10-K 1 mrk1231201710k.htm 2017 FORM 10-K Document
As filed with the Securities and Exchange Commission on February 27, 2018
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________________________
FORM 10-K
(MARK ONE)
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the Fiscal Year Ended December 31, 2017
 
 
or
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from                  to                 

Commission File No. 1-6571
_________________________________
Merck & Co., Inc.
2000 Galloping Hill Road
Kenilworth, N. J. 07033
(908) 740-4000
Incorporated in New Jersey
 
I.R.S. Employer
Identification No. 22-1918501
Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on which Registered
Common Stock ($0.50 par value)
 
New York Stock Exchange
1.125% Notes due 2021
 
New York Stock Exchange
0.500% Notes due 2024
 
New York Stock Exchange
1.875% Notes due 2026
 
New York Stock Exchange
2.500% Notes due 2034
 
New York Stock Exchange
1.375% Notes due 2036
 
New York Stock Exchange
Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2018: 2,696,190,502.
Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2017 based on closing price on June 30, 2017: $174,700,000,000.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes        No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes        No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes        No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes        No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes        No  
Documents Incorporated by Reference:
Document
 
Part of Form 10-K
Proxy Statement for the Annual Meeting of Shareholders to be held May 22, 2018, to be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report
 
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.
 
 
 
Item 16.
 



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 and animal health products. The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable segment.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. 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 an Animal Health segment that discovers, develops, manufactures and markets animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. The Company was incorporated in New Jersey in 1970.
For financial information and other information about the Company’s segments, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” below.
All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted. All other trademarks or services marks are those of their respective owners.
Product Sales
Total Company sales, including sales of the Company’s top pharmaceutical products, as well as total sales of animal health products, were as follows:
($ in millions)
2017
 
2016
 
2015
Total Sales
$
40,122

 
$
39,807

 
$
39,498

Pharmaceutical
35,390

 
35,151

 
34,782

Januvia/Janumet
5,896

 
6,109

 
6,014

Keytruda
3,809

 
1,402

 
566

Gardasil/Gardasil 9
2,308

 
2,173

 
1,908

Zetia/Vytorin
2,095

 
3,701

 
3,777

ProQuad/M-M-R II/Varivax
1,676

 
1,640

 
1,505

Zepatier
1,660

 
555

 

Isentress/Isentress HD
1,204

 
1,387

 
1,511

Remicade
837

 
1,268

 
1,794

Pneumovax 23
821

 
641

 
542

Simponi
819

 
766

 
690

Animal Health
3,875

 
3,478

 
3,331

Other Revenues(1)
857

 
1,178

 
1,385

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

1


Pharmaceutical
The Company’s pharmaceutical products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Certain of the products within the Company’s franchises are as follows:
Primary Care and Women’s Health
Cardiovascular: Zetia (ezetimibe) (marketed as Ezetrol in most countries outside the United States); Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States); and Atozet (ezetimibe and atorvastatin) (marketed in certain countries outside of the United States), cholesterol modifying medicines; and Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary arterial hypertension.
Diabetes: Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of type 2 diabetes.
General Medicine and Women’s Health: NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant/Nexplanon (etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive implant; and Follistim AQ (follitropin beta injection) (marketed as Puregon in most countries outside the United States), a fertility treatment.
Hospital and Specialty
Hepatitis: Zepatier (elbasvir and grazoprevir) for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with ribavirin in certain patient populations.
HIV: Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection.
Hospital Acute Care: Bridion (sugammadex) Injection, a medication for the reversal of two types of neuromuscular blocking agents used during surgery; Noxafil (posaconazole) for the prevention of invasive fungal infections; Invanz (ertapenem sodium) for the treatment of certain infections; Cancidas (caspofungin acetate), an anti-fungal product; Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections or bacteremia, when caused by designated susceptible organisms; and Primaxin (imipenem and cilastatin sodium), an anti-bacterial product.
Immunology: Remicade (infliximab), a treatment for inflammatory diseases; and Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases, which the Company markets in Europe, Russia and Turkey.
Oncology
Keytruda (pembrolizumab), the Company’s anti-PD-1 (programmed death receptor-1) therapy, as monotherapy for the treatment of certain patients with non-small-cell lunch cancer (NSCLC), melanoma, classical Hodgkin Lymphoma (cHL), urothelial carcinoma, head and neck squamous cell carcinoma (HNSCC), gastric or gastroesophageal junction adenocarcinoma, and microsatellite instability-high (MSI-H) or mismatch repair deficient cancer, and in combination with pemetrexed and carboplatin in certain patients with NSCLC; Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting; and Temodar (temozolomide) (marketed as Temodal outside the United States), a treatment for certain types of brain tumors.

