of odanacatib in 2014 with additional data from the extension trial. The Company continues to believe that odanacatib will have the potential to address unmet medical needs in patients with osteoporosis.
V419 is an investigational hexavalent pediatric combination vaccine, which contains components of current vaccines, designed to help protect against six potentially serious diseases — diphtheria, tetanus, whooping cough (Bordetella pertussis), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b, and hepatitis B — that is being developed in collaboration with Sanofi-Pasteur. The Company continues to anticipate filing a BLA for V419 with the FDA in 2014.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (“CETP”) that is being investigated in lipid management to raise HDL-C and reduce LDL-C. Anacetrapib is being evaluated in a large, event-driven cardiovascular clinical outcomes trial REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification) involving patients with preexisting vascular disease that is predicted to be completed in 2017.
MK-8931 is Merck’s novel investigational oral ß-amyloid precursor protein site-cleaving enzyme (“BACE”) inhibitor for the treatment of Alzheimer’s disease being evaluated in a Phase 2/3 clinical trial (EPOCH) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with mild-to-moderate Alzheimer’s disease. Based on a positive DMC recommendation made following a planned analysis of interim safety data that included a safety cohort of 200 patients treated with MK-8931 for at least three months, the Company recently began enrolling patients in the Phase 3 portion of the trial, as well as a new Phase 3 trial (APECS) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease.
MK-3415A, actoxumab/bezlotoxumab, an investigational candidate for the prevention of Clostridium difficile infection recurrence, is a combination of two monoclonal antibodies used to treat patients with a single infusion.
MK-3102, omarigliptin, is an investigational once-weekly dipeptidyl peptidase-4 (“DPP-4”) inhibitor in development for the treatment of type 2 diabetes.
MK-8835, ertugliflozin, is an investigational oral sodium glucose cotransporter (“SGLT2”) inhibitor being evaluated for the treatment of type 2 diabetes. During 2013, the Company entered into a worldwide (except Japan) collaboration agreement with Pfizer Inc. for the development and commercialization of ertugliflozin.
MK-1293 is an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes. In February 2014, the Company announced that it had expanded its collaboration with Samsung Bioepis to develop, manufacture and commercialize MK-1293. Under the terms of the agreement, the companies will collaborate on clinical development, regulatory filings and manufacturing. If approved, Merck will commercialize this candidate.
V212 is an inactivated VZV vaccine in development for the prevention of herpes zoster. The Company is conducting two Phase 3 trials, one in autologous hematopoietic cell transplant patients and the other in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies.
MK-3222, tildrakizumab, is an anti-interleukin-23 monoclonal antibody candidate being investigated for the treatment of psoriasis.
MK-5172/MK-8742, an all-oral combination regimen in Phase 2 development consisting of MK-5172, an investigational HCV NS3/4A protease inhibitor, and MK-8742, an investigational HCV NS5A replication complex inhibitor, was granted a Breakthrough Therapy designation in October 2013 by the FDA for treatment of chronic HCV infection. MK-5172 and MK-8742 are being investigated in a broad clinical program that includes studies in patients with multiple HCV genotypes who are treatment-naïve, treatment failures as well as other important HCV subpopulations such as patients with cirrhosis and those co-infected with HIV.
MK-8175A, NOMAC/E2, which is being marketed as Zoely in the EU, is an investigational oral contraceptive for use by women to prevent pregnancy. In November 2011, Merck received a CRL from the FDA for NOMAC/E2. Merck has made the decision to discontinue the Phase 3 clinical trial for NOMAC/E2 being conducted in the United States. This decision is not based on any new safety or efficacy findings. 

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In May 2013, the Company provided an update on the clinical program for preladenant, Merck’s investigational adenosine A2A receptor antagonist for the treatment of Parkinson’s disease. An initial review of data from three separate Phase 3 trials did not provide evidence of efficacy for preladenant compared with placebo. Based on these results, Merck has taken steps to discontinue the extension phases of these studies and no longer plans to pursue regulatory filings for preladenant. The decision to discontinue these studies was not based on any safety finding. The Company recorded an impairment charge of $181 million in 2013 related to the discontinuation of the clinical development program for preladenant.
The chart below reflects the Company’s research pipeline as of February 21, 2014. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area and additional claims, line extensions or formulations for in-line products are not shown.

Phase 2
Phase 3 (Phase 3 entry date)
Under Review
Allergy
MK-8237, Immunotherapy(1)
Alzheimer’s Disease
MK-7622
Asthma
MK-1029
Bacterial Infection
MK-7655
Cancer
MK-0646 (dalotuzumab)
MK-2206
CMV Prophylaxis in Transplant Patients
MK-8228 (letermovir)
Contraception, Medicated IUS
MK-8342
Contraception, Next Generation Ring
MK-8175A
MK-8342B
Hepatitis C
MK-5172
MK-8742
HIV
MK-1439 (doravirine)
Non-Small Cell Lung Cancer
MK-3475(2,3)
Pneumoconjugate Vaccine
V114
Rheumatoid Arthritis
MK-8457
Atherosclerosis
MK-0859 (anacetrapib) (May 2008)
Alzheimer’s Disease
MK-8931 (December 2013)
Clostridium difficile Infection
MK-3415A (actoxumab/bezlotoxumab)
   (November 2011)
Diabetes Mellitus
MK-3102 (omarigliptin) (September 2012)
MK-8835 (ertugliflozin) (November 2013)
MK-1293 (February 2014)
Herpes Zoster
V212 (inactivated VZV vaccine) (December 2010)
Melanoma
MK-3475 (August 2013)(2,4)
Osteoporosis
MK-0822 (odanacatib) (September 2007)
Pediatric Hexavalent Combination Vaccine
V419 (April 2011)
Platinum-Resistant Ovarian Cancer
MK-8109 (vintafolide) (U.S.) (April 2011)
Psoriasis
MK-3222 (tildrakizumab) (December 2012)

Allergy
MK-7243, Grass pollen (U.S.)(1)
MK-3641, Ragweed (U.S.)(1)
Fertility
MK-8962 (corifollitropin alfa injection) (U.S.)
Hepatitis C
MK-7009 (vaniprevir) (Japan)
HPV-Related Cancers
V503 (HPV vaccine (9 valent)) (U.S.)
Insomnia
MK-4305 (suvorexant) (U.S.)(5)
Neuromuscular Blockade Reversal
MK-8616 (sugammadex sodium injection)
   (U.S.)(6)
Platinum-Resistant Ovarian Cancer
MK-8109 (vintafolide) (EU)
Thrombosis
MK-5348 (vorapaxar) (U.S./EU)
Footnotes:
(1) North American rights only.
(2)  A new nonproprietary name for MK-3475 is under review.
(3)  Phase 2/3 adaptive design.
(4)  In January 2014, the Company announced it has started a rolling submission to the FDA of a BLA for MK-3475 for patients with advanced melanoma who have previously been treated with ipilimumab.
(5)  In June 2013, Merck received a CRL from the FDA for suvorexant (MK-4305). In February 2014, the Company resubmitted its NDA to the FDA.
(6)  In September 2013, Merck received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection (MK-8616). To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing an NDA resubmission with the FDA in 2014.
.

Employees
As of December 31, 2013, the Company had approximately 76,000 employees worldwide, with approximately 29,100 employed in the United States, including Puerto Rico. Approximately 32% of worldwide

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employees of the Company are represented by various collective bargaining groups. In addition, the Company’s joint ventures in China and Brazil, which are included in the consolidated results of Merck, had about 1,300 employees.
2013 Restructuring Program
In October 2013, the Company announced a new global restructuring program (the “2013 Restructuring Program”) as part of a global initiative to sharpen its commercial and research and development focus. As part of the new program, the Company expects to reduce its total workforce by approximately 8,500 positions. These workforce reductions will primarily come from the elimination of positions in sales, administrative and headquarters organizations, as well as research and development. The Company will also reduce its global real estate footprint and continue to improve the efficiency of its manufacturing and supply network. The Company will continue to hire employees in strategic growth areas of the business as necessary.
Merger Restructuring Program
In 2010, subsequent to the Merck and Schering-Plough merger (the “Merger”), the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) designed to streamline the cost structure of the combined company. Further actions under this program were initiated in 2011. The actions under this program primarily reflect the elimination of positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. Since inception of the Merger Restructuring Program through December 31, 2013, Merck has eliminated approximately 26,880 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. Approximately 6,300 position eliminations remain pending under this program and an older program as of December 31, 2013. The restructuring actions under the Merger Restructuring Program were substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related. Subsequent to the Merger, the Company has rationalized a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2016.
Environmental Matters
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $20 million in 2013, $14 million in 2012 and $25 million in 2011, and are estimated at $117 million in the aggregate for the years 2014 through 2018. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and providing for these costs and, in management’s opinion, the liabilities for all environmental matters, which are probable and reasonably estimable, have been accrued and totaled $213 million at December 31, 2013. Although it is not possible to predict with certainty the outcome of these environmental matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $84 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
Merck believes that climate change could present risks to its business. Some of the potential impacts of climate change to its business include increased operating costs due to additional regulatory requirements, physical risks to the Company’s facilities, water limitations and disruptions to its supply chain. These potential risks are integrated into the Company’s business planning including investment in reducing energy, water use and greenhouse gas emissions. The Company does not believe these risks are material to its business at this time.
Geographic Area Information
The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United States were 59% of sales in 2013, 57% of sales in 2012 and 57% of sales in 2011.
The Company’s worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion

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of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions.
Merck has expanded its operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time.
Financial information about geographic areas of the Company’s business is provided in Item 8. “Financial Statements and Supplementary Data” below.
Available Information
The Company’s Internet website address is www.merck.com. The Company will make available, free of charge at the “Investors” portion of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).
The Company’s corporate governance guidelines and the charters of the Board of Directors’ four standing committees are available on the Company’s website at www.merck.com/about/leadership and all such information is available in print to any stockholder who requests it from the Company.
Item 1A.
Risk Factors.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.
The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely affected.
Patent protection is considered, in the aggregate, to be of material importance in the Company’s marketing of human health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.
Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or infringement and similar claims against the Company. The Company aggressively defends its important patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file Abbreviated New Drug Applications with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. The Company normally responds by vigorously defending its patent, including by filing lawsuits alleging patent infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other

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companies’ U.S. patents, potential U.S. legislation relating to patent reform, as well as regulatory initiatives may result in further erosion of intellectual property protection.
If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available and, in the case of certain products, such a loss could result in a material non-cash impairment charge. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement products.
A chart listing the U.S. patent protection for the Company’s major marketed products is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”
As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.
The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales for that product, as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of patent protection can have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects. The patent that provides market exclusivity in the EU for Nasonex expired on January 1, 2014 and the Company anticipates that sales will decline significantly. Also, a court has ruled that a proposed generic form of Nasonex, made by Apotex, a generic manufacturer, does not infringe the Company’s U.S. patent for Nasonex. If Apotex receives approval to market in the United States its generic form of Nasonex, the Company will experience a loss of Nasonex sales.
In addition, in September 2013, the EC approved a biosimilar for Remicade. While the Company is experiencing generic competition in certain smaller European markets, the Company anticipates a more substantial decline in Remicade sales following loss of market exclusivity in major European markets in February 2015.
Key Company products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material and negative impact on results of operations and cash flows.
The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as Januvia, Zetia, Remicade, Gardasil, Janumet, Isentress, Vytorin, and Nasonex. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-market trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. If any of these events had a material adverse effect on the sales of certain products, such an event could result in a material non-cash impairment charge.
The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that have lost patent protection.
Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products each year. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products which it may develop through joint ventures and products which it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may

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take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.
For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals, therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the FDA for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.
The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.
The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.
Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:
•
findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;
•
failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, and increasing uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;
•
failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;
•
lack of economic feasibility due to manufacturing costs or other factors; and
•
preclusion from commercialization by the proprietary rights of others.
In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with mergers and acquisitions.
The Company is devoting substantial resources to the development of MK-3475, Merck’s anti-PD-1 immunotherapy, and there can be no assurance that it will be approved for marketing by the FDA.
On January 13, 2014, the Company announced that it had initiated a rolling submission to the FDA of a BLA for MK-3475, the Company's anti-PD-1 immunotherapy, for patients with advanced melanoma who have been previously treated with ipilimumab. The Company also stated that it expected to complete the submission in the first half of 2014. There can be no assurance that the Company will complete the submission, or that the FDA will approve MK-3475 for marketing and sale in the United States for the initial indication or for additional indications. In addition, if approved, there can be no assurance that MK-3475 will succeed in the marketplace.
The Company’s products, including products in development, can not be marketed unless the Company obtains and maintains regulatory approval.
The Company’s activities, including research, preclinical testing, clinical trials and manufacturing and marketing its products, are subject to extensive regulation by numerous federal, state and local governmental authorities

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in the United States, including the FDA, and by foreign regulatory authorities, including in the EU. In the United States, the FDA is of particular importance to the Company, as it administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, cost reduction. The FDA and foreign regulatory authorities have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.
Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.
Developments following regulatory approval may adversely affect sales of the Company’s products.
Even after a product reaches market, certain developments following regulatory approval, including results in post-marketing Phase 4 trials or other studies, may decrease demand for the Company’s products, including the following:
•
the re-review of products that are already marketed;
•
new scientific information and evolution of scientific theories;
•
the recall or loss of marketing approval of products that are already marketed;
•
changing government standards or public expectations regarding safety, efficacy or labeling changes; and
•
greater scrutiny in advertising and promotion.
In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, following the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and Japan’s Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities.
The Company faces intense competition from lower cost-generic products.
In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is

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significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures which encourages the use of generic products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial position and prospects.
The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.
The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such an event, the competitors’ products may be safer or more effective, more convenient to use or more effectively marketed and sold than the Company’s products. Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial position and prospects. In addition, if products that were measured at fair value and capitalized in connection with mergers and acquisitions, such as the Company’s portfolio products marketed for the treatment of chronic hepatitis C or Vytorin or Zetia, experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.
The Company faces pricing pressure with respect to its products.
The Company faces increasing pricing pressure globally and, particularly in mature markets, from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act of 2010. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. In addition, the Company faces the risk of litigation with the government over its pricing calculations.
Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in funding health care and, in that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with respect to its products.
The Company expects pricing pressures to increase in the future.
The health care industry in the United States will continue to be subject to increasing regulation and political action.
The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by Congress and state legislatures.
In 2010, major health care reform was adopted into law and important market reforms have begun and will continue through full implementation in 2014. The new law is expected to expand access to health care to about 32 million Americans by the end of the decade. In 2010, the minimum rebate to states participating in the Medicaid program increased from 15.1% to 23.1% on the Company’s branded prescription drugs; the Medicaid rebate was extended to Medicaid Managed Care Organizations; and eligibility for the federal 340B drug discount program was

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extended to rural referral centers, sole community hospitals, critical access hospitals, certain free standing cancer hospitals, and certain additional children’s hospitals.
In addition, the law requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, the Company is required to pay an annual health care reform fee, which is assessed on all branded prescription drug manufacturers and importers. The fee is calculated based on the industry’s total sales of branded prescription drugs to specified government programs. The percentage of a manufacturer’s sales that are included is determined by a tiered scale based on the manufacturer’s individual revenues. Each manufacturer’s portion of the total annual fee is based on the manufacturer’s proportion of the total includable sales in the prior year. The annual industry fee for 2013 was $2.8 billion and will be $3.0 billion in 2014.
The Company cannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have on the Company’s results of operations, financial condition or business.
The uncertainty in global economic conditions together with austerity measures being taken by certain governments could negatively affect the Company’s operating results.
The uncertainty in global economic conditions may result in a further slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2013. The Company anticipates these pricing actions, including the biennial price reductions in Japan, and other austerity measures will continue to negatively affect revenue performance in 2014.
The Company continues to monitor the credit and economic conditions within Greece, Spain, Italy and Portugal, among other members of the EU. These economic conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect on the accounts receivable outstanding in these countries and may also impact the likelihood of collecting 100% of outstanding accounts receivable. As of December 31, 2013, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $900 million. Of this amount, hospital and public sector receivables were approximately $600 million in the aggregate, of which approximately 9%, 41%, 40% and 10% related to Greece, Italy, Spain and Portugal, respectively. As of December 31, 2013, the Company’s total accounts receivable outstanding for more than one year were approximately $200 million, of which approximately 50% related to accounts receivable in Greece, Italy, Spain and Portugal, mostly comprised of hospital and public sector receivables.
If credit and economic conditions in Europe worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.
The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material negative impact on the Company’s results of operations.
The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:
•
changes in medical reimbursement policies and programs and pricing restrictions in key markets;
•
multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;
•
trade protection measures and import or export licensing requirements;
•
foreign exchange fluctuations;

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•
diminished protection of intellectual property in some countries; and
•
possible nationalization and expropriation.
In addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.
The Company is evaluating the strategic options for its Merck Consumer Care and Animal Health businesses, however, there can be no assurance that any transactions will occur.
On January 13, 2014, the Company announced that it was evaluating the respective roles of Merck’s Animal Health and Consumer Care businesses in the Company’s strategy for long-term value creation. Furthermore, the Company stated that it expects to complete the evaluation process and take action, if any, in 2014. The Company could reach different decisions about the two businesses. There can be no assurance that the Company will determine to take action with respect to either business or that it will be able to effectuate any action it determines to take.
The Company has experienced difficulties and delays in manufacturing of certain of its products.
As previously disclosed, Merck has, in the past, experienced difficulties in manufacturing certain of its vaccines and other products. The Company may, in the future, experience difficulties and delays inherent in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in product manufacturing; (ii) construction delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. Manufacturing difficulties can result in product shortages, leading to lost sales.
The Company faces significant litigation related to Vioxx.
On September 30, 2004, Merck voluntarily withdrew Vioxx, its arthritis and acute pain medication, from the market worldwide. Although Merck has settled the major portion of the U.S. Product Liability litigation, the Company still faces material litigation arising from the voluntary withdrawal of Vioxx.
In addition to the Vioxx Product Liability Lawsuits and lawsuits from certain states that did not participate in a previously-disclosed settlement, various purported class actions and individual lawsuits have been brought against Merck and several current and former officers and directors of Merck alleging that Merck made false and misleading statements regarding Vioxx in violation of the federal securities laws and state laws (all of these suits are referred to as the “Vioxx Securities Lawsuits”). The Vioxx Securities Lawsuits have been transferred by the Judicial Panel on Multidistrict Litigation to the U.S. District Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide multidistrict litigation, and have been consolidated for all purposes. Merck has also been named as a defendant in actions in various countries outside the United States. (All of these suits are referred to as the “Vioxx International Lawsuits”.)
The Vioxx litigation is discussed more fully in Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. The Company believes that it has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx Securities Lawsuits and Vioxx International Lawsuits (collectively, the “Vioxx Litigation”) and will vigorously defend against them. The Company’s insurance coverage with respect to the Vioxx Litigation will not be adequate to cover its defense costs and any losses.
The Company is not currently able to estimate any additional amounts that it may be required to pay in connection with the Vioxx Litigation. These proceedings are still expected to continue for years and the Company cannot predict the course the proceedings will take. In view of the inherent difficulty of predicting the outcome of litigation, the Company is unable to predict the outcome of these matters, and at this time cannot reasonably estimate the possible loss or range of loss with respect to the remaining Vioxx Litigation. The Company has not established any material reserves for any potential liability relating to the remaining Vioxx Litigation although it has established reserves related

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to the settlement of certain Vioxx International Lawsuits and with respect to certain other Vioxx Product Liability Lawsuits, all of which are discussed in Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
Unfavorable outcomes in the Vioxx Litigation resulting in the payment of substantial damages could have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
Issues concerning Vytorin and the ENHANCE clinical trial have had an adverse effect on sales of Vytorin and Zetia in the United States and results from the IMPROVE-IT trial could have a material adverse effect on such sales.
The Company sells Vytorin and Zetia. As previously disclosed, in January 2008, the Company announced the results of the ENHANCE clinical trial, an imaging trial in 720 patients with heterozygous familial hypercholesterolemia, a rare genetic condition that causes very high levels of LDL “bad” cholesterol and greatly increases the risk for premature coronary artery disease. As previously reported, despite the fact that ezetimibe/simvastatin 10/80 mg (Vytorin) significantly lowered LDL “bad” cholesterol more than simvastatin 80 mg alone, there was no significant difference between treatment with ezetimibe/simvastatin and simvastatin alone on the pre-specified primary endpoint, a change in the thickness of carotid artery walls over two years as measured by ultrasound. In January 2009, the FDA announced that it had completed its review of the final clinical study report of ENHANCE. The FDA stated that the results from ENHANCE did not change its position that elevated LDL cholesterol is a risk factor for cardiovascular disease and that lowering LDL cholesterol reduces the risk for cardiovascular disease.
The IMPROVE-IT trial, which is currently underway and is designed to provide cardiovascular outcomes data for ezetimibe/simvastatin in patients presenting with acute coronary syndrome, is scheduled for completion later in 2014. No incremental benefit of ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated for simvastatin has been established. In the IMPROVE-IT trial, blinded interim efficacy analyses were conducted by the Data Safety Monitoring Board (“DSMB”) for the trial when approximately 50% and 75% of the endpoints were accrued, respectively. In each case, the DSMB recommended continuing the trial without change in design. The DSMB completed another planned interim review of the study data in March 2013 and again recommended that the study continue.
The issues concerning the ENHANCE clinical trial have had an adverse effect on sales of Vytorin and Zetia and could continue to have an adverse effect on such sales. If the results of the IMPROVE-IT trial fail to demonstrate an incremental benefit of ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated for simvastatin, sales of Zetia and Vytorin could be materially adversely affected. If sales of such products are materially adversely affected, the Company’s business, cash flow, results of operations, financial position and prospects could also be materially adversely affected and the Company could be required to record a material non-cash impairment charge.
The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its presence in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in emerging markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.
For instance, in February 2013, the Venezuelan government devalued its currency. As a result of that devaluation, the Company recognized losses due to exchange. If the Venezuelan government were to devalue its currency again in 2014, the Company would recognize additional losses due to exchange and the Company expects that the impact would be greater than in 2013.
In addition, in 2013 in China, governmental investigations involving other multinational pharmaceutical companies and domestic health care companies and medical institutes adversely affected the Company’s near term growth prospects in that market. While the Company continues to believe that China represents an important growth

24

opportunity, these events, coupled with heightened scrutiny of the health care industry, may continue to have an impact on product pricing and market access generally. The Company anticipates that the reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in China may continue.
For all these reasons, sales within emerging markets carry significant risks. However, a failure to continue to expand the Company’s business in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and, as such, virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into acquisition, licensing, borrowings or other financial transactions that may give rise to currency and interest rate exposure.
Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates and interest rates could negatively affect the Company’s results of operations, financial position and cash flows as occurred in Venezuela in 2013.
In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.
The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.
The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
In April 2013, President Obama’s administration re-proposed significant changes to the U.S. international tax laws, including changes that would tax companies on “excess returns” attributable to certain offshore intangible assets, limit U.S. tax deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit rules. Other potentially significant changes to the U.S. international laws, including a move toward a territorial tax system and taxing currently the accumulated unrepatriated foreign earnings of controlled foreign corporations, have been set out by various Congressional committees. The Company cannot determine whether these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to their being enacted into law. If these or other changes to the U.S. international tax laws are enacted, they could have a significant impact on the financial results of the Company.
In addition, the Company may be affected by changes in tax laws, including tax rate changes, changes to the laws related to the remittance of foreign earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.
Pharmaceutical products can develop unexpected safety or efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.
Changes in laws and regulations could adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.

25

Reliance on third party relationships and outsourcing arrangements could adversely affect the Company’s business.
The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third party service providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its information technology systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.
The Company is increasingly dependent on sophisticated information technology and infrastructure.
The Company is increasingly dependent on sophisticated information technology and infrastructure. The size and complexity of the Company’s computer systems makes them potentially vulnerable to service interruption, malicious intrusion and random attacks. In addition, data privacy or security breaches by employees or others may pose a risk that data, including intellectual property or personal information, may be exposed to unauthorized individuals or to the public. There can be no assurance that the Company’s efforts to protect its data and systems will prevent service interruption or the loss of critical or sensitive information which could result in financial, legal, business or reputational harm to the Company.
Negative events in the animal health industry could have a negative impact on future results of operations.
Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as Bovine Spongiform Encephalopathy or mad cow disease, could lead to their widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely impact the Company’s results of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt production of vaccines at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to animal health include epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.
In 2013, the Company voluntarily suspended sales of Zilmax, an animal feed supplement, in the United States and Canada after concerns were raised about cattle that had been fed Zilmax. The suspension materially reduced the sales of Zilmax. The Company can give no assurances as to when sales of Zilmax in the United States and Canada will resume.
Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.
The successful development, testing, manufacturing and commercialization of biologics, particularly human and animal health vaccines, is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics, including:
•
There may be limited access to and supply of normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.
•
The development, manufacturing and marketing of biologics are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both preclinical and clinical trial data and extensive data regarding the manufacturing

26

procedures, is required for human vaccine candidates and FDA approval is required for the release of each manufactured commercial lot.
•
Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.
•
Biologics are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
•
The use of biologically derived ingredients can lead to allegations of harm, including infections or allergic reactions, or closure of product facilities due to possible contamination. Any of these events could result in substantial costs.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. With respect to product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certain product liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential, and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:
•Competition from generic products as the Company’s products lose patent protection.
•Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.
•The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability

27

to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.
•Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.
•Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.
•Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.
•Significant litigation related to Vioxx and Fosamax.
•Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.
•Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.
•Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.
•Changes in tax laws including changes related to the taxation of foreign earnings.
•Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.
•Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The Company’s corporate headquarters is currently located in Whitehouse Station, New Jersey, although the Company has announced that it intends to move its headquarters to Kenilworth, New Jersey in 2015. The Company’s U.S. commercial operations are headquartered in Upper Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd and Whitehouse Station. The Company’s vaccines business is conducted through divisional headquarters located in West Point, Pennsylvania. Merck’s Animal Health and Consumer Care global headquarters functions are located in Summit, New Jersey, although the Company has announced it will vacate its Summit property. Principal U.S. research facilities are located in Rahway, Kenilworth and Summit, New Jersey, West Point, Pennsylvania, Palo Alto, California, Boston, Massachusetts, and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in the Netherlands, Switzerland and China. The Company also has production facilities for human health products at 12 locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Australia, Canada, Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.

28

Capital expenditures were $1.5 billion in 2013, $2.0 billion in 2012 and $1.7 billion in 2011. In the United States, these amounted to $902 million for 2013, $1.3 billion for 2012 and $1.2 billion in 2011. Abroad, such expenditures amounted to $646 million for 2013, $662 million for 2012 and $516 million for 2011.
The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company considers that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.
Item 3.
Legal Proceedings.
The information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities”.
Item 4.
Mine Safety Disclosures.
Not Applicable
Executive Officers of the Registrant (ages as of February 1, 2014)
At the time of the Merger, November 3, 2009, certain executive officers assumed their position in the newly merged company as noted below.
KENNETH C. FRAZIER — Age 59
December 2011 — Chairman, President and Chief Executive Officer, Merck & Co., Inc.
January 2011 — President and Chief Executive Officer, Merck & Co., Inc.
May 2010 — President, Merck & Co., Inc. — responsible for the Company’s three largest worldwide divisions — Global Human Health, Merck Manufacturing Division and Merck Research Laboratories
Prior to May 2010, Mr. Frazier was Executive Vice President and President, Global Human Health, Merck & Co., Inc. from 2007 to 2010.
ADELE D. AMBROSE — Age 57
November 2009 — Senior Vice President and Chief Communications Officer, Merck & Co., Inc. — responsible for the Global Communications organization
December 2007 — Vice President and Chief Communications Officer, Merck & Co., Inc. — responsible for the Global Communications organization
JOHN CANAN — Age 57
November 2009 — Senior Vice President Finance-Global Controller, Merck & Co., Inc. — responsible for the Company’s global controller’s organization including all accounting, controls, external reporting and financial standards and policies
January 2008 — Senior Vice President and Controller, Merck & Co., Inc. — responsible for the Corporate Controller’s Group
WILLIE A. DEESE — Age 58
November 2009 — Executive Vice President and President, Merck Manufacturing Division, Merck & Co., Inc. — responsible for the Company’s global manufacturing, procurement, and distribution and logistics functions
January 2008 — Executive Vice President and President, Merck Manufacturing Division, Merck & Co., Inc. — responsible for the Company’s global manufacturing, procurement, and distribution and logistics functions

29

RICHARD R. DELUCA, JR. — Age 51
September 2011 — Executive Vice President and President, Merck Animal Health, Merck & Co., Inc. — responsible for the Merck Animal Health organization
Prior to September 2011, Mr. DeLuca was Chief Financial Officer, Becton Dickinson Biosciences (a medical technology company) since 2010 and President, Wyeth’s Fort Dodge Animal Health division from 2007 to 2010. He also served as Chief Operating Officer, Fort Dodge from 2006 to 2007 and Executive Vice President and Chief Financial Officer from 2002 to 2006.
CUONG VIET DO — Age 47
October 2011 — Executive Vice President and Chief Strategy Officer, Merck & Co., Inc. — responsible for leading the formulation and execution of the Company’s long term strategic plan
Prior to October 2011, Mr. Do was Senior Vice President, Corporate Strategy and Business Development, TE Connectivity (a global company that designs, manufactures and markets products for customers in a variety of industries) from 2009 to 2011 and Senior Vice President and Chief Strategy Officer, Lenovo (a personal technology company) from 2006 to 2009.
CLARK GOLESTANI — Age 47
December 2012 — Executive Vice President and Chief Information Officer, Merck & Co., Inc. — responsible for Merck’s global information technology (IT)
August 2008 — Vice President, Merck Research Laboratories Information Technology, Merck & Co., Inc. — responsible for global IT for Merck’s Research & Development division, including Basic Research, PreClinical, Clinical and Regulatory
MIRIAN M. GRADDICK-WEIR — Age 59
November 2009 — Executive Vice President, Human Resources, Merck & Co., Inc. — responsible for the Global Human Resources organization
January 2008 — Executive Vice President, Human Resources, Merck & Co., Inc. — responsible for the Global Human Resources organization
BRIDGETTE P. HELLER — Age 52
March 2010 — Executive Vice President and President, Merck Consumer Care, Merck & Co., Inc. — responsible for the Merck Consumer Care organization
Prior to March 2010, Ms. Heller was President, Johnson & Johnson’s Global Baby Business Unit from 2007 to 2010.
MICHAEL J. HOLSTON — Age 51
June 2012 — Executive Vice President and Chief Ethics and Compliance Officer, Merck & Co., Inc. — responsible for the Company’s compliance function, including Global Safety & Environment, Systems Assurance, Ethics and Privacy
Prior to June 2012, Mr. Holston was Executive Vice President, General Counsel and Board Secretary for Hewlett-Packard Company (a technology company) since 2007, where he oversaw the legal, compliance, government affairs, privacy and ethics operations.
PETER N. KELLOGG — Age 57
November 2009 — Executive Vice President and Chief Financial Officer, Merck & Co., Inc. — responsible for the Company’s worldwide financial organization, investor relations, corporate development, global facilities, and the Company’s joint venture relationships
August 2007 — Executive Vice President and Chief Financial Officer, Merck & Co., Inc. — responsible for the Company’s worldwide financial organization, investor relations, corporate development and licensing, and the Company’s joint venture relationships

30

BRUCE N. KUHLIK — Age 57
November 2009 — Executive Vice President and General Counsel, Merck & Co., Inc. — responsible for legal, communications, and public policy functions
January 2008 — Executive Vice President and General Counsel, Merck & Co., Inc. — responsible for legal, communications, and public policy functions
ROGER M. PERLMUTTER — Age 61
April 2013 — Executive Vice President and President, Merck Research Laboratories, Merck & Co., Inc. — responsible for the Company’s research and development efforts worldwide
Prior to April 2013, Dr. Perlmutter was Executive Vice President of Research and Development, Amgen Inc. from 2001 to 2012.
MICHAEL ROSENBLATT, M.D. — Age 66
December 2009 — Executive Vice President and Chief Medical Officer, Merck & Co., Inc. — the Company’s primary voice to the global medical community on critical issues such as patient safety and oversight for the Company’s Global Center for Scientific Affairs
Prior to December 2009, Dr. Rosenblatt was the Dean of Tufts University School of Medicine since 2003.
ADAM H. SCHECHTER — Age 49
May 2010 — Executive Vice President and President, Global Human Health, Merck & Co., Inc. — responsible for the Company’s pharmaceutical and vaccine worldwide business
November 2009 — President, Global Human Health, U.S. Market-Integration Leader, Merck & Co., Inc. — commercial responsibility in the United States for the Company’s portfolio of prescription medicines. Leader for the integration efforts for the Merck/Schering-Plough merger across all divisions and functions.
August 2007 — President, Global Pharmaceuticals, Global Human Health, Merck & Co., Inc. — global responsibilities for the Company’s atherosclerosis/cardiovascular, diabetes/obesity, oncology, specialty/neuroscience, respiratory, bone, arthritis and analgesia franchises as well as commercial responsibility in the United States for the Company’s portfolio of prescription medicines
On February 3, 2014, the Board accepted the resignation of John Canan, who will retire from the Company on March 1, and elected Rita Karachun as Senior Vice President Finance - Global Controller, effective March 1, 2014, making her the Company’s principal accounting officer. Ms. Karachun, age 50, has served as Assistant Controller of the Company since November 2009. Prior to her appointment as Assistant Controller of the Company, Ms. Karachun served as the Assistant Controller of Schering-Plough Corporation since February 2007, responsible for preparing financial statements and for the worldwide consolidation of international entities.
All officers listed above serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and the Board.