Diversified Brands
Respiratory: Singulair (montelukast), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis; Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms; and Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate), a combination medicine for the treatment of asthma.
Other: Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), treatments for hypertension; Arcoxia (etoricoxib) for the treatment of arthritis and pain, which the Company markets outside the United States; and Fosamax (alendronate sodium) (marketed as Fosamac in Japan) for the treatment and prevention of osteoporosis.

2


Vaccines
Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), vaccines to help prevent certain diseases caused by certain types of human papillomavirus (HPV); ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella; M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella); Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease; RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children; and Zostavax (Zoster Vaccine Live), a vaccine to help prevent shingles (herpes zoster).
Animal Health
The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. Principal products in this segment include:
Livestock Products: Nuflor (Florfenicol) antibiotic range for use in cattle and swine; Bovilis/Vista vaccine lines for infectious diseases in cattle; Banamine (Flunixin meglumine) bovine and swine anti-inflammatory; Estrumate (cloprostenol sodium) for the treatment of fertility disorders in cattle; Matrix (altrenogest) fertility management for swine; Resflor (florfenicol and flunixin meglumine), a combination broad-spectrum antibiotic and non-steroidal anti-inflammatory drug for bovine respiratory disease; Zuprevo (Tildipirosin) for bovine respiratory disease; Zilmax (zilpaterol hydrochloride) and Revalor (trenbolone acetate and estradiol) to improve production efficiencies in beef cattle; Safe-Guard (fenbendazole) de-wormer for cattle; M+Pac (Mycoplasma Hyopneumoniae Bacterin) swine pneumonia vaccine; and Porcilis (Lawsonia intracellularis baterin) and Circumvent (Porcine Circovirus Vaccine, Type 2, Killed Baculovirus Vector) vaccine lines for infectious diseases in swine.
Poultry Products: Nobilis/Innovax (Live Marek’s Disease Vector), vaccine lines for poultry; Paracox and Coccivac coccidiosis vaccines and Exzolt, a systemic treatment for poultry red mite infestations.
Companion Animal Products: Bravecto (fluralaner), a line of oral and topical products that kills fleas and ticks in dogs and cats for up to 12 weeks; Nobivac vaccine lines for flexible dog and cat vaccination; Otomax (Gentamicin sulfate, USP; Betamethasone valerate USP; and Clotrimazole USP ointment)/Mometamax (Gentamicin sulfate, USP, Mometasone Furoate Monohydrate and Clotrimazole, USP, Otic Suspension)/Posatex (Orbifloxacin, Mometasone Furoate Monohydrate and Posaconazole, Suspension) ear ointments for acute and chronic otitis; Caninsulin/Vetsulin (porcine insulin zinc suspension) diabetes mellitus treatment for dogs and cats; Panacur (fenbendazole)/Safeguard (fenbendazole) broad-spectrum anthelmintic (de-wormer) for use in many animals; Regumate (altrenogest) fertility management for horses; Prestige vaccine line for horses; and Activyl (Indoxacrb)/Scalibor (Deltamethrin)/Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.
Aquaculture Products: Slice (Emamectin benzoate) parasiticide for sea lice in salmon; Aquavac (Avirulent Live Culture)/Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor (Florfenicol) antibiotic for farm-raised fish.
For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