31

PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal market for trading of the Company’s Common Stock is the New York Stock Exchange (“NYSE”) under the symbol MRK. The Common Stock market price information set forth in the table below is based on historical NYSE market prices.
The following table also sets forth, for the calendar periods indicated, the dividend per share information.
 
Cash Dividends Paid per Common Share
 
 
 
 
 
 
 
 
 
 
 
Year

 
4th Q

 
3rd Q

 
2nd Q

 
1st Q

 
2013
$
1.72

 
$
0.43

 
$
0.43

 
$
0.43

 
$
0.43

 
2012
$
1.68

 
$
0.42

 
$
0.42

 
$
0.42

 
$
0.42

 
Common Stock Market Prices
 
 
2013
 
 
4th Q

 
3rd Q

 
2nd Q

 
1st Q

 
High
 
 
$
50.42

 
$
49.08

 
$
50.16

 
$
45.42

 
Low
 
 
$
44.62

 
$
46.03

 
$
43.77

 
$
40.83

 
2012
 
 
 
 
 
 
 
 
 
 
High
 
 
$
48.00

 
$
45.70

 
$
41.75

 
$
39.43

 
Low
 
 
$
40.02

 
$
41.06

 
$
37.02

 
$
36.91

As of January 31, 2014, there were approximately 148,780 shareholders of record.
Issuer purchases of equity securities for the three months ended December 31, 2013 were as follows:
Issuer Purchases of Equity Securities
 
 
 
 
 
 
($ in millions)
Period
 
Total Number
of Shares
Purchased(1)
 
Average Price
Paid Per
Share
 
Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs(1)
October 1 — October 31
 
6,879,788(2)
 
$47.55
 
$10,506
November 1 — November 30
 
1,411,050
 
$46.69
 
$10,440
December 1 — December 31
 
1,265,007
 
$49.13
 
$10,378
Total
 
9,555,845
 
$47.63
 
$10,378
(1) 
All shares purchased during the period were made as part of a plan approved by the Board of Directors in May 2013 to purchase up to $15 billion in Merck shares.
(2) 
Includes 5.5 million shares received in October upon settlement of an accelerated share repurchase agreement for which no cash was paid during the period.

32

 
Performance Graph
The following graph assumes a $100 investment on December 31, 2008, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of the major U.S.-based pharmaceutical companies, which are: Abbott Laboratories, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, and Pfizer Inc.
Comparison of Five-Year Cumulative Total Return*
Merck & Co., Inc., Composite Peer Group and S&P 500 Index
 
End of
Period Value
 
2013/2008
CAGR**
MERCK
$
320

 
26
%
PEER GRP.***
196

 
14

S&P 500
228

 
18

 
2008
2009
2010
2011
2012
2013
MERCK
100.00
199.24
204.95
224.50
252.10
319.67
PEER GRP.
100.00
107.89
107.41
130.56
150.00
196.15
S&P 500
100.00
126.47
145.55
148.59
172.34
228.11
*
The Performance Graph reflects Schering-Plough’s stock performance from December 31, 2008 through the close of the Merger and Merck’s stock performance from November 3, 2009 through December 31, 2013. Assumes the cash component of the merger consideration was reinvested in Merck stock at the closing price on November 3, 2009.
**
Compound Annual Growth Rate
***
As discussed above, on November 3, 2009, Merck and Schering-Plough completed the Merger in which Merck (subsequently renamed Merck Sharp & Dohme Corp. (“MSD”)) became a wholly-owned subsidiary of Schering-Plough (subsequently renamed Merck & Co., Inc.). As a result of the Merger, MSD no longer exists as a publicly traded entity and ceased all trading of its common stock as of the close of business on the Merger date. MSD has been permanently removed from the peer group index. In addition, Abbott Laboratories (“Abbott”) is currently included in the peer group; however, in 2013, Abbott spun off its pharmaceutical business into AbbVie Inc. In the future, the Company intends to remove Abbott from the peer group calculation.

This Performance Graph will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities and Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.  In addition, the Performance Graph will not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, other than as provided in Regulation S-K, or to the liabilities of section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.

33


Item 6.
Selected Financial Data.                        
The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report.
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
 
2013(1)
 
2012(2)
 
2011(3)
 
2010(4)
 
2009(5)
 
Results for Year:
 
 
 
 
 
 
 
 
 
 
Sales
$
44,033

 
$
47,267

 
$
48,047

 
$
45,987

 
$
27,428

 
Materials and production
16,954

 
16,446

 
16,871

 
18,396

 
9,019

 
Marketing and administrative
11,911

 
12,776

 
13,733

 
13,125

 
8,543

 
Research and development
7,503

 
8,168

 
8,467

 
11,111

 
5,845

 
Restructuring costs
1,709

 
664

 
1,306

 
985

 
1,634

 
Equity income from affiliates
(404
)
 
(642
)
 
(610
)
 
(587
)
 
(2,235
)
 
Other (income) expense, net
815

 
1,116

 
946

 
1,304

 
(10,668
)
 
Income before taxes
5,545

 
8,739

 
7,334

 
1,653

 
15,290

 
Taxes on income
1,028

 
2,440

 
942

 
671

 
2,268

 
Net income
4,517

 
6,299

 
6,392

 
982

 
13,022

 
Less: Net income attributable to noncontrolling interests
113

 
131

 
120

 
121

 
123

 
Net income attributable to Merck & Co., Inc.
4,404

 
6,168

 
6,272

 
861

 
12,899

 
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
$
1.49

 
$
2.03

 
$
2.04

 
$
0.28

 
$
5.67

 
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
$
1.47

 
$
2.00

 
$
2.02

 
$
0.28

 
$
5.65

 
Cash dividends declared
5,132

 
5,173

 
4,818

 
4,730

 
3,598

(6) 
Cash dividends declared per common share
$
1.73

 
$
1.69

 
$
1.56

 
$
1.52

 
$
1.52

 
Capital expenditures
1,548

 
1,954

 
1,723

 
1,678

 
1,461

 
Depreciation
2,225

 
1,999

 
2,351

 
2,638

 
1,654

 
Average common shares outstanding (millions)
2,963

 
3,041

 
3,071

 
3,095

 
2,268

 
Average common shares outstanding assuming dilution (millions)
2,996

 
3,076

 
3,094

 
3,120

 
2,273

 
Year-End Position:
 
 
 
 
 
 
 
 
 
 
Working capital
$
17,817

 
$
16,509

 
$
16,936

 
$
13,423

 
$
12,791

 
Property, plant and equipment, net
14,973

 
16,030

 
16,297

 
17,082

 
18,279

 
Total assets
105,645

 
106,132

 
105,128

 
105,781

 
112,314

 
Long-term debt
20,539

 
16,254

 
15,525

 
15,482

 
16,095

 
Total equity
52,326

 
55,463

 
56,943

 
56,805

 
61,485

 
Year-End Statistics:
 
 
 
 
 
 
 
 
 
 
Number of stockholders of record
149,400

 
157,400

 
166,100

 
171,000

 
175,600

 
Number of employees (7)
76,000

 
83,000

 
86,000

 
94,000

 
100,000

 
(1) 
Amounts for 2013 include the amortization of purchase accounting adjustments, the impact of restructuring actions, intangible asset impairment charges, including in-process research and development impairment charges reflected in research and development expenses, and the favorable impact of certain tax items.
(2) 
Amounts for 2012 include the amortization of purchase accounting adjustments, a net charge recorded in connection with the settlement of certain shareholder litigation, in-process research and development impairment charges reflected in research and development expenses, the impact of restructuring actions and the favorable impact of certain tax items.
(3) 
Amounts for 2011 include the amortization of purchase accounting adjustments, in-process research and development impairment charges reflected in research and development expenses, the impact of restructuring actions, an arbitration settlement charge, and the favorable impact of certain tax items, including a net favorable impact of approximately $700 million relating to the settlement of a federal income tax audit.
(4) 
Amounts for 2010 include the amortization of purchase accounting adjustments, in-process research and development impairment charges of $2.4 billion reflected in research and development expenses, the impact of restructuring actions, a reserve related to Vioxx litigation, a gain recognized on AstraZeneca LP’s exercise of its option to acquire certain assets from the Company and the favorable impact of certain tax items.
(5) 
Amounts for 2009 include the impact of the merger with Schering-Plough Corporation on November 3, 2009, including the recognition of a gain representing the fair value step-up of Merck’s previously held interest in the Merck/Schering-Plough partnership as a result of obtaining a controlling interest and the amortization of purchase accounting adjustments recorded in the post-merger period. Also included in 2009, is a gain on the sale of Merck’s interest in Merial Limited, the favorable impact of certain tax items and the impact of restructuring actions.
(6) 
Amount reflects dividends declared on Merck common stock. In addition, approximately $144 million of dividends were paid subsequent to the merger with Schering-Plough, and $431 million were paid prior to the merger, relating to common stock and preferred stock dividends declared by Schering-Plough in 2009.
(7) 
Number of employees at December 31, 2013, does not reflect 1,300 employees of the Company’s joint ventures in China and Brazil, which are included in the consolidated results of Merck.

34

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Description of Merck’s Business
Merck & Co., Inc. (“Merck” or the “Company”) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are comprised of four operating segments, which are the Pharmaceutical, Animal Health, Consumer Care and Alliances segments, and one reportable segment, which is the Pharmaceutical segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Additionally, the Company has consumer care operations that develop, manufacture and market over-the-counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets, as well as club stores and specialty channels.
Overview
The Company’s revenue performance in 2013 was tempered by ongoing business challenges, including recent product patent expiries and ongoing global efforts toward health care cost containment that continue to exert pressure on product pricing and market access. Worldwide sales were $44.0 billion in 2013, a decline of 7% compared with 2012, including a 2% unfavorable effect from foreign exchange. The decline was driven primarily by the recent loss of market exclusivity for several products, particularly Singulair, a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis, as well as Maxalt, a product for acute treatment of migraine, Propecia, a product for the treatment of male pattern hair loss, and Temodar, a treatment for certain types of brain tumors. The Company experienced a significant and rapid decline in sales of these products following loss of market exclusivity. These declines were partially offset by higher sales of vaccines, immunology, diabetes and HIV products.
The Company continued to successfully execute on its cost reduction initiatives in 2013. Marketing and administrative expenses and Research and development costs were down over $1.5 billion on a combined basis in 2013 as compared with 2012 reflecting targeted reductions in promotional spending and lower costs as a result of portfolio prioritization.
In an effort to drive further company-wide efficiencies, Merck is taking several strategic and operating actions in response to its business challenges and the rapidly changing external environment it is facing that are designed to drive short- and long-term growth. In October 2013, the Company announced a multi-year global initiative to sharpen its commercial and research and development focus designed to enable Merck to better allocate its resources on candidates that it believes are capable of providing unambiguous, promotable advantages to patients and payers. This includes bolstering its pipeline and implementing a more agile operating model, with a significantly reduced, more flexible cost structure while still maintaining a high level of cash returned to shareholders.
Geographically, the Company will increase its focus on ten prioritized markets, which account for the majority of revenue in its pharmaceutical and vaccine business. These markets are the United States, Japan, France, Germany, Canada, United Kingdom, China, Brazil, Russia and Korea. The Company will continue to invest in high-growth and key emerging markets.
Within the core human pharmaceutical and vaccine business, Merck will continue to support its in-line portfolio and prepare for promising launches in the pipeline. The Company will increase its focus on the key therapeutic areas that meet unmet medical needs, provide the best opportunities for the business and deliver the greatest value for customers – diabetes, acute hospital care, vaccines and oncology. As part of its intensified portfolio assessment process, the Company has divested a portion of its U.S. ophthalmics business and sold the U.S. marketing rights for Saphris,

35

an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults. The Company’s portfolio assessment process is ongoing and future product divestitures may occur.
In addition, in January 2014, the Company announced that it was evaluating the respective roles of Merck’s Animal Health and Consumer Care businesses in the Company’s strategy for long-term value creation. The Company expects to complete the evaluation process and take action, if any, in 2014. The Company could reach different decisions about the two businesses.
The Company’s re-focused research and development efforts include programs such as the Company’s anti-PD-1 immunotherapy (MK-3475) in oncology, which has received a Breakthrough Therapy designation from the U.S. Food and Drug Administration (the “FDA”) for advanced melanoma, Merck’s BACE inhibitor for Alzheimer’s disease (MK-8931), the Company’s all oral combination regimen for the treatment of chronic hepatitis C virus infection (MK-5172/MK-8742), and V503, a nine-valent human papillomavirus (“HPV”) vaccine. In January 2014, the Company announced it has initiated the rolling submission of a Biologics License Application (“BLA”) to the FDA for MK-3475 in patients with advanced melanoma who have previously been treated with ipilimumab. During 2013, the Company received a Breakthrough Therapy designation for MK-5172/MK-8742 and has advanced the combination into Phase 2B in a diverse range of chronic hepatitis C patients. The Company has initiated Phase 3 trials for its BACE inhibitor (MK-8931) and filed a BLA with the FDA for V503.
Merck is pursuing emerging product opportunities independent of therapeutic area or modality and is building its biologics capabilities. The Company expects to make externally sourced programs a greater component of its pipeline strategy. During 2013, the Company entered into a collaboration agreement for the development and commercialization of ertugliflozin, an investigational oral sodium glucose cotransporter (“SGLT2”) inhibitor being evaluated for the treatment of type 2 diabetes in Phase 3 clinical development.
The Company is out-licensing or discontinuing selected late-stage clinical development assets and reducing its focus on platform technologies. During 2013, the Company out-licensed MK-1775, an investigational treatment for certain types of ovarian cancer, and in January 2014 entered into an agreement to divest its Sirna Therapeutics, Inc. subsidiary and related RNAi technology assets.
The Company currently has several candidates under review with the FDA: MK-5348, vorapaxar, an investigational anti-thrombotic medicine (also under review in the European Union (the “EU”)); V503, a nine-valent HPV vaccine; MK-8962, corifollitropin alfa injection, an investigational fertility treatment; MK-7243, Grastek, an investigational Timothy grass pollen allergy immunotherapy tablet (“AIT”) and MK-3641, Ragwitek, an investigational ragweed pollen AIT. Also, MK-8109, vintafolide, an investigational cancer candidate, is under review in the EU and MK-7009, vaniprevir, an investigational, oral twice-daily protease inhibitor for the treatment of chronic hepatitis C virus infection is under review in Japan. In February 2014, the Company resubmitted its New Drug Application (“NDA”) to the FDA for MK-4305, suvorexant, responding to the agency’s Complete Response Letter (“CRL”) received in 2013. In addition, the Company anticipates resubmitting its NDA application in 2014 to the FDA for MK-8616, sugammadex sodium injection, a medication for the reversal of certain muscle relaxants used during surgery for which the Company received a CRL in 2013 (see “Research and Development” below). The Company also has 12 candidates in Phase 3 development and anticipates filing a New Drug Application (“NDA”) or a BLA, as applicable, with the FDA with respect to several of these candidates in 2014, including the completion of the rolling submission of the BLA for MK-3475 for patients with advanced melanoma who have previously been treated with ipilimumab.
In October 2013, in connection with the implementation of Company’s new global initiative, the Company announced a global restructuring program (the “2013 Restructuring Program”). As part of the program, the Company expects to reduce its total workforce by approximately 8,500 positions. These workforce reductions will primarily come from the elimination of positions in sales, administrative and headquarters organizations, as well as research and development. The Company will also reduce its global real estate footprint and continue to improve the efficiency of its manufacturing and supply network. The Company recorded total pretax costs of $1.2 billion in 2013 related to this restructuring program. The actions under the 2013 Restructuring Program are expected to be substantially completed by the end of 2015 with the cumulative pretax costs estimated to be approximately $2.5 billion to $3.0 billion. The Company expects the actions under the 2013 Restructuring Program to result in annual net cost savings of approximately $2.0 billion by the end of 2015. The Company anticipates that the actions under the 2013 Restructuring Program, combined with remaining actions under the Merger Restructuring Program (discussed below), will result in annual net cost savings of $2.5 billion by the end of 2015 compared with full-year 2012 expense levels.

36

The global restructuring program (the “Merger Restructuring Program”) that was initiated in 2010 subsequent to the Merck and Schering-Plough Corporation (“Schering-Plough”) merger (the “Merger”) is intended to streamline the cost structure of the combined company. The workforce reductions associated with this plan relate to the elimination of positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company recorded total pretax costs of $1.1 billion in 2013, $951 million in 2012 and $1.8 billion in 2011 related to this restructuring program. The restructuring actions under the Merger Restructuring Program were substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related. Subsequent to the Merger, the Company has rationalized a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2016. The Company expects the estimated total cumulative pretax costs for this program to be approximately $7.4 billion to $7.7 billion and to yield annual savings upon completion of the program of approximately $4.0 billion to $4.6 billion.
Costs associated with the Company’s restructuring actions are included in Materials and production costs, Marketing and administrative expenses, Research and development expenses and Restructuring costs. The Company estimates that of the projected costs associated with the above mentioned restructuring programs, approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
During 2013, the Company returned $11.7 billion of cash to shareholders through stock buy-back activity and dividend payments. Pursuant to a $15 billion share repurchase program approved in May 2013 by Merck’s Board of Directors, Merck entered into an accelerated share repurchase (“ASR”) agreement with Goldman, Sachs & Co. (“Goldman Sachs”). Under the ASR, Merck repurchased 105 million shares of common stock for $5 billion utilizing funding from an underwritten public debt offering. Also, in November 2013, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.44 per share from $0.43 per share.
Earnings per common share assuming dilution attributable to common shareholders (“EPS”) for 2013 were $1.47 compared with $2.00 in 2012. EPS in both years reflect a net unfavorable impact resulting from acquisition-related costs and restructuring costs, and certain other items. Non-GAAP EPS, which excludes these items, were $3.49 in 2013 compared with $3.82 in 2012 (see “Non-GAAP Income and Non-GAAP EPS” below). The decline in Non-GAAP EPS in 2013 as compared with 2012 was due primarily to lower sales reflecting the loss of market exclusivity for certain products, particularly Singulair, lower equity income and higher foreign exchange losses, partially offset by lower operating expenses. EPS in 2013 benefited from lower average shares outstanding due to the ASR program discussed above.
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, and generic drug and consumer and animal health care manufacturers. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent positions are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the recognition of an impairment charge with respect to intangible assets associated with certain products. Competitive pressures have intensified as pressures in the industry have grown. The effect on operations of competitive factors and patent disputes cannot be predicted.
Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a

37

strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as joint ventures and licenses, and has been refining its sales and marketing efforts to further address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements, even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the Company’s products in that therapeutic category.
The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by competitors.
The Company’s consumer care operations face competition from other consumer health care businesses as well as retailers who carry their own private label brands. The Company’s competitive position is affected by several factors, including regulatory and legislative issues, scientific and technological advances, the quality and price of the Company’s products, promotional efforts and the growth of lower cost private label brands.

Health Care Environment
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, the United States enacted major health care reform legislation in 2010, which began to be implemented in 2010. Various insurance market reforms have advanced and will continue through full implementation in 2014. The law is expected to expand access to health care to about 32 million Americans by the end of the decade who did not previously have insurance coverage. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $280 million, $210 million and $150 million was recorded by Merck as a reduction to revenue in 2013, 2012 and 2011, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual health care reform fee. The total annual industry fee was $2.8 billion in 2013 and will be $3.0 billion in 2014. The fee is assessed on each company in proportion to its share of sales to certain government programs, such as Medicare and Medicaid. The Company recorded $151 million, $190 million and $162 million of costs within Marketing and administrative expenses in 2013, 2012 and 2011, respectively, for the annual health care reform fee. The full impact of U.S. health care reform cannot be predicted at this time.
The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups, federal and state exchanges, and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act of 2010. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures.
In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative proposals that have been debated but not enacted. These types of revenue generating or cost saving proposals include additional direct price controls in the Medicare prescription drug program (Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reduction proposals that would directly or indirectly affect the Company.
Efforts toward health care cost containment remain intense in several European countries. Many countries have continued to announce and execute austerity measures, which include the implementation of pricing actions to

38

reduce prices of generic and patented drugs and mandatory switches to generic drugs. While the Company is taking steps to mitigate the impact in these countries, the austerity measures continued to negatively affect the Company’s revenue performance in 2013 and the Company anticipates the austerity measures will continue to negatively affect revenue performance in 2014. In addition, a majority of countries attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, including the Company’s. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines. Furthermore, the government can order repricings for classes of drugs if it determines that it is appropriate under applicable rules.
Certain markets outside of the United States have also implemented cost management strategies, such as health technology assessments, which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement.
The Company’s focus on and share of revenue from emerging markets has increased. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures, such as compulsory licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access challenges will continue in 2014 to varying degrees in the emerging markets.
Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care, including medicines.
Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health care environment and market forces.

Government Regulation
The pharmaceutical industry is subject to regulation by regional, country, state and local agencies around the world. Governmental regulation and legislation tend to focus on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement, especially related to the pricing of products.
Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription pharmaceuticals. In many cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States.
The EU has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. The Company’s policies and

39

procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company’s business.
The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment.

Access to Medicines
As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that it has an important role to play in helping to improve access to its products around the world. The Company’s efforts in this regard are wide-ranging and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines. In 2011, Merck announced that it would launch “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Through this initiative, Merck is leveraging its scientific and business expertise to help make proven solutions more widely available, develop new technologies and improve public and policymaker awareness of these issues.
Merck has also in the past provided funds to the Merck Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health. One of these partnerships is The African Comprehensive HIV/AIDS Partnership in Botswana, a collaboration with the government of Botswana that was renewed in 2010 and supports Botswana’s response to HIV/AIDS through a comprehensive and sustainable approach to HIV prevention, care, treatment, and support.

Privacy and Data Protection
The Company is subject to a number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the Company’s business, including recently enacted laws and regulations in the United States, Europe, Asia and Latin America, and increased enforcement and litigation activity in the United States and other developed markets.
Operating Results
Sales
Worldwide sales totaled $44.0 billion in 2013, a decline of 7% compared with $47.3 billion in 2012. The sales decline was driven primarily by lower sales of Singulair. The patents that provided U.S. market exclusivity and market exclusivity in a number of major European markets for Singulair expired in August 2012 and February 2013, respectively, and the Company experienced a significant and rapid decline in Singulair sales in those markets thereafter. Foreign exchange unfavorably affected global sales performance by 2% in 2013. The revenue decline in 2013 also reflects lower sales of Maxalt, Cozaar and Hyzaar, treatments for hypertension, Temodar, Clarinex, a non-sedating antihistamine, PegIntron, a treatment for chronic hepatitis C, Propecia, Fosamax, a treatment for osteoporosis, and Vytorin, a cholesterol modifying medicine. These declines were partially offset by growth in Gardasil, a vaccine to help prevent certain diseases caused by four types of HPV, Remicade and Simponi, treatments for inflammatory diseases, Janumet, a treatment for type 2 diabetes, Isentress, a treatment for HIV-1 infection, Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, and Zostavax, a vaccine to help prevent shingles (herpes zoster).
Sales in the United States were $18.2 billion in 2013, a decline of 11% compared with $20.4 billion in 2012. The sales decrease was driven primarily by lower sales of Singulair, as well as Maxalt, Temodar, Victrelis, an oral medicine for the treatment of chronic hepatitis C virus, and Clarinex, partially offset by higher sales of Gardasil, Zetia, a cholesterol absorption inhibitor, and Dulera Inhalation Aerosol.
International sales were $25.8 billion in 2013, a decline of 4% compared with $26.9 billion in 2012. Foreign exchange unfavorably affected international sales performance by 4% in 2013. The decline was driven primarily by lower sales in the Pharmaceutical segment, reflecting declines in Japan, largely attributable to the unfavorable effect of foreign exchange, and Europe that were partially offset by growth in the emerging markets. Sales in Japan declined 21% in 2013, to $3.9 billion, of which 17% was due to the unfavorable effect of foreign exchange. The sales decline

40

reflects the ongoing impacts of the loss of the market exclusivity for several products, including Cozaar and Hyzaar, as well as lower sales of Gardasil, reflecting the Japanese government’s decision to suspend proactive recommendation of HPV vaccines, and declines in PegIntron and Rebetol, products for the treatment of chronic hepatitis C. These declines were partially offset by volume growth in Januvia, a treatment for type 2 diabetes, Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, Zetia, and RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children. Sales in Europe declined 1% in 2013, to $9.6 billion, including a 2% favorable effect from foreign exchange driven by ongoing generic erosion and fiscal austerity measures in this region, partially offset by growth in Remicade, Simponi, Janumet, Januvia and Isentress. Sales in the emerging markets grew 3% in 2013, to $7.8 billion, including a 4% unfavorable effect from foreign exchange reflecting higher sales of vaccine, hospital, hepatitis and immunology products, partially offset by lower sales of Singulair and diversified brands. Total international sales represented 59% and 57% of total sales in 2013 and 2012, respectively.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2013. The Company anticipates these pricing actions, including the biennial price reductions in Japan, and other austerity measures will continue to negatively affect revenue performance in 2014.
In October 2013, the Company sold its active pharmaceutical ingredient (“API”) manufacturing business and, effective December 31, 2013, certain related products within Diversified Brands. In November 2013, Merck sold the U.S. rights to certain ophthalmic products and in January 2014 sold the U.S. rights to Saphris. The aggregate annual sales associated with these divested assets were approximately $625 million. The annual sales associated with the divested products were approximately $425 million of which approximately $385 million related to the Pharmaceutical segment and $40 million related to the Consumer Care segment. The annual sales associated with the divested API manufacturing business were approximately $200 million and related to non-segment revenues.
Worldwide sales were $47.3 billion in 2012, a decline of 2% compared with $48.0 billion in 2011. Foreign exchange unfavorably affected global sales performance by 3%. The sales decrease was driven primarily by Singulair, which lost market exclusivity in the United States in August 2012 resulting in a significant and rapid decline in U.S. Singulair sales. The sales decline was also driven by lower sales of Remicade, largely as a result of the arbitration settlement agreement reached in 2011 as discussed below. In addition, lower sales of Cozaar and Hyzaar, Clarinex, Fosamax, Vytorin, Primaxin, an anti-bacterial product, and Avelox, a broad-spectrum fluoroquinolone antibiotic for the treatment of certain respiratory and skin infections, as well as lower revenue from the Company’s relationship with AstraZeneca LP (“AZLP”) also contributed to the sales decline in 2012. These declines were largely offset by higher sales of Januvia, Gardasil, Victrelis, Zostavax, Janumet, Isentress, Zetia, and Dulera Inhalation Aerosol, as well as by higher sales of the Company’s animal health and consumer care products.


41

Sales of the Company’s products were as follows:
 
2013
 
2012
 
2011
Primary Care and Women’s Health
 
 
 
 
 
Cardiovascular
 
 
 
 
 
Zetia
$
2,658

 
$
2,567

 
$
2,428

Vytorin
1,643

 
1,747

 
1,882

Diabetes and Obesity
 
 
 
 
 
Januvia
4,004

 
4,086

 
3,324

Janumet
1,829

 
1,659

 
1,363

Respiratory
 
 
 
 
 
Nasonex
1,335

 
1,268

 
1,286

Singulair
1,196

 
3,853

 
5,479

Dulera
324

 
207

 
96

Asmanex
184

 
185

 
206

Women’s Health and Endocrine
 
 
 
 
 
NuvaRing
686

 
623

 
623

Fosamax
560

 
676

 
855

Follistim AQ
481

 
468

 
530

Implanon
403

 
348

 
294

Cerazette
208

 
271

 
268

Other
 
 
 
 
 
Arcoxia
484

 
453

 
431

Avelox
140

 
201

 
322

Hospital and Specialty
 
 
 
 
 
Immunology
 
 
 
 
 
Remicade
2,271

 
2,076

 
2,667

Simponi
500

 
331

 
264

Infectious Disease
 
 
 
 
 
Isentress
1,643

 
1,515

 
1,359

Cancidas
660

 
619

 
640

PegIntron
496

 
653

 
657

Invanz
488

 
445

 
406

Victrelis
428

 
502

 
140

Noxafil
309

 
258

 
230

Oncology
 
 
 
 
 
Temodar
708

 
917

 
935

Emend
507

 
489

 
419

Other
 
 
 
 
 
Cosopt/Trusopt
416

 
444

 
477

Bridion
288

 
261

 
201

Integrilin
186

 
211

 
230

Diversified Brands
 
 
 
 
 
Cozaar/Hyzaar
1,006

 
1,284

 
1,663

Primaxin
335

 
384

 
515

Zocor
301

 
383

 
456

Propecia
283

 
424

 
447

Clarinex
235

 
393

 
621

Remeron
206

 
232

 
241

Claritin Rx
204

 
244

 
314

Proscar
183

 
217

 
223

Maxalt
149

 
638

 
639

Vaccines (1)
 
 
 
 
 
Gardasil
1,831

 
1,631

 
1,209

ProQuad/M-M-R II/Varivax
1,306

 
1,273

 
1,202

Zostavax
758

 
651

 
332

Pneumovax 23
653

 
580

 
498

RotaTeq
636

 
601

 
651

Other pharmaceutical (2)
4,316

 
4,333

 
4,266

Total Pharmaceutical segment sales
37,437

 
40,601

 
41,289

Other segment sales (3)
6,325

 
6,412

 
6,428

Total segment sales
43,762

 
47,013

 
47,717

Other (4)
271

 
254

 
330

 
$
44,033

 
$
47,267

 
$
48,047

(1) 
These amounts do not reflect sales of vaccines sold in most major European markets through the Company’s joint venture, Sanofi Pasteur MSD, the results of which are reflected in Equity income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur MSD.
(2) 
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(3)  
Represents the non-reportable segments of Animal Health, Consumer Care and Alliances. The Alliances segment includes revenue from the Company’s relationship with AZLP.
(4) 
Other revenues are primarily comprised of miscellaneous corporate revenues, third-party manufacturing sales, sales related to divested products or businesses and other supply sales not included in segment results. As discussed above, on October 1, 2013, the Company divested a substantial portion of its third-party manufacturing sales. In addition, other revenues in 2013 reflect $50 million of revenue for the out-license of a pipeline compound.