3



2017 Product Approvals

Set forth below is a summary of significant product approvals received by the Company in 2017.
Product
Date
Approval
Keytruda
December 2017
Japanese Ministry of Health, Labour and Welfare approved Keytruda for the treatment of patients with radically unresectable urothelial carcinoma who progressed after cancer chemotherapy.
September 2017
The U.S. Food and Drug Administration (FDA) approved Keytruda for previously treated patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction cancer whose tumors express PD-L1.
September 2017
The European Commission (EC) approved Keytruda for the treatment of certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer.
May 2017
FDA approved Keytruda for the treatment of adult and pediatric patients with previously treated unresectable or metastatic, microsatellite instability-high (MSI-H) or mismatch repair deficient, solid tumors.
May 2017
FDA approved Keytruda for the treatment of certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer.
May 2017
FDA approved Keytruda in combination with pemetrexed and carboplatin for the first-line treatment of patients with metastatic nonsquamous NSCLC.
May 2017
EC approved Keytruda for the treatment of adult patients with relapsed or refractory classical Hodgkin Lymphoma (cHL) who have failed autologous stem cell transplant (ASCT) and brentuximab vedotin (BV), or who are transplant-eligible and have failed BV.
March 2017
FDA approved Keytruda for the treatment of adult and pediatric patients with refractory cHL, or who have relapsed after three or more prior lines of therapy.
January 2017
EC approved Keytruda for the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression with no EGFR or ALK positive tumor mutations.
Lynparza(1)
August 2017
FDA approved the oral poly (ADP-ribose) polymerase (PARP) inhibitor, Lynparza (olaparib), as follows:
• New use of Lynparza as a maintenance treatment for recurrent, epithelial ovarian, fallopian tube or primary peritoneal adult cancer who are in response to platinum-based chemotherapy, regardless of BRCA status;
• New use of Lynparza tablets (2 tablets twice daily) as opposed to capsules (8 capsules twice daily);
• Lynparza tablets also now indicated for the use in patients with deleterious or suspected deleterious germline BRCA-mutated advanced ovarian cancer, who have been treated with three or more prior lines of chemotherapy.
Isentress
November 2017
FDA approved Isentress for use in combination with other antiretroviral agents for the treatment of HIV-1 in neonates - newborn patients from birth to four weeks of age - weighing at least 2 kg.

4


Isentress HD
July 2017
EC approved Isentress 600 mg film-coated tablets, in combination with other anti-retroviral medicinal products, as a once-daily treatment of HIV-1 infection in patients who are treatment-naïve or who are virologically suppressed on an initial regimen of Isentress 400 mg twice daily.
May 2017
FDA approved Isentress HD, a once-daily dose of Isentress, in combination with other antiretroviral agents, for the treatment of HIV-1 infection patients who are treatment-naïve or whose virus has been suppressed on an initial regimen of Isentress 400 mg given twice daily.
Prevymis
November 2017
FDA approved Prevymis (letermovir) for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients [R+] of an allogeneic hematopoietic stem cell transplant (HSCT).
Steglatro/
Steglujan/
Segluromet(2)
December 2017
FDA approved Steglatro (ertugliflozin) tablets, an oral sodium-glucose cotransporter 2 (SGLT2) inhibitor, the fixed-dose combination Steglujan (ertugliflozin and sitagliptin) tablets, and the fixed-dose combination Segluromet (ertugliflozin and metformin hydrochloride) for the treatment of type 2 diabetes. 
(1) 
In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types.
(2) 
In 2013, Merck and Pfizer Inc. announced that they entered into a worldwide collaboration, except Japan, for the co-development and co-promotion of ertugliflozin.
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry in general are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, generic drug manufacturers and animal health care companies. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent rights are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the payment of royalties or in the recognition of an impairment charge with respect to intangible assets associated with certain products. Competitive pressures have intensified as pressures in the industry have grown.
Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as licensing arrangements and collaborations, and has been refining its sales and marketing efforts to further address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements, even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the Company’s products in that therapeutic category.
The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by competitors.