42

Pharmaceutical Segment
Primary Care and Women’s Health
Cardiovascular
Worldwide sales of Zetia (also marketed as Ezetrol outside the United States), a cholesterol absorption inhibitor, were $2.7 billion in 2013, an increase of 4% compared with 2012 including a 2% unfavorable effect from foreign exchange. The sales increase primarily reflects favorable pricing in the United States and volume growth in Japan, partially offset by the unfavorable effect of foreign exchange particularly in Japan. Sales of Zetia increased 6% in 2012 to $2.6 billion, including a 2% unfavorable effect from foreign exchange. The sales increase reflects positive performance in the United States due to pricing, as well as volume growth in Japan, partially offset by volume declines in the United States.
Global sales of Vytorin (marketed outside the United States as Inegy), a combination product containing the active ingredients of both Zetia and Zocor, a statin for modifying cholesterol, were $1.6 billion in 2013, a decline of 6% compared with 2012, driven primarily by lower volumes in the United States and Latin America, partially offset by volume growth in the Asia Pacific region. Worldwide sales of Vytorin declined 7% in 2012 to $1.7 billion, including a 3% unfavorable effect from foreign exchange. The sales decline reflects volume declines in the United States, partially offset by pricing in the United States and volume growth in certain international markets.
In March 2013, the Data Safety Monitoring Board (the “DSMB”) of the IMPROVE-IT trial, a large cardiovascular outcomes study evaluating ezetimibe/simvastatin against simvastatin alone in patients presenting with acute coronary syndrome, completed its planned review of study data and recommended that the study continue. Merck remains blinded to the actual results of this analysis and to other IMPROVE-IT safety and efficacy data. IMPROVE-IT is an 18,000 patient event-driven trial and, based on the targeted number of 5,250 clinical endpoints and the rate at which events are being reported, the trial is projected to conclude later in 2014. If the results of the IMPROVE-IT trial fail to demonstrate an incremental benefit of ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated for simvastatin, sales of Zetia and Vytorin could be materially adversely affected and, if so, the Company may take non-cash impairment charges with respect to the carrying values of the Zetia and Vytorin intangible assets, which were $4.7 billion and $2.6 billion, respectively, at December 31, 2013 and such charges could be material. 

Diabetes and Obesity
Global sales of Januvia, Merck’s dipeptidyl peptidase-4 (“DPP-4”) inhibitor for the treatment of type 2 diabetes, were $4.0 billion in 2013, a decline of 2% compared with 2012 including a 5% unfavorable effect from foreign exchange. Excluding the negative effect from foreign exchange, sales performance in 2013 compared with 2012 reflects volume growth in Japan, positive performance in Europe and the emerging markets, partially offset by declines in the United States reflecting lowering demand. Worldwide sales of Januvia rose 23% to $4.1 billion in 2012 compared with 2011 reflecting volume growth in the United States, as well as in international markets, particularly in Japan. Foreign exchange unfavorably affected sales performance by 2% in 2012. In 2014, the Company anticipates that all DPP-4 inhibitors, including Januvia, will be subject to repricing in Japan.
The Trial Evaluating Cardiovascular Outcomes after treatment with Sitagliptin (“TECOS”), an event-driven, cardiovascular outcomes study for sitagliptin, began in 2008 and has over 14,000 patients enrolled. TECOS will evaluate the impact of sitagliptin when added to usual care compared to usual care without sitagliptin in a large, high-risk type 2 diabetes population across multiple countries. TECOS is expected to be completed later in 2014.
Worldwide sales of Janumet, Merck’s oral antihyperglycemic agent that combines sitagliptin (Januvia) with metformin in a single tablet, were $1.8 billion in 2013, an increase of 10% compared with 2012, driven primarily by volume growth outside the United States. Global sales of Janumet were $1.7 billion in 2012, an increase of 22% compared with 2011, reflecting volume growth in the United States, the emerging markets and Europe. Foreign exchange unfavorably affected sales performance by 4% in 2012.
Global sales of the combined diabetes franchise of Januvia/Janumet were $5.8 billion in 2013, an increase of 2% compared with 2012 including a 3% unfavorable effect from foreign exchange, and were $5.7 billion in 2012, an increase of 23% compared with 2011 including a 2% unfavorable effect from foreign exchange.


43

Respiratory
Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, increased 5% to $1.3 billion in 2013 compared with 2012 driven primarily by increases in the United States, reflecting net favorable adjustments to indirect customer discounts, as well as by volume growth in Japan, partially offset by declines in Latin America, Canada and Europe. Foreign exchange unfavorably affected global sales performance by 3% in 2013. By agreement, generic manufacturers were able to launch a generic version of Nasonex in most European markets on January 1, 2014 and generic versions of Nasonex have since launched in several of these markets. Accordingly, the Company anticipates a rapid decline in Nasonex sales in Europe in 2014. Sales of Nasonex in Europe were $207 million in 2013. In 2009, Apotex Inc. and Apotex Corp. (collectively, “Apotex”) filed an application with the FDA seeking approval to sell its generic version of Nasonex. In June 2012, the U.S. District Court for the District of New Jersey ruled against the Company in a patent infringement suit against Apotex holding that Apotex’s generic version of Nasonex does not infringe on the Company’s formulation patent. In June 2013, the Court of Appeals for the Federal Circuit issued a decision affirming the U.S. District Court decision and the Company has exhausted all of its appeal options. If Apotex’s generic version becomes available, significant losses of U.S. Nasonex sales could occur and the Company may take a non-cash impairment charge with respect to the carrying value of the Nasonex intangible asset, which was $1.3 billion at December 31, 2013. If the Nasonex intangible asset is determined to be impaired, the impairment charge could be material. U.S. sales of Nasonex were $681 million in 2013. Worldwide sales of Nasonex declined 1% in 2012 to $1.3 billion, including a 1% unfavorable impact from foreign exchange. Sales performance in 2012 compared with 2011 reflects price declines in Europe and lower volumes in the United States, largely offset by higher prices in the United States.
Worldwide sales of Singulair, a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, fell 69% to $1.2 billion in 2013 compared with 2012 driven primarily by lower sales in the United States and Europe as a result of generic competition. The patent that provided U.S. market exclusivity for Singulair expired in August 2012 and the Company has lost nearly all sales of Singulair in the United States. In addition, the patents that provided market exclusivity for Singulair expired in a number of major European markets in February 2013 and the Company experienced a significant and rapid reduction in sales of Singulair in those markets following the patent expiries and expects the decline to continue. The patent that provides market exclusivity for Singulair in Japan will expire in 2016. Singulair sales in Japan were $523 million in 2013. Global sales of Singulair declined 30% to $3.9 billion in 2012 compared with 2011 driven primarily by lower sales in the United States. Revenue declines in Europe, Canada and Latin America also contributed to the Singulair sales decline in 2012.
Global sales of Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, were $324 million in 2013, $207 million in 2012 and $96 million in 2011 reflecting higher demand in the United States. Dulera Inhalation Aerosol was approved by the FDA in June 2010. In January 2012, Merck received a CRL from the FDA on the Company’s supplemental New Drug Application for Dulera Inhalation Aerosol for the treatment of chronic obstructive pulmonary disease. The Company has determined not to conduct an additional clinical study and will no longer pursue an update to the application.

Women’s Health and Endocrine
Worldwide sales of NuvaRing, a vaginal contraceptive product, were $686 million in 2013, an increase of 10% compared with 2012, primarily reflecting volume growth and favorable pricing in the United States. Global sales of NuvaRing were $623 million in 2012, comparable with sales in 2011. Foreign exchange unfavorably affected sales performance by 3% in 2012. Excluding the unfavorable impact of foreign exchange, sales performance in 2012 reflects volume growth in the emerging markets and positive performance in Europe.
Worldwide sales of Fosamax (marketed as Fosamac in Japan) and Fosamax Plus D (marketed as Fosavance throughout the EU) for the treatment and, in the case of Fosamax, prevention of osteoporosis, declined 17% in 2013 to $560 million and decreased 21% in 2012 to $676 million driven by declines in most regions. These medicines have lost market exclusivity in the United States and in most major international markets. The Company expects the sales declines within the Fosamax product franchise to continue.
Global sales of Follistim AQ (marketed in most countries outside the United States as Puregon), a fertility treatment, grew 3% to $481 million in 2013 compared with 2012 driven largely by positive performance in the United States. Sales of Follistim AQ declined 12% in 2012 to $468 million, including a 3% unfavorable effect from foreign

44

exchange, driven largely by declines in Europe resulting from supply issues and pricing. Puregon lost market exclusivity in the EU in August 2009.
Worldwide sales of Implanon, a single-rod subdermal contraceptive implant, grew 16% to $403 million in 2013 compared with 2012 driven primarily by volume growth in the United States that was partially offset by declines in the emerging markets from pricing pressures. Implanon sales increased 18% in 2012 to $348 million, including a 2% unfavorable effect from foreign exchange, reflecting volume growth in the emerging markets and in the United States.
In recent years, the Company experienced difficulties manufacturing certain women’s health products. The Company has resolved these issues, which were not material to the Company’s results of operations.

Other
Other products included in Primary Care and Women’s Health include among others, Asmanex Twisthaler, an inhaled corticosteroid for asthma; Cerazette, a progestin only oral contraceptive; Arcoxia, for the treatment of arthritis and pain and Avelox, a broad-spectrum fluroquinolone antibiotic for the treatment of certain respiratory and skin infections marketed by the Company in the United States. The patent that provides U.S. market exclusivity for Avelox expires in March 2014.

Hospital and Specialty
Immunology
Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $2.3 billion in 2013, an increase of 9% compared with 2012 including a 2% favorable effect from foreign exchange. Sales growth reflects volume growth in Europe, as well as Russia. In September 2013, the EC approved an infliximab biosimilar. While the Company is experiencing generic competition in certain smaller European markets, the Company anticipates a more substantial decline in Remicade sales following loss of market exclusivity in major European markets in February 2015. Sales of Remicade were $2.1 billion in 2012, a decline of 22% compared with 2011 including a 6% unfavorable effect from foreign exchange. Prior to July 1, 2011, Remicade was marketed by the Company outside of the United States (except in Japan and certain other Asian markets). As a result of the agreement reached in April 2011 to amend the agreement governing the distribution rights to Remicade and Simponi, effective July 1, 2011, Merck relinquished marketing rights for these products in certain territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific. Merck retained exclusive marketing rights throughout Europe, Russia and Turkey (the “Retained Territories”). In the Retained Territories, Remicade sales declined 2% in 2012, which reflects an 8% unfavorable effect from foreign exchange and volume growth in Europe.
Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $500 million in 2013, $331 million in 2012 and $264 million in 2011 driven by continued launch activities. Simponi was approved by the European Commission (the “EC”) in October 2009. In September 2013, the EC approved Simponi for the treatment of adult patients with moderately to severely active ulcerative colitis who have had an inadequate response to conventional therapy or who are intolerant to or have medical contraindications for such therapies.

Infectious Disease
Worldwide sales of Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, grew 8% to $1.6 billion in 2013 compared with 2012 driven primarily by volume growth in the United States and Europe. Global sales of Isentress grew 11% in 2012 to $1.5 billion compared with 2011 driven primarily by volume growth in the United States, Latin America and the Asia Pacific region. Foreign exchange unfavorably affected global sales performance by 1% in 2013 and 4% in 2012.
Global sales of Cancidas, an anti-fungal product, increased 7% to $660 million in 2013 compared with 2012 reflecting growth in most emerging markets, as well as in Europe and Japan. Sales of Cancidas declined 3% in 2012 to $619 million, which reflects a 5% unfavorable effect from foreign exchange and growth in the emerging markets.
Worldwide sales of PegIntron, a treatment for chronic hepatitis C, declined 24% to $496 million in 2013 compared with 2012 reflecting declines in all regions. The Company believes the sales declines are attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available.

45

Foreign exchange unfavorably affected global sales performance by 3% in 2013. Global sales of PegIntron declined 1% in 2012 to $653 million, including an unfavorable effect from foreign exchange of 4%. Excluding the unfavorable impact of foreign exchange, sales performance reflects volume growth and favorable pricing in the United States and volume growth in certain emerging markets.
Global sales of Victrelis, an oral medicine for the treatment of chronic hepatitis C, were $428 million in 2013, a decline of 15% compared with 2012 including a 1% unfavorable effect from foreign exchange. Sales declines in the United States, Europe and Canada were partially offset by growth across the emerging markets. The Company believes the sales declines in the United States, Europe and Canada are attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available. Sales of Victrelis were $502 million in 2012 compared with $140 million in 2011, driven by post-launch growth in the United States and internationally, particularly in Europe. Victrelis was approved by the FDA in May 2011 and by the EC in July 2011.
Sales of the Company’s products indicated for treatment of chronic hepatitis C including Victrelis and PegIntron discussed above, as well as Rebetol, continued to be adversely affected in 2013 by patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available. Sales of Rebetol, a product sold almost entirely in international markets, were particularly adversely affected by this trend given the markets where Rebetol is sold, as well as from generic competition. Worldwide sales of Rebetol declined 43% in 2013 to $74 million driven by declines in Japan and Europe. Cash flow revisions in the fourth quarter of 2013 indicated that the Rebetol intangible asset value was not recoverable on an undiscounted cash flows basis. Utilizing market participant assumptions, the Company concluded that its best estimate of the fair value of the intangible asset related to Rebetol was $94 million at December 31 2013, which resulted in an impairment charge of $156 million recorded within Materials and production costs. In the event that the availability of new treatment options adversely affects sales of products currently marketed by the Company for the treatment of chronic hepatitis C to a greater extent than anticipated by the Company, or in the event other circumstances arise that significantly reduce cash flow projections for these products, the Company may record additional intangible asset impairment charges in the future and such charges could be material. The carrying value of the intangible assets related to these products was $1.3 billion in the aggregate at December 31, 2013.

Oncology
Sales of Temodar (marketed as Temodal outside the United States), a treatment for certain types of brain tumors, declined 23% to $708 million in 2013 compared with 2012. Foreign exchange unfavorably affected global sales performance by 3% in 2013. The sales decline was driven primarily by generic competition in the United States and Europe. As previously disclosed, by agreement, a generic manufacturer launched a generic version of Temodar in the United States in August 2013. The U.S. patent and exclusivity periods otherwise expired in February 2014. Temodar lost patent exclusivity in the EU in 2009. Accordingly, the Company is experiencing sales declines due to the loss of exclusivity in these markets and the Company expects these declines to continue. Sales of Temodar decreased 2% in 2012 to $917 million, including a 2% unfavorable effect from foreign exchange. Sales declines in Europe from generic competition were offset by price increases in the United States.
Global sales of Emend, for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $507 million in 2013, an increase of 4% compared with 2012 including a 1% unfavorable effect from foreign exchange, largely reflecting volume growth in the United States and the emerging markets, partially offset by a decline in Japan. Sales of Emend were $489 million in 2012, an increase of 17% compared with 2011 including a 2% unfavorable effect from foreign exchange, reflecting volume growth in the United States and Japan.

Other
Worldwide sales of ophthalmic products Cosopt and Trusopt were $416 million in 2013, a decline of 6% compared with 2012, reflecting a 7% unfavorable effect from foreign exchange and lower sales in Europe and Canada due to generic competition, partially offset by volume growth in Japan. The patent for Cosopt expired in a number of major European markets in March 2013 and the Company is experiencing sales declines in those markets. The patents that provided market exclusivity for Cosopt and Trusopt in the United States and for Trusopt in a number of major European markets had previously expired. Sales of Cosopt and Trusopt were $444 million in 2012, a decline of 7% compared with 2011 including a 4% unfavorable effect from foreign exchange. The sales decline primarily reflects lower sales in Europe due to generic erosion and price reductions, mitigated in part by higher Cosopt sales in Japan.