5


Health Care Environment and Government Regulation
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, the United States enacted major health care reform legislation in 2010 (the Patient Protection and Affordable Care Act (ACA)). Various insurance market reforms have since advanced and state and federal insurance exchanges were launched in 2014. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $385 million, $415 million and $550 million was recorded by Merck as a reduction to revenue in 2017, 2016 and 2015, respectively, related to the donut hole provision. Beginning in 2019, the 50% point of service discount will increase to a 70% point of service discount in the coverage gap, as a result of the Balanced Budget Act of 2018. In addition, the 70% point of service discount will be extended to biosimilar products. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $4.0 billion in 2017 and will increase to $4.1 billion in 2018. The annual fee will decline to $2.8 billion in 2019 and is currently planned to remain at that amount thereafter. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. The Company recorded $210 million, $193 million and $173 million of costs within Marketing and administrative expenses in 2017, 2016 and 2015, respectively, for the annual health care reform fee. In February 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The Company will evaluate the financial impact of these two elements when they become effective.
There is significant uncertainty about the future of the ACA in particular and health care laws in general in the United States. The Company is participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of operations, financial condition or business.
Also, during 2016, the Vermont legislature passed a pharmaceutical cost transparency law. The law requires manufacturers identified by the Vermont Green Mountain Care Board to report certain product price information to the Vermont Attorney General. The Attorney General is then required to submit a report to the legislature. During 2017, Nevada and California passed similar price transparency bills requiring manufacturers to disclose certain pricing information and to provide advance notification of price increases. A number of other states have introduced legislation of this kind and the Company expects that states will continue their focus on pharmaceutical price transparency. The extent to which these proposals will pass into law is unknown at this time.
The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care organizations, federal and state exchanges, and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and the ACA.
Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries,

6


could result in further pricing pressures. As an example, health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative proposals that have been debated but not enacted. These types of revenue generating or cost saving proposals include additional direct price controls in the Medicare prescription drug program (Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reduction proposals that would directly or indirectly affect the Company.
In the U.S. private sector, consolidation and integration among health care providers is a major factor in the competitive marketplace for pharmaceutical products. Health plans and pharmacy benefit managers have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. Private third-party insurers, as well as governments, increasingly employ formularies to control costs by negotiating discounted prices in exchange for formulary inclusion. Failure to obtain timely or adequate pricing or formulary placement for Merck’s products or obtaining such pricing or placement at unfavorable pricing could adversely impact revenue. In addition to formulary tier co-pay differentials, private health insurance companies and self-insured employers have been raising co-payments required from beneficiaries, particularly for branded pharmaceuticals and biotechnology products. Private health insurance companies also are increasingly imposing utilization management tools, such as clinical protocols, requiring prior authorization for a branded product if a generic product is available or requiring the patient to first fail on one or more generic products before permitting access to a branded medicine. These same utilization management tools are also used in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. As the U.S. payer market concentrates further and as more drugs become available in generic form, pharmaceutical companies may face greater pricing pressure from private third-party payers.
In order to provide information about the Company’s pricing practices, the Company recently posted  on its website its Pricing Action Transparency Report for the United States for the years 2010 - 2017. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010.  The report shows that the Company’s average annual net price increases (after taking sales deductions such as rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits from 2010 - 2016. In 2017, the average net price across the Company’s portfolio declined by 1.9%, reflecting specific in-year dynamics, including the impact of loss of patent protection for three major Merck medicines. Additionally, the weighted average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of the ACA. In 2017, the Company’s gross U.S. sales were reduced by 45.1% as a result of rebates, discounts and returns.
Efforts toward health care cost containment also remain intense in European countries. The Company faces competitive pricing pressure resulting from generic and biosimilar drugs. In addition, a majority of countries in Europe attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, including the Company’s. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines, which will occur again in 2018. Furthermore, the government can order repricings for classes of drugs if it determines that it is appropriate under applicable rules.
Certain markets outside of the United States have also implemented other cost management strategies, such as health technology assessments (HTA), which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement. In the United States, HTAs are also being used by government and private payers.
The Company’s focus on emerging markets has continued. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures, such as compulsory licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access challenges will continue in 2018 to varying degrees in the emerging markets.

7


Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care, including medicines.
Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health care environment and market forces.
The pharmaceutical industry is also subject to regulation by regional, country, state and local agencies around the world focused on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement.
Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription pharmaceuticals. In some cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States. At the same time, the FDA has committed to expediting the development and review of products bearing the “breakthrough therapy” designation, which has accelerated the regulatory review process for medicines with this designation.
The European Union (EU) has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. The Company’s policies and procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company’s business.
The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment. (See “Research and Development” below for a discussion of the regulatory approval process.)
Access to Medicines
As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that it has an important role to play in helping to improve access to its products around the world. The Company’s efforts in this regard are wide-ranging and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines. In 2011, Merck launched “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Merck has also provided funds to the Merck Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health.

8


Privacy and Data Protection
The Company is subject to a significant number of privacy and data protection laws and regulations globally, many of which place restrictions on the Company’s ability to transfer, access and use personal data across its business. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the Company’s business, including a new EU General Data Protection Regulation, which will become effective in 2018 and impose penalties up to 4% of global revenue, additional laws and regulations enacted in the United States, Europe, Asia and Latin America, increased enforcement and litigation activity in the United States and other developed markets, and increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global privacy program to manage these evolving risks which has been certified as compliant with and approved by the Asia Pacific Economic Cooperation Cross-Border Privacy Rules System, the EU-U.S. Privacy Shield Program, and the Binding Corporate Rules in the EU.
Distribution
The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccines are sold primarily to physicians, wholesalers, physician distributors and government entities. The Company’s professional representatives communicate the effectiveness, safety and value of the Company’s pharmaceutical and vaccine products to health care professionals in private practice, group practices, hospitals and managed care organizations. The Company sells its animal health products to veterinarians, distributors and animal producers.
Raw Materials
Raw materials and supplies, which are generally available from multiple sources, are purchased worldwide and are normally available in quantities adequate to meet the needs of the Company’s business.
Patents, Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of its products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products or the uses of products. Protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.
The Food and Drug Administration Modernization Act includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. Current U.S. patent law provides additional patent term for periods when the patented product was under regulatory review by the FDA. The EU also provides an additional six months of pediatric market exclusivity attached to a product’s Supplementary Protection Certificate (SPC). Japan provides the additional term for pediatric studies attached to market exclusivity unrelated to patent rights.

9


Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key patent protection in the United States, the EU and Japan (including the potential for patent term extensions (PTE) and SPCs where indicated) for the following marketed products:
Product
Year of Expiration (U.S.)
Year of Expiration (EU)(1)
Year of Expiration (Japan)
Cancidas
Expired
Expired
2022
Zostavax
Expired
2018 (use)
N/A
Zetia
Expired
2018
2019
Vytorin
Expired
2019
2019
Asmanex
2018 (formulation)
2018 (formulation)
2020 (formulation)
NuvaRing
2018 (delivery system)
2018 (delivery system)
N/A
Emend for Injection
2019(2)
2020(2)
2020
Follistim AQ
2019 (formulation)
2019 (formulation)
2019 (formulation)
Noxafil
2019
2019
N/A
RotaTeq
2019
Expired
Expired
Recombivax
2020 (method of making)
Expired
Expired
Dulera
2020 (combination)
N/A
N/A
Januvia
2022(2)
2022(2)
2025-2026(3)
Janumet
2022(2)
2023
N/A
Janumet XR
2022(2)
N/A
N/A
Isentress
2024
2022(2)
2022
Simponi
N/A(4)
2024
N/A(4)
Adempas(5)
2026(2)
2023 (patents), 2028(2) (SPCs)
2027-2028(3)
Bridion
2026(2) (with pending PTE)
2023
2024
Nexplanon
2027 (device)
2025 (device)
Not Marketed
Bravecto
2027 (with pending PTE)
2025 (patents), 2029 (SPCs)
2029
Gardasil
2028
2021(2)
2017
Gardasil 9
2028
2025 (patents), 2030(2) (SPCs)
N/A
Keytruda
2028
2028 (patents), 2030(2) (SPCs)
2032
Lynparza(6)
2028(2) (with pending PTE)
2024 (patents), 2029(2) (SPCs)
2024(7)
Zerbaxa
2028(2) (with pending PTE)
2023 (patents), 2028(2) (SPCs)
N/A
Sivextro
2028(2)
2024 (patents), 2029(2) (SPCs)
N/A
Belsomra
2029(2)
N/A
2031
Prevymis
2029(2) (with pending PTE)
2024(8)
N/A
Steglatro(9)
2031(2) (with pending PTE)
N/A
N/A
Steglujan(9)
2031 (with pending PTE)
N/A
N/A
Segluromet(9)
2031 (with pending PTE)
N/A
N/A
Zepatier
2031(2)
2030 (patents), 2031(2) (SPCs)
2034 (with pending PTE)
N/A:
Currently no marketing approval.
Note:
Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 11. “Contingencies and Environmental Liabilities” below.
(1) 
The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the United Kingdom (Major EU Markets). If an SPC has been granted in some but not all Major EU Markets, both the patent expiry date and the SPC expiry date are listed.
(2) 
Eligible for 6 months Pediatric Exclusivity.
(3) 
The PTE system in Japan allows for a patent to be extended more than once provided the later approval is directed to a different indication from that of the previous approval. This may result in multiple PTE approvals for a given patent, each with its own expiration date.
(4) 
The Company has no marketing rights in the U.S. and Japan.
(5) 
Being commercialized in a worldwide collaboration with Bayer AG.
(6) 
Being developed and commercialized in a global strategic oncology collaboration with AstraZeneca.
(7) 
PTE application to be filed by April 2018. Expected expiry 2029.
(8) 
SPC applications to be filed by July 2018. Expected expiry 2029. Eligible for Pediatric Exclusivity.
(9) 
Being developed and promoted in a worldwide, except Japan, collaboration with Pfizer.