46

In November 2013, Merck sold the U.S. rights to ophthalmic products Cosopt, Cosopt PF and AzaSite to Akorn, Inc. The annual U.S. sales associated with these ophthalmic products were approximately $45 million.
Bridion (sugammadex sodium injection), for the reversal of certain muscle relaxants used during surgery, is approved and has been launched in many countries outside of the United States. Sales of Bridion were $288 million in 2013, an increase of 10% compared with 2012. The sales growth was driven by volume growth in Europe, the emerging markets and Japan, partially offset by a 13% unfavorable effect of foreign exchange primarily on sales in Japan. Sales of Bridion grew 30% in 2012 to $261 million driven primarily by higher sales in Japan and the emerging markets. In September 2013, the Company received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection (see “Research and Development” below).
Saphris (asenapine), an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults, was previously marketed by the Company in the United States. Merck’s sales of Saphris were $158 million in 2013, $166 million in 2012 and $120 million in 2011. Asenapine, sold under the brand name Sycrest, is also approved in the EU for the treatment of bipolar I disorder in adults. Under a commercialization agreement for Sycrest sublingual tablets (5 mg, 10 mg), H. Lundbeck A/S (“Lundbeck”) makes product supply payments in exchange for exclusive commercial rights to Sycrest in all markets outside the United States, China and Japan. During the second quarter of 2013, the Company reduced cash flow projections for Saphris/Sycrest as a result of reduced expectations in international markets and in the United States. These revisions to cash flows indicated that the Saphris/Sycrest intangible asset value was not recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions and considered several different scenarios to determine its best estimate of the fair value of the intangible asset related to Saphris/Sycrest that, when compared with its related carrying value, resulted in an impairment charge of $330 million reflected in Materials and production costs. In January 2014, Merck sold the U.S. rights to Saphris to Forest Laboratories, Inc. (“Forest”). Under the terms of the agreement, Forest will make upfront payments of approximately $230 million and will make additional payments to Merck based on defined sales milestones.
Other products contained in Hospital and Specialty include among others, Invanz, for the treatment of certain infections; Noxafil, for the prevention of certain invasive fungal infections; and Integrilin, a treatment for patients with acute coronary syndrome, which is sold by the Company in the United States and Canada.

Diversified Brands
Merck’s diversified brands include human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the Company’s offering in other markets around the world.
Global sales of Cozaar and its companion agent Hyzaar (a combination of Cozaar and hydrochlorothiazide), treatments for hypertension, were $1.0 billion in 2013, a decline of 22% compared with 2012 including an 8% unfavorable effect from foreign exchange. The decline was driven largely by lower sales in Japan, Europe and Canada due to generic competition and the unfavorable effect of foreign exchange, particularly on sales in Japan. Sales of Cozaar/Hyzaar decreased 23% in 2012 to $1.3 billion driven by declines in most regions. The patents that provided market exclusivity for Cozaar and Hyzaar in the United States and in a number of major international markets have expired. Accordingly, the Company is experiencing significant declines in Cozaar and Hyzaar sales and the Company expects the declines to continue.
Worldwide sales of Propecia, a product for the treatment of male pattern hair loss, were $283 million in 2013, a decline of 33% compared with 2012 including a 6% unfavorable impact from foreign exchange. The decline was driven primarily by generic competition in the United States, as well as by lower sales in Japan due largely to the unfavorable effect of foreign exchange. The Company lost U.S. market exclusivity for Propecia in 2013 and multiple generics have entered the market. Accordingly, the Company is experiencing a significant decline in U.S. sales of Propecia and expects the decline to continue. Sales of Propecia declined 5% in 2012 to $424 million compared with 2011 driven by declines in Europe and the United States, partially offset by increases in the Asia Pacific region.
Global sales of Clarinex (marketed as Aerius in many countries outside the United States), a non-sedating antihistamine, declined 40% in 2013 to $235 million and decreased 37% in 2012 to $393 million driven by lower volumes in the United States and Europe as a result of generic competition. The Company anticipates that sales of Clarinex will continue to decline.

47

Global sales of Maxalt, a product for the acute treatment of migraine, fell 77% in 2013 to $149 million as compared with 2012 driven primarily by lower volumes in the United States due to generic competition. The patent that provided U.S. market exclusivity for Maxalt expired in December 2012 and the Company experienced a significant and rapid decline in U.S. Maxalt sales thereafter. In addition, the patents that provided market exclusivity for Maxalt expired in a number of major European markets in August 2013 and the Company is experiencing sales declines in those markets as well. Sales of Maxalt were $638 million in 2012, comparable with sales in 2011, reflecting higher sales in the United States driven by favorable pricing, offset by volume declines in Europe and Canada due to generic erosion.
Other products contained in Diversified Brands include among others, Primaxin, an anti-bacterial product; Zocor, a statin for modifying cholesterol; prescription Claritin, a treatment for seasonal outdoor allergies and year-round indoor allergies; Remeron, an antidepressant; and Proscar, a urology product for the treatment of symptomatic benign prostate enlargement.

Vaccines
The following discussion of vaccines does not include sales of vaccines sold in most major European markets through Sanofi Pasteur MSD (“SPMSD”), the Company’s joint venture with Sanofi Pasteur, the results of which are reflected in Equity income from affiliates (see “Selected Joint Venture and Affiliate Information” below). Supply sales to SPMSD, however, are included.
Merck’s sales of Gardasil, a vaccine to help prevent certain diseases caused by four types of HPV, grew 12% to $1.8 billion in 2013 compared with 2012 driven primarily by volume growth in the United States, reflecting continued uptake in both males and females, and volume growth in Latin America, partially offset by lower volumes in Japan. Sales in 2013 and 2012 included $37 million and $44 million, respectively, of purchases for the U.S. Centers for Disease Control and Prevention (“CDC”) Pediatric Vaccine Stockpile. On June 14, 2013, the Japanese Health Ministry issued an advisory to suspend active promotion of HPV vaccines. Accordingly, the Company recorded almost no sales of Gardasil in Japan in the second half of 2013. Merck’s sales of Gardasil rose 35% in 2012 to $1.6 billion compared with 2011 driven primarily by growth in the United States, reflecting continued uptake in males and higher government purchases for the CDC Pediatric Vaccine Stockpile, as well as growth in the emerging markets, particularly in Latin America and the Asia Pacific region, and in Japan. The Company is a party to certain third-party license agreements with respect to Gardasil (including a cross-license and settlement agreement with GlaxoSmithKline). As a result of these agreements, the Company pays royalties on worldwide Gardasil sales of 21% to 27% which vary by country and are included in Materials and production costs.
Merck’s sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $314 million in 2013, $61 million in 2012 and $34 million in 2011. Sales of ProQuad in 2012 and 2011 were affected by supply constraints. ProQuad became available again in the United States for ordering in October 2012.
Merck’s sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $684 million in 2013, $846 million in 2012 and $831 million in 2011. Merck’s sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, were $307 million in 2013, $365 million in 2012 and $337 million in 2011. Sales of Varivax and M‑M‑R II declined in 2013 due to the availability of ProQuad discussed above.
Merck’s sales of Zostavax, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $758 million in 2013, $651 million in 2012 and $332 million in 2011. Sales growth in 2013 as compared with 2012 was driven by higher demand in the United States and Canada, as well as by launches within the Asia Pacific region. The Company is continuing to launch Zostavax outside of the United States. Sales of Zostavax in 2011 were affected by supply issues.
Merck’s sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, grew 13% in 2013 to $653 million compared with 2012 driven primarily by volume growth in the emerging markets, as well as volume and price increases in the United States. Merck’s sales of Pneumovax 23 increased 17% in 2012 to $580 million due primarily to growth in the United States as a result of price increases and higher volumes, partially offset by declines in Japan.
Merck’s sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, grew 6% in 2013 to $636 million compared with 2012 reflecting higher pricing in the United States and volume growth

48

in Japan. Merck’s sales of RotaTeq declined 8% in 2012 to $601 million reflecting favorable public sector inventory fluctuations in 2011, partially offset by volume growth in the emerging markets and Japan in 2012.
Other Segments
The Company’s other segments are the Animal Health, Consumer Care and Alliances segments, which are not material for separate reporting. In January 2014, the Company announced that it was evaluating the respective roles of Merck’s Animal Health and Consumer Care businesses in the Company’s strategy for long-term value creation. The Company expects to complete the evaluation process and take action, if any, in 2014. The Company could reach different decisions about the two businesses.

Animal Health
Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. Animal Health sales are affected by competition and the frequent introduction of generic products. Global sales of Animal Health products were $3.4 billion in 2013, a decline of 1% compared with 2012 including a 2% unfavorable effect from foreign exchange. The sales decline reflects lower sales of ruminant products, primarily Zilmax, partially offset by growth in companion animal and poultry products. In August 2013, Merck Animal Health voluntarily suspended sales of Zilmax, a feed supplement for beef cattle, in the United States and Canada. The suspension of Zilmax unfavorably affected Animal Health sales by 2% in 2013. Sales of Animal Health products were $3.4 billion in 2012, an increase of 4% compared with 2011 including a 5% unfavorable effect from foreign exchange, driven by positive performance among ruminant, poultry, companion animal and swine products.

Consumer Care
Consumer Care products include over-the-counter, foot care and sun care products such as Claritin non-drowsy antihistamines; MiraLAX, for the relief of occasional constipation; Dr. Scholl’s foot care products; and Coppertone sun care products. Consumer Care product sales are affected by competition and consumer spending patterns. Global sales of Consumer Care products were $1.9 billion in 2013, a decline of 3% compared with 2012 including a 1% unfavorable effect from foreign exchange. The sales decline in 2013 resulted from the termination in China of certain Consumer Care distribution arrangements and a reversal of sales previously made to these distributors, together with associated termination costs. Excluding these items, Consumer Care global sales would have increased by 1% in 2013 compared with 2012, including a 1% unfavorable effect from foreign exchange, reflecting higher sales of women’s health products, partially offset by lower sales of foot care products. In 2013, the Company launched Oxytrol for Women, the first and only over-the-counter treatment for overactive bladder in women. Consumer care product sales grew 6% in 2012, including a 1% unfavorable effect from foreign exchange, to $2.0 billion reflecting higher sales of Dr. Scholl’s, Coppertone, MiraLAX and Claritin, partially offset by lower sales of Marvelon, an oral contraceptive, which is an over-the-counter product in China.
As discussed above, on December 31, 2013, the Company divested certain products to Aspen. Annual sales of these products reflected within Consumer Care were approximately $40 million.

Alliances
The alliances segment includes results from the Company’s relationship with AZLP. Revenue from AZLP, primarily relating to sales of Nexium and Prilosec, was $920 million in 2013, $915 million in 2012 and $1.2 billion in 2011. AstraZeneca has an option to buy Merck’s interest in a subsidiary, and through it, Merck’s interest in Nexium and Prilosec, exercisable in 2014, and the Company believes that it is likely that AstraZeneca will exercise that option (see “Selected Joint Venture and Affiliate Information” below). If AstraZeneca exercises its option, the Company will no longer record equity income from AZLP and supply sales to AZLP will terminate. In addition, the Company will recognize a non-cash pretax gain of approximately $700 million.



49

Costs, Expenses and Other
($ in millions)
2013
 
Change
 
2012
 
Change
 
2011
Materials and production
$
16,954

 
3
 %
 
$
16,446

 
-3
 %
 
$
16,871

Marketing and administrative
11,911

 
-7
 %
 
12,776

 
-7
 %
 
13,733

Research and development (1) 
7,503

 
-8
 %
 
8,168

 
-4
 %
 
8,467

Restructuring costs
1,709

 
*

 
664

 
-49
 %
 
1,306

Equity income from affiliates
(404
)
 
-37
 %
 
(642
)
 
5
 %
 
(610
)
Other (income) expense, net
815

 
-27
 %
 
1,116

 
18
 %
 
946

 
$
38,488

 
—
 %
 
$
38,528

 
-5
 %
 
$
40,713

* 100% or greater.
(1) 
Includes $279 million, $200 million and $587 million of IPR&D impairment charges in 2013, 2012 and 2011, respectively.

Materials and Production
Materials and production costs were $17.0 billion in 2013, $16.4 billion in 2012 and $16.9 billion in 2011. Costs include expenses for the amortization of intangible assets recorded in connection with mergers and acquisitions which totaled $4.7 billion in 2013 and $4.9 billion in each of 2012 and 2011. Additionally, expenses in 2011 include $89 million of amortization of purchase accounting adjustments to Schering-Plough’s inventories recognized as a result of the Merger. Costs in 2013 and 2011 include intangible asset impairment charges of $486 million and $118 million, respectively. The impairment charges in 2013 related to changes in cash flow assumptions for currently marked products Saphris/Sycrest and Rebetol (see “Pharmaceutical Segment” above). The Company may recognize additional non-cash impairment charges in the future related to product intangibles that were measured at fair value and capitalized in connection with mergers and acquisitions and such charges could be material. Additionally, costs in 2013 include a $41 million intangible asset impairment charge related to a licensing agreement. Also included in materials and production were costs associated with restructuring activities which amounted to $446 million, $188 million and $348 million in 2013, 2012 and 2011, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.
Gross margin was 61.5% in 2013 compared with 65.2% in 2012 and 64.9% in 2011. The amortization of intangible assets and purchase accounting adjustments to inventories, as well as the restructuring and impairment charges noted above reduced gross margin by 12.8 percentage points in 2013, 10.7 percentage points in 2012 and 11.4 percentage points in 2011. Excluding these impacts, the gross margin decline in 2013 as compared with 2012 was driven in part by the loss of Singulair sales as result of patent expiries in the United States in August 2012 and in major European markets in February 2013. In addition, generic competition in the United States for Maxalt, Temodar, Clarinex and Propecia coupled with changes in product mix and continued pricing pressures in mature markets also negatively affected gross margin in 2013. The gross margin decline in 2012 as compared with 2011 reflects the significant decline in Singulair sales as a result of the loss of U.S. market exclusivity, partially offset by improvements resulting from other changes in product mix. The Company anticipates that gross margin will continue to be negatively affected by the ongoing impacts of recent patent expiries and additional patent expiries that will occur in 2014.

Marketing and Administrative
Marketing and administrative expenses declined 7% in 2013 to $11.9 billion and decreased 7% in 2012 to $12.8 billion largely due to lower promotional spending and selling costs resulting from restructuring activities, and also reflecting the favorable effect of foreign exchange. Expenses for 2013, 2012 and 2011 include restructuring costs of $145 million, $90 million and $119 million, respectively, related primarily to accelerated depreciation for facilities to be closed or divested. Separation costs associated with sales force reductions have been incurred and are reflected in Restructuring costs as discussed below. Expenses also include $94 million, $272 million and $278 million of acquisition-related costs in 2013, 2012 and 2011, respectively, consisting of incremental, third-party integration costs related to the Merger, including costs related to legal entity and system integration. Acquisition-related costs for 2011 also consist of severance costs associated with the acquisition of Inspire Pharmaceuticals, Inc., which are not part of the Company’s formal restructuring programs.