While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in

10


the United States and certain other countries, market exclusivity that may be available under relevant law. The effect of product patent expiration on pharmaceutical products also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries.
Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by an increase in the number of incentives for and use of generic products. Additionally, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties.
The Company has the following key U.S. patent protection for drug candidates under review in the United States by the FDA. Additional patent term may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity. 
Under Review (in the U.S.)
Currently Anticipated
Year of Expiration (in the U.S.)
V419 (pediatric hexavalent combination vaccine)
2020 (method of making)
MK-1439 (doravirine)
2031
MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate)
2031
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.)
V920 (ebola vaccine)
2023
MK-5618 (selumetinib)(1)
2023
MK-7655A (relebactam + imipenem/cilastatin)
2030
MK-1242 (vericiguat)(2)
2031
(1) 
Being developed and commercialized in a global strategic oncology collaboration with AstraZeneca.
(2) 
Being developed in a worldwide clinical development collaboration with Bayer AG.
Unless otherwise noted, the patents in the above charts are compound patents. Each patent is subject to any future patent term restoration of up to five years and six month pediatric market exclusivity, either or both of which may be available. In addition, depending on the circumstances surrounding any final regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved; the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.
For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 11. “Contingencies and Environmental Liabilities” below.
Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely.
Royalty income in 2017 on patent and know-how licenses and other rights amounted to $158 million. Merck also incurred royalty expenses amounting to $944 million in 2017 under patent and know-how licenses it holds.
Research and Development
The Company’s business is characterized by the introduction of new products or new uses for existing products through a strong research and development program. At December 31, 2017, approximately 12,650 people were employed in the Company’s research activities. Research and development expenses were $10.2 billion in 2017,

11


$10.1 billion in 2016 and $6.7 billion in 2015 (which included restructuring costs and acquisition and divestiture-related costs in all years). The Company prioritizes its research and development efforts and focuses on candidates that it believes represent breakthrough science that will make a difference for patients and payers.
The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company is committed to ensuring that externally sourced programs remain an important component of its pipeline strategy, with a focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.
The Company also reviews its pipeline to examine candidates that may provide more value through out-licensing. The Company continues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including cancer, cardiovascular diseases, diabetes, infectious diseases, neurosciences, obesity, pain, respiratory diseases, and vaccines.
In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through preclinical tests and controlled clinical evaluation. Before a new drug or vaccine may be marketed in the United States, recorded data on preclinical and clinical experience are included in the New Drug Application (NDA) for a drug or the Biologics License Application (BLA) for a vaccine or biologic submitted to the FDA for the required approval.
Once the Company’s scientists discover a new small molecule compound or biologic that they believe has promise to treat a medical condition, the Company commences preclinical testing with that compound. Preclinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable preclinical data, the Company will initiate clinical testing in accordance with established regulatory requirements. The clinical testing begins with Phase 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase 2 studies are initiated to determine the efficacy of the compound in the affected population, define appropriate dosing for the compound, as well as identify any adverse effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 trials, if satisfactory, the Company submits regulatory filings with the appropriate regulatory agencies around the world to have the product candidate approved for marketing. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed.
Vaccine development follows the same general pathway as for drugs. Preclinical testing focuses on the vaccine’s safety and ability to elicit a protective immune response (immunogenicity). Pre-marketing vaccine clinical trials are typically done in three phases. Initial Phase 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies.

12


In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, the FDA determines if the application is sufficiently complete to permit a substantive review. The FDA also assesses, at that time, whether the application will be granted a priority review or standard review. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, the FDA will generally act upon the application within those timelines, unless a major amendment has been submitted (either at the Company’s own initiative or the FDA’s request) to the pending application. If this occurs, the FDA may extend the review period to allow for review of the new information, but by no more than three months. Extensions to the review period are communicated to the Company. The FDA can act on an application either by issuing an approval letter or by issuing a Complete Response Letter (CRL) stating that the application will not be approved in its present form and describing all deficiencies that the FDA has identified. Should the Company wish to pursue an application after receiving a CRL, it can resubmit the application with information that addresses the questions or issues identified by the FDA in order to support approval. Resubmissions are subject to review period targets, which vary depending on the underlying submission type and the content of the resubmission.
The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review.
In addition, under the Generating Antibiotic Incentives Now Act, the FDA may grant Qualified Infectious Disease Product (QIDP) status to antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority Review of the NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and Cosmetic Act.
The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new chemical compounds and products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (MAA) with the European Medicines Agency (EMA). After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.
Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the Pharmaceuticals and Medical Devices Agency in Japan, Health Canada, Agência Nacional de Vigilância Sanatária in Brazil, Korea Food and Drug Administration in South Korea, Therapeutic Goods Administration in Australia and China Food and Drug Administration. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.

13


Research and Development Update
The Company currently has several candidates under regulatory review in the United States and internationally.
Keytruda is an approved anti-PD-1 therapy in clinical development for expanded indications in different cancer types.
In December 2017, the FDA accepted for review a supplemental BLA for Keytruda for the treatment of adult and pediatric patients with refractory primary mediastinal B-cell lymphoma (PMBCL), or who have relapsed after two or more prior lines of therapy. The FDA granted Priority Review status with a PDUFA, or target action, date of April 3, 2018.
Additionally, Keytruda has received Breakthrough Therapy designation from the FDA in combination with axitnib as a first-line treatment for patients with advanced or metastatic renal cell carcinoma; for the treatment of high-risk early-stage triple-negative breast cancer in combination with neoadjuvant chemotherapy; and for the treatment of Merkel cell carcinoma. Also, in January 2018, Merck and Eisai Co., Ltd. (Eisai) announced receipt of Breakthrough Therapy designation from the FDA for Eisai’s multiple receptor tyrosine kinase inhibitor Lenvima (lenvatinib) in combination with Keytruda for the potential treatment of patients with advanced and/or metastatic renal cell carcinoma. The Lenvima and Keytruda combination therapy is being jointly developed by Eisai and Merck. This marks the 12th Breakthrough Therapy designation granted to Keytruda. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.
In January 2018, Merck announced that the pivotal Phase 3 KEYNOTE-189 trial investigating Keytruda in combination with pemetrexed (Alimta) and cisplatin or carboplatin, for the first-line treatment of patients with metastatic non-squamous NSCLC, met its dual primary endpoints of overall survival (OS) and progression-free survival (PFS). Based on an interim analysis conducted by the independent Data Monitoring Committee, treatment with Keytruda in combination with pemetrexed plus platinum chemotherapy resulted in significantly longer OS and PFS than pemetrexed plus platinum chemotherapy alone. Results from KEYNOTE-189 will be presented at an upcoming medical meeting and submitted to regulatory authorities.
In 2017, the FDA placed a full clinical hold on KEYNOTE-183 and KEYNOTE-185 and a partial clinical hold on Cohort 1 of KEYNOTE-023, three combination studies of Keytruda with lenalidomide or pomalidomide versus lenalidomide or pomalidomide alone in the blood cancer multiple myeloma. This decision followed a review of data by the Data Monitoring Committee in which more deaths were observed in the Keytruda arms of KEYNOTE-183 and KEYNOTE-185. The FDA determined that the data available at the time indicated that the risks of Keytruda plus pomalidomide or lenalidomide outweighed any potential benefit for patients with multiple myeloma. All patients enrolled in KEYNOTE-183 and KEYNOTE-185 and those in the Keytruda/lenalidomide/dexamethasone cohort in KEYNOTE-023 have discontinued investigational treatment with Keytruda. This clinical hold does not apply to other studies with Keytruda.
The Keytruda clinical development program consists of more than 700 clinical trials, including more than 400 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, nasopharyngeal, NSCLC, ovarian, PMBCL, prostate, renal, small-cell lung and triple-negative breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
MK-8835, ertugliflozin, an investigational oral SGLT-2 inhibitor in development to help improve glycemic control in adults with type 2 diabetes, and two fixed-dose combination products (MK-8835A, ertugliflozin and Januvia, and MK-8835B, ertugliflozin and metformin) are under review in the EU. In January 2018, the Committee for Medicinal Products for Human Use (CHMP) of the EMA adopted a positive opinion recommending approval of these medicines. The CHMP positive opinion will be considered by the EC. Ertugliflozin and the two fixed-dose combination products were approved by the FDA in December 2017.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under review with the Japan Pharmaceuticals and Medical Devices Agency. MK-0431 is being developed for commercialization in Japan