50

Research and Development
Research and development expenses were $7.5 billion in 2013, $8.2 billion in 2012 and $8.5 billion in 2011. Research and development expenses are comprised of the costs directly incurred by Merck Research Laboratories (“MRL”), the Company’s research and development division that focuses on human health-related activities, which were approximately $4.2 billion in 2013 and $4.5 billion in each of 2012 and 2011. Also included in research and development expenses are costs incurred by other divisions in support of research and development activities, including depreciation, production and general and administrative, as well as licensing activity, certain costs from operating segments, including the Pharmaceutical, Animal Health and Consumer Care segments, which in the aggregate were $2.9 billion, $3.4 billion and $3.2 billion for 2013, 2012 and 2011, respectively. The decline in research and development costs in 2013 as compared with 2012 was due to targeted reductions and lower clinical development spend as a result of portfolio prioritization, as well as lower payments for licensing activity. Research and development expenses in 2013, 2012 and 2011 were favorably affected by cost savings resulting from restructuring activities.
Research and development expenses also include in-process research and development (“IPR&D”) impairment charges of $279 million, $200 million and $587 million in 2013, 2012 and 2011, respectively (see “Research and Development” below). The Company may recognize additional non-cash impairment charges in the future for the cancellation or delay of other pipeline programs that were measured at fair value and capitalized in connection with mergers and acquisitions and such charges could be material. Research and development expenses in 2013, 2012 and 2011 reflect $101 million, $57 million and $138 million, respectively, of accelerated depreciation and asset abandonment costs associated with restructuring activities. In 2012, the Company recorded an adjustment to accelerated depreciation costs included in research and development expenses revising previously recorded amounts for certain facilities.

Restructuring Costs
Restructuring costs, primarily representing separation and other related costs associated with restructuring activities, were $1.7 billion, $664 million and $1.3 billion in 2013, 2012 and 2011, respectively. Costs in 2013 include $898 million of costs related to the 2013 Restructuring Program. Nearly all of the remaining costs recorded in 2013 and the costs recorded in 2012 and 2011 related to the Merger Restructuring Program. In 2013, 2012 and 2011, separation costs of $1.4 billion, $489 million and $1.1 billion, respectively, were incurred associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. Merck eliminated approximately 6,070 positions in 2013 (of which 1,540 related to the 2013 Restructuring Program, 4,475 related to the Merger Restructuring Program and 55 related to the 2008 Restructuring Program), approximately 4,255 positions in 2012 (of which 3,975 related to the Merger Restructuring Program, 155 related to the 2008 Restructuring Program and 125 related to the legacy Schering-Plough program), and approximately 7,590 positions in 2011 (of which 6,880 related to the Merger Restructuring Program, 450 related to the 2008 Restructuring Program and 260 related to the legacy Schering-Plough program). These position eliminations are comprised of actual headcount reductions, and the elimination of contractors and vacant positions. Also included in restructuring costs are curtailment, settlement and termination charges associated with pension and other postretirement benefit plans, share-based compensation plan costs, as well as contract termination and shutdown costs. For segment reporting, restructuring costs are unallocated expenses. Additional costs associated with the Company’s restructuring activities are included in Materials and production, Marketing and administrative and Research and development as discussed above.

51

Equity Income from Affiliates
Equity income from affiliates, which reflects the performance of the Company’s joint ventures and other equity method affiliates, declined 37% in 2013 to $404 million compared with 2012 driven primarily by lower equity income from AZLP, partially offset by higher equity income from SPMSD. Equity income from affiliates increased 5% in 2012 to $642 million due primarily to higher equity income from AZLP. During 2011, the Company divested its interest in the Johnson & Johnson°Merck Consumer Pharmaceuticals Company (“JJMCP”) joint venture. (See “Selected Joint Venture and Affiliate Information” below.)

Other (Income) Expense, Net
Other (income) expense, net was $815 million of expense in 2013 compared with $1.1 billion of expense in 2012 reflecting a $493 million net charge in 2012 relating to the settlement of certain shareholder litigation (the ENHANCE Litigation”) (see Note 10 to the consolidated financial statements), partially offset by higher exchange losses in 2013 driven by $140 million of exchange losses related to a Venezuelan currency devaluation (see Note 14 to the consolidated financial statements), as well as higher interest expense in 2013 resulting in part from issuances of debt in September 2012 and May 2013. Other (income) expense, net was $1.1 billion of expense in 2012 compared with $946 million of expense in 2011 reflecting the $493 million net charge in 2012 relating to the settlement of the ENHANCE Litigation and gains recognized in 2011 of $136 million on the disposition of the Company’s interest in the JJMCP joint venture (see Note 8 to the consolidated financial statements) and $127 million on the sale of certain manufacturing facilities and related assets (see Note 4 to the consolidated financial statements), partially offset by a $500 million charge in 2011 related to the resolution of the arbitration proceeding involving the Company’s rights to market Remicade and Simponi and higher interest income in 2012.
Segment Profits
 
 
 
 
 
($ in millions)
2013
 
2012
 
2011
Pharmaceutical segment profits
$
22,983

 
$
25,852

 
$
25,617

Other non-reportable segment profits
3,094

 
3,163

 
2,995

Other
(20,532
)
 
(20,276
)
 
(21,278
)
Income before income taxes
$
5,545

 
$
8,739

 
$
7,334

Segment profits are comprised of segment sales less standard costs, certain operating expenses directly incurred by the segment, components of equity income or loss from affiliates and depreciation and amortization expenses. For internal management reporting presented to the chief operating decision maker, Merck does not allocate materials and production costs, other than standard costs, the majority of research and development expenses or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. Also excluded from the determination of segment profits are the amortization of purchase accounting adjustments and other acquisition-related costs, intangible asset impairment charges, restructuring costs, taxes paid at the joint venture level, a portion of equity income, other expenses from corporate and manufacturing cost centers and other miscellaneous income or expense. Additionally, segment profits do not reflect the charge related to the settlement of the ENHANCE Litigation recorded in 2012, the arbitration settlement charge, the gain on the divestiture of the Company’s interest in the JJMCP joint venture and a gain on the sale of certain manufacturing facilities and related assets recorded in 2011. All of these unallocated items are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales, divested products or businesses, and other supply sales.
Pharmaceutical segment profits declined 11% in 2013 driven primarily by the effects of the loss of market exclusivity for certain products, particularly Singulair. Pharmaceutical segment profits increased 1% in 2012 driven primarily by lower operating expenses mostly offset by the effects of the loss of U.S. market exclusivity for Singulair.


52

Taxes on Income
The effective income tax rates of 18.5% in 2013, 27.9% in 2012 and 12.8% in 2011 reflect the impacts of acquisition-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. The effective tax rate in 2013 reflects a net benefit of $165 million from the settlements of certain federal income tax issues, net benefits from reductions in tax reserves upon expiration of applicable statutes of limitations, the favorable impact of tax legislation enacted in the first quarter of 2013 that extended the R&D tax credit for both 2012 and 2013, as well as an out-of-period net tax benefit of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue (see Note 15 to the consolidated financial statements). The effective tax rate for 2012 also reflects the favorable impacts of a tax settlement with the Canada Revenue Agency (the “CRA”), the realization of foreign tax credits and the impact of a favorable ruling on a state tax matter. In addition, the 2012 effective tax rate reflects the unfavorable impact of the net charge recorded in connection with the settlement of the ENHANCE Litigation for which no tax benefit was recorded and does not reflect any impacts for the R&D tax credit, which expired on December 31, 2011. As a result of legislation passed in 2013 that extended the R&D tax credit, both the 2012 and 2013 R&D tax credits were recognized in 2013 as noted above. The effective tax rate for 2011 reflects a net favorable impact of approximately $700 million relating to the settlement of Merck’s 2002-2005 federal income tax audit, the favorable impact of certain foreign and state tax rate changes that resulted in a net $270 million reduction of deferred tax liabilities on intangibles established in purchase accounting, and the unfavorable impact of a $500 million charge related to the resolution of the arbitration proceeding involving the Company’s rights to market Remicade and Simponi.

Net Income and Earnings per Common Share
Net income attributable to Merck & Co., Inc. was $4.4 billion in 2013, $6.2 billion in 2012 and $6.3 billion in 2011. EPS was $1.47 in 2013, $2.00 in 2012 and $2.02 in 2011. The declines in net income and EPS in 2013 as compared with 2012 were due primarily to lower sales reflecting the loss of market exclusivity for certain products, particularly Singulair, as well as higher restructuring costs, intangible asset impairment charges and exchange losses, partially offset by the favorable impact of certain tax items and lower operating expenses. EPS in 2013 benefited from lower average shares outstanding due to the ASR program (see Note 11 to the consolidated financial statements). The decreases in net income and EPS in 2012 as compared with 2011 were due primarily to the net charge recorded in connection with the settlement of the ENHANCE Litigation, the effects of the loss of U.S. market exclusivity for Singulair in 2012 and the favorable impact of tax items in 2011, partially offset by lower marketing and administrative expenses, lower restructuring costs and lower intangible asset impairment charges in 2012 and the arbitration settlement charge recorded in 2011.

Non-GAAP Income and Non-GAAP EPS
Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance used by management that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items consist of acquisition-related costs, restructuring costs and certain other items. These excluded items are significant components in understanding and assessing financial performance. Therefore, the information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not in lieu of, net income and EPS prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Additionally, since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies.
Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes non-GAAP income and non-GAAP EPS and the performance of the Company is measured on this basis along with other performance metrics. Senior management’s annual compensation is derived in part using non-GAAP income and non-GAAP EPS.

53

A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:
($ in millions except per share amounts)
2013
 
2012
 
2011
Pretax income as reported under GAAP
$
5,545

 
$
8,739

 
$
7,334

Increase (decrease) for excluded items:
 
 
 
 
 
Acquisition-related costs
5,549

 
5,344

 
5,939

Restructuring costs
2,401

 
999

 
1,911

Other items:
 
 
 
 
 
Net charge related to settlement of ENHANCE Litigation
—

 
493

 
—

Arbitration settlement charge
—

 
—

 
500

Gain on disposition of interest in JJMCP joint venture
—

 
—

 
(136
)
Gain on sale of manufacturing facilities and related assets
—

 
—

 
(127
)
Other
(13
)
 
—

 
5

 
13,482

 
15,575

 
15,426

Taxes on income as reported under GAAP
1,028

 
2,440

 
942

Estimated tax benefit on excluded items
1,573

 
1,261

 
1,697

Net tax benefits from settlements of federal income tax issues
325

 
—

 
700

Tax benefit from foreign and state tax rate changes
—

 
—

 
270

 
2,926

 
3,701

 
3,609

Non-GAAP net income
10,556

 
11,874

 
11,817

Less: Net income attributable to noncontrolling interests
113

 
131

 
120

Non-GAAP net income attributable to Merck & Co., Inc.
$
10,443

 
$
11,743

 
$
11,697

EPS assuming dilution as reported under GAAP
$
1.47

 
$
2.00

 
$
2.02

EPS difference (1)
2.02

 
1.82

 
1.75

Non-GAAP EPS assuming dilution
$
3.49

 
$
3.82

 
$
3.77

(1) 
Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the applicable year.

Acquisition-Related Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with mergers and acquisitions. These amounts include the amortization of intangible assets and inventory step-up, as well as intangible asset impairment charges. Also excluded are incremental, third-party integration costs associated with the Merger, such as costs related to legal entity and system integration, as well as other costs associated with mergers and acquisitions, such as severance costs which are not part of the Company’s formal restructuring programs. These costs are excluded because management believes that these costs are not representative of ongoing normal business activities.

Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 3 to the consolidated financial statements). These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the site, based upon the anticipated date the site will be closed or divested, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs. The Company has undertaken restructurings of different types during the covered periods and, therefore, these charges should not be considered non-recurring; however, management excludes these amounts from non-GAAP income and non-GAAP EPS because it believes it is helpful for understanding the performance of the continuing business.

Certain Other Items
Non-GAAP income and non-GAAP EPS exclude certain other items. These items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature and generally represent items that, either as a result of their nature or magnitude, management would not anticipate that they would occur as part of the Company’s normal business on a regular basis.

54

Certain other items are comprised of the net charge recorded in connection with the settlement of the ENHANCE Litigation, the arbitration settlement charge, the gain on the disposition of the Company’s interest in the JJMCP joint venture and the gain associated with the sale of certain manufacturing facilities and related assets. Also excluded from non-GAAP income and non-GAAP EPS are tax benefits from the resolution of certain federal income tax issues.
Research and Development
A chart reflecting the Company’s current research pipeline as of February 21, 2014 is set forth in Item 1. “Business — Research and Development” above.

Research and Development Update
The Company currently has several candidates under regulatory review in the United States or internationally.
MK-5348, vorapaxar, is an investigational anti-thrombotic medicine under review by the FDA and the European Medicines Agency (the “EMA”). Merck is seeking approval of vorapaxar for the reduction of atherothrombotic events, when added to standard of care, in patients with a history of heart attack and no history of stroke or transient ischemic attack. In January 2014, the FDA’s Cardiovascular and Renal Drugs Advisory Committee recommended approval of vorapaxar. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines.
V503, the Company’s nine-valent HPV vaccine in development to help protect against certain HPV-related diseases, is under review by the FDA. V503 incorporates antigens against five additional cancer-causing HPV types as compared with Gardasil. The Company anticipates submitting a Marketing Authorization Application (“MAA”) to the EMA in the first half of 2014.
MK-8962, corifollitropin alfa injection, is an investigational fertility treatment under review by the FDA for controlled ovarian stimulation in women participating in assisted reproductive technology. If approved, corifollitropin alfa would be the first sustained follicular stimulant for use in a fertility treatment regimen in the United States. Merck’s corifollitropin alfa is currently approved in more than 50 markets outside the United States, including the EU.
MK-7243, Grastek, an investigational Timothy grass pollen allergy immunotherapy tablet (“AIT”), and MK-3641, Ragwitek, an investigational ragweed pollen AIT, are both under review by the FDA. MK-7243 and MK-3641 are investigational sublingual tablets designed to help treat the underlying cause of allergic rhinitis by generating an immune response to help protect allergic patients against effects triggered by the targeted allergen. Merck has partnered with ALK-Abello to develop its investigational sublingual allergy immunotherapy tablets for Timothy grass pollen, ragweed pollen and house dust mites in North America. In December 2013, the FDA’s Allergenic Products Advisory Committee had a positive discussion of MK-7243. In January 2014, the same Advisory Committee had a positive discussion of MK-3641. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines. Merck expects the FDA’s review for both MK-7243 and MK-3641 to be completed in the first half of 2014. In February 2014, the Company announced that Grastek received regulatory approval in Canada.
MK-4305, suvorexant, is an investigational insomnia medicine in a new class of medicines called orexin receptor antagonists for use in patients with difficulty falling or staying asleep. In July 2013, the Company announced that it had received a CRL from the FDA regarding the NDA for suvorexant. In the CRL, the FDA advised Merck that: (1) the efficacy of suvorexant has been established at doses of 10 mg to 40 mg in elderly and non-elderly adult patients; (2) 10 mg should be the starting dose for most patients and must be available before suvorexant can be approved; (3) 15 mg and 20 mg doses would be appropriate in patients in whom the 10 mg dose is well-tolerated but not effective; and (4), for patients taking concomitant moderate CYP3A4 inhibitors, a 5 mg dose would be necessary. In addition, the FDA determined that the safety data do not support the approval of suvorexant 30 mg and 40 mg. In February, 2014, the Company resubmitted its NDA to the FDA. As previously disclosed, both FDA approval and a separate scheduling determination by the U.S. Drug Enforcement Administration are required before Merck can introduce suvorexant in the United States. Insomnia is a condition characterized by difficulty falling asleep and/or staying asleep. The Company has submitted a new drug application for suvorexant to the health authorities in Japan and is continuing with plans to seek approval for suvorexant in other countries around the world.