14


in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
MK-1439, doravirine, is an investigational, non-nucleoside reverse transcriptase inhibitor for the treatment of HIV-1 infection. In January 2018, Merck announced that the FDA accepted for review two NDAs for doravirine. The NDAs include data for doravirine as a once-daily tablet for use in combination with other antiretroviral agents, and for use of doravirine with lamivudine and tenofovir disoproxil fumarate in a once-daily fixed-dose combination single tablet as a complete regimen (MK-1439A). The PDUFA action date for both applications is October 23, 2018.
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a joint venture between Merck and Sanofi. This vaccine is designed to help protect against six important diseases - diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b (Hib), and hepatitis B. In November 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are working to provide additional data requested by the FDA. V419 is being marketed as Vaxelis in the EU.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a QIDP with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.
MK-7339, Lynparza (olaparib), is an oral PARP inhibitor currently approved for certain types of ovarian and breast cancer. In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types.
MK-5618, selumetinib, is an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple cancer types. Additionally, in February 2018, the FDA granted Orphan Drug designation for selumetinib for the treatment of neurofibromatosis type 1. The development of selumetinib is part of the global strategic oncology collaboration between Merck and AstraZeneca reference above.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that V920 offers substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-randomized clusters. Results from other ongoing studies to be included in the first regulatory filing are anticipated in the first half of 2018.
MK-1242, vericiguat, is an investigational treatment for heart failure being studied in patients suffering from chronic heart failure. The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer.
V212 is an inactivated varicella zoster virus (VZV) vaccine in development for the prevention of herpes zoster. The Company completed a Phase 3 trial in autologous hematopoietic cell transplant patients and another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017. The study in

15


patients with solid tumor malignancies undergoing chemotherapy met its primary endpoints, but the primary efficacy endpoint was not met in patients with hematologic malignancies. Merck will present the results from this study at an upcoming scientific meeting. Due to the competitive environment, the development of V212 is currently on hold.
MK-7264 is a selective, non-narcotic, orally-administered P2X3-receptor agonist being developed for the treatment of refractory, chronic cough. Merck plans to initiate a Phase 3 clinical trial in the first half of 2018. MK-7264 was originally developed by Afferent Pharmaceuticals, which was acquired by the Company in 2016.
The Company also discontinued certain drug candidates.
In February 2018, Merck announced that it will be stopping protocol 019, also known as the APECS study, a Phase 3 study evaluating verubecestat, MK-8931, an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1), in people with prodromal Alzheimer’s disease. The decision to stop the study follows a recommendation by the external Data Monitoring Committee (eDMC), which assessed overall benefit/risk during a recent interim safety analysis. The eDMC concluded that it was unlikely that positive benefit/risk could be established if the trial continued.
In 2017, Merck announced that it will not submit applications for regulatory approval for MK-0859, anacetrapib, the Company’s investigational cholesteryl ester transfer