55

MK-8616, sugammadex sodium injection, is an investigational agent for the reversal of neuromuscular blockade induced by rocuronium or vecuronium (neuromuscular blocking agents). Neuromuscular blockade is used in anesthesiology to induce muscle relaxation during surgery. In September 2013, Merck announced that it had received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection. The FDA’s letter raised concerns about operational aspects of a hypersensitivity study that the agency had requested in 2008. To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing an NDA resubmission with the FDA in 2014. Sugammadex sodium injection is approved and has been launched in many countries outside of the United States where it is marketed as Bridion.
MK-8109, vintafolide, is an investigational cancer candidate under review by the EMA. As part of an exclusive license agreement with Endocyte, Inc. (“Endocyte”), Merck is responsible for the development and worldwide commercialization of vintafolide in oncology. The EMA accepted the MAA filings for vintafolide and Endocyte’s investigational companion diagnostic imaging agent, etarfolatide, for the targeted treatment of patients with folate-receptor positive platinum-resistant ovarian cancer in combination with pegylated liposomal doxorubicin. Both vintafolide and etarfolatide have been granted orphan drug status by the EC. Vintafolide is in Phase 3 development in the United States.
MK-7009, vaniprevir, is an investigational, oral twice-daily protease inhibitor for the treatment of chronic hepatitis C virus infection under review in Japan.
In addition to the candidates under regulatory review, the Company has 12 drug candidates in Phase 3 development targeting a broad range of diseases. The Company anticipates filing an NDA or a BLA, as applicable, with the FDA with respect to several of these candidates in 2014.
MK-3475, an investigational anti-PD-1 immunotherapy, is currently being evaluated for the treatment of patients with advanced melanoma and other tumor types. In January 2014, the Company announced it has started a rolling submission to the FDA of a BLA for MK-3475 for patients with advanced melanoma who have previously been treated with ipilimumab. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Company expects to complete the application in the first half of 2014. In April 2013, Merck announced that MK-3475 received a Breakthrough Therapy designation for advanced melanoma from the FDA. The designation of an investigational drug as a Breakthrough Therapy is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.
The MK-3475 clinical development program also includes studies across a broad range of cancer types including: bladder, colorectal, gastric, head and neck, melanoma, non-small cell lung, renal, triple negative breast and hematological malignancies. In addition, the Company has announced four collaborations with other pharmaceutical companies to evaluate novel combination regimens with MK-3475.
MK-0822, odanacatib, is an oral, once-weekly investigational treatment for patients with osteoporosis. Osteoporosis is a disease that reduces bone density and strength and results in an increased risk of bone fractures. Odanacatib is a cathepsin K inhibitor that selectively inhibits the cathepsin K enzyme. Cathepsin K is known to play a central role in the function of osteoclasts, which are cells that break down existing bone tissue, particularly the protein components of bone. Inhibition of cathepsin K is a novel approach to the treatment of osteoporosis. In July 2012, Merck announced an update on the Phase 3 trial assessing fracture risk reduction with odanacatib. The independent Data Monitoring Committee (the “DMC”) for the study completed its first planned interim analysis for efficacy and recommended that the study be closed early due to robust efficacy and a favorable benefit-risk profile. The DMC noted that safety issues remain in certain selected areas and made recommendations with respect to following up on them. On February 1, 2013, Merck announced that it had recently received and was reviewing safety and efficacy data from the Phase 3 trial. As a result of its review of this data, the Company concluded that review of additional data from the previously planned, ongoing extension study was warranted and that filing an application for approval with the FDA should be delayed. As previously announced, the Company is conducting a blinded extension of the trial in approximately 8,200 women, which will provide additional safety and efficacy data. Merck continues to anticipate that it will file applications for approval of odanacatib in 2014 with additional data from the extension trial. The Company continues to believe that odanacatib will have the potential to address unmet medical needs in patients with osteoporosis.

56

V419 is an investigational hexavalent pediatric combination vaccine, which contains components of current vaccines, designed to help protect against six potentially serious diseases — diphtheria, tetanus, whooping cough (Bordetella pertussis), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b, and hepatitis B — that is being developed in collaboration with Sanofi-Pasteur. The Company continues to anticipate filing a BLA for V419 with the FDA in 2014.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (“CETP”) that is being investigated in lipid management to raise HDL-C and reduce LDL-C. Anacetrapib is being evaluated in a large, event-driven cardiovascular clinical outcomes trial REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification) involving patients with preexisting vascular disease that is predicted to be completed in 2017.
MK-8931 is Merck’s novel investigational oral ß-amyloid precursor protein site-cleaving enzyme (“BACE”) inhibitor for the treatment of Alzheimer’s disease being evaluated in a Phase 2/3 clinical trial (EPOCH) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with mild-to-moderate Alzheimer’s disease. Based on a positive DMC recommendation made following a planned analysis of interim safety data that included a safety cohort of 200 patients treated with MK-8931 for at least three months, the Company recently began enrolling patients in the Phase 3 portion of the trial, as well as a new Phase 3 trial (APECS) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease.
MK-3415A, actoxumab/bezlotoxumab, an investigational candidate for the prevention of Clostridium difficile infection recurrence, is a combination of two monoclonal antibodies used to treat patients with a single infusion.
MK-3102, omarigliptin, is an investigational once-weekly DPP-4 inhibitor in development for the treatment of type 2 diabetes.
MK-8835, ertugliflozin, is an investigational oral sodium glucose cotransporter (“SGLT2”) inhibitor being evaluated for the treatment of type 2 diabetes. During 2013, the Company entered into a worldwide (except Japan) collaboration agreement with Pfizer Inc. (“Pfizer”) for the development and commercialization of ertugliflozin as discussed below.
MK-1293 is an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes. In February 2014, the Company announced that it had expanded its collaboration with Samsung Bioepis to develop, manufacture and commercialize MK-1293. Under the terms of the agreement, the companies will collaborate on clinical development, regulatory filings and manufacturing. If approved, Merck will commercialize this candidate.
V212 is an inactivated varicella zoster virus vaccine in development for the prevention of herpes zoster. The Company is conducting two Phase 3 trials, one in autologous hematopoietic cell transplant patients and the other in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies.
MK-3222, tildrakizumab, is an anti-interleukin-23 monoclonal antibody candidate being investigated for the treatment of psoriasis.
MK-5172/MK-8742, an all-oral combination regimen in Phase 2 development consisting of MK-5172, an investigational hepatitis C virus NS3/4A protease inhibitor, and MK-8742, an investigational hepatitis C virus NS5A replication complex inhibitor, was granted a Breakthrough Therapy designation in October 2013 by the FDA for treatment of chronic hepatitis C virus infection. MK-5172 and MK-8742 are being investigated in a broad clinical program that includes studies in patients with multiple hepatitis C virus genotypes who are treatment-naïve, treatment failures as well as other important hepatitis C virus subpopulations such as patients with cirrhosis and those co-infected with HIV.
MK-8175A, NOMAC/E2, which is being marketed as Zoely in the EU, is an investigational oral contraceptive for use by women to prevent pregnancy. In November 2011, Merck received a CRL from the FDA for NOMAC/E2. Merck has made the decision to discontinue the Phase 3 clinical trial for NOMAC/E2 being conducted in the United States. This decision is not based on any new safety or efficacy findings. 
In May 2013, the Company provided an update on the clinical program for preladenant, Merck’s investigational adenosine A2A receptor antagonist for the treatment of Parkinson’s disease. An initial review of data

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from three separate Phase 3 trials did not provide evidence of efficacy for preladenant compared with placebo. Based on these results, Merck has taken steps to discontinue the extension phases of these studies and no longer plans to pursue regulatory filings for preladenant. The decision to discontinue these studies was not based on any safety finding. The Company recorded an impairment charge of $181 million in 2013 related to the discontinuation of the clinical development program for preladenant.
The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. Further, Merck has moved to diversify its portfolio through a collaboration on the development of biosimilars, which have the potential to harness the market opportunity presented by biological medicine patent expiries by delivering high quality biosimilars to enhance access for patients worldwide. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a renewed focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company is evaluating certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, insomnia, neurodegenerative diseases, osteoporosis, respiratory diseases and women’s health.

In-Process Research and Development
In connection with mergers and acquisitions, the Company has recorded the fair value of incomplete research projects which, at the time of acquisition, had not yet reached technological feasibility. At December 31, 2013, the balance of IPR&D was $1.9 billion. Some of the more significant projects in late-stage development include vorapaxar, the Company’s BACE inhibitor, sugammadex sodium injection and the AIT programs discussed above.
During 2013, 2012 and 2011, approximately $346 million, $78 million and $666 million, respectively, of IPR&D projects received marketing approval in a major market and the Company began amortizing these assets based on their estimated useful lives.
All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates. The time periods to receive approvals from the FDA and other regulatory agencies are subject to uncertainty. Significant delays in the approval process, or the Company’s failure to obtain approval at all, would delay or prevent the Company from realizing revenues from these products. Additionally, if certain of the IPR&D programs fail or are abandoned during development, then the Company will not realize the future cash flows it has estimated and recorded as IPR&D as of the acquisition date, and the Company may also not recover the research and development expenditures made since the acquisition to further develop such program. If such circumstances were to occur, the Company’s future operating results could be adversely affected and the Company may recognize impairment charges and such charges could be material.
During 2013, the Company recorded $279 million of IPR&D impairment charges within Research and development expenses. Of this amount, $181 million related to the write-off of the intangible asset associated with preladenant as a result of the discontinuation of the clinical development program for this compound. In addition, the Company recorded impairment charges resulting from changes in cash flow assumptions for certain compounds, as well as for pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use in the period. During 2012, the Company recorded $200 million of IPR&D impairment charges primarily for pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use during the period. During 2011, the Company recorded $587 million of IPR&D impairment charges primarily for

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pipeline programs that were abandoned and determined to have no alternative use, as well as for expected delays in the launch timing or changes in the cash flow assumptions for certain compounds. In addition, the impairment charges in 2011 related to pipeline programs that had previously been deprioritized and were either deemed to have no alternative use during the period or were out-licensed to a third party for consideration that was less than the related asset’s carrying value.
Additional research and development will be required before any of the remaining programs reach technological feasibility. The costs to complete the research projects will depend on whether the projects are brought to their final stages of development and are ultimately submitted to the FDA or other regulatory agencies for approval. As of December 31, 2013, the estimated costs to complete projects acquired in connection with mergers and acquisitions in Phase 3 development for human health and the analogous stage of development for animal health were approximately $1.2 billion.

Acquisitions, Divestitures, Research Collaborations and License Agreements
Merck continues to remain focused on pursuing opportunities that have the potential to drive both near- and long-term growth. During 2013, the Company completed transactions across a broad range of therapeutic categories. Merck is actively monitoring the landscape for growth opportunities that meet the Company’s strategic criteria.
In April 2013, Merck and Pfizer announced that they had entered into a worldwide (except Japan) collaboration agreement for the development and commercialization of Pfizer’s ertugliflozin, an investigational oral sodium glucose cotransporter (“SGLT2”) inhibitor being evaluated for the treatment of type 2 diabetes. The Company has initiated Phase 3 clinical trials for ertugliflozin with Pfizer. Under the terms of the agreement, Merck and Pfizer will collaborate on the clinical development and commercialization of ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and with Januvia (sitagliptin) tablets. Merck will continue to retain the rights to its existing portfolio of sitagliptin-containing products. Through the end of 2013, Merck recorded research and development expenses of $125 million for upfront and milestone payments made to Pfizer. Pfizer will be eligible for additional payments associated with the achievement of pre-specified future clinical, regulatory and commercial milestones. The companies will share potential revenues and certain costs 60% to Merck and 40% to Pfizer. Each party will have certain manufacturing and supply obligations. The Company and Pfizer each have the right to terminate the agreement due to a material, uncured breach by, or insolvency of, the other party, or in the event of a safety issue. Pfizer has the right to terminate the agreement upon 12 months notice at any time following the first anniversary of the first commercial sale of a collaboration product, but must assign all rights to ertugliflozin to Merck. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of ertugliflozin and certain payment obligations.
In September 2013, Merck and AstraZeneca announced a worldwide out-licensing agreement for Merck’s oral small molecule inhibitor of WEE1 kinase (MK-1775). MK-1775 is currently being evaluated in Phase 2a clinical studies in combination with standard-of-care therapies for the treatment of patients with certain types of ovarian cancer. Under the terms of the agreement, AstraZeneca paid Merck a $50 million upfront fee, which the Company recorded as revenue. In addition, Merck will be eligible to receive future payments tied to development and regulatory milestones, plus sales-related payments and tiered royalties. AstraZeneca will be responsible for all future clinical development, manufacturing and marketing.
In January 2014, the Company entered into an agreement to divest its Sirna Therapeutics, Inc. subsidiary and related RNAi technology assets to Alnylam Pharmaceuticals, Inc. (“Alnylam”). Under the terms of the agreement, the consideration to be paid by Alnylam to Merck will consist of $25 million in cash and 2,520,044 shares of Alnylam common stock (valued at approximately $165 million at the time of the agreement). In addition, Merck is eligible to receive up to $115 million in developmental and sales milestone payments, as well as single-digit royalties associated with certain preclinical candidates. The transaction is subject to customary closing conditions and is expected to close during the first quarter of 2014.



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Selected Joint Venture and Affiliate Information
To expand its research base and realize synergies from combining capabilities, opportunities and assets, in previous years Merck has formed a number of joint ventures.

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 including Prilosec, the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.
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.
While maintaining a 1% limited partner interest in AZLP, Merck has consent and protective rights intended to preserve its business and economic interests, including restrictions on the power of the general partner to make certain distributions or dispositions. Furthermore, in limited events of default, additional rights will be granted to the Company, including powers to direct the actions of, or remove and replace, the Partnership’s chief executive officer and chief financial officer. Merck earns ongoing revenue based on sales of KBI products and such revenue was $920 million, $915 million and 1.2 billion in 2013, 2012 and 2011, respectively, primarily relating to sales of Nexium, as well as Prilosec. In addition, Merck earns certain Partnership returns which are recorded in Equity income from affiliates. Such returns include 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. These returns aggregated $352 million, $621 million and $574 million in 2013, 2012 and 2011, respectively.
In 2014, AstraZeneca has the option to purchase Merck’s interest in KBI based in part on the value of Merck’s interest in Nexium and Prilosec. AstraZeneca’s option is exercisable between March 1, 2014 and April 30, 2014. If AstraZeneca chooses to exercise this option, the closing date is expected to be June 30, 2014. Under the amended agreement, AstraZeneca will make a payment to Merck upon closing of $327 million, reflecting an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018. The exercise price will also include an additional amount equal to a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. The Company believes that it is likely that AstraZeneca will exercise its option in 2014. If AstraZeneca exercises its option, the Company will no longer record equity income from AZLP and supply sales to AZLP will terminate. In addition, the Company will recognize a non-cash pretax gain of approximately $700 million.

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.

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Sales of joint venture products were as follows:
($ in millions)
2013
 
2012
 
2011
Gardasil
$
291

 
$
264

 
$
253

Influenza vaccines
162

 
161

 
183

Other viral vaccines
104

 
107

 
105

Zostavax
68

 
—

 
—

RotaTeq
55

 
47

 
44

Hepatitis vaccines
31

 
31

 
39

Other vaccines
453

 
474

 
486

 
$
1,164

 
$
1,084

 
$
1,110

Johnson & Johnson°Merck Consumer Pharmaceuticals Company
In 2011, Merck sold its 50% interest in the JJMCP joint venture to J&J. The venture between Merck and J&J was formed in 1989 to develop, manufacture, market and distribute certain over-the-counter consumer products in the United States and Canada. Merck received a one-time payment of $175 million and recognized a pretax gain of $136 million in 2011 reflected in Other (income) expense, net. The partnership assets also included a manufacturing facility. Sales of products marketed by the joint venture were $62 million for the period from January 1, 2011 until the September 29, 2011 divestiture date.
Capital Expenditures
Capital expenditures were $1.5 billion in 2013, $2.0 billion in 2012 and $1.7 billion in 2011. Expenditures in the United States were $902 million in 2013, $1.3 billion in 2012 and $1.2 billion in 2011.
Depreciation expense was $2.2 billion in 2013, $2.0 billion in 2012 and $2.4 billion in 2011 of which $1.5 billion, $1.3 billion and $1.4 billion, respectively, applied to locations in the United States. Total depreciation expense in 2013, 2012 and 2011 included accelerated depreciation of $577 million, $235 million and $589 million, respectively, associated with restructuring activities (see Note 3 to the consolidated financial statements).
Analysis of Liquidity and Capital Resources
Merck’s strong financial profile enables it to fully fund research and development, focus on external alliances, support in-line products and maximize upcoming launches while providing significant cash returns to shareholders.
Selected Data
 
 
 
 
 
($ in millions)
2013
 
2012
 
2011
Working capital
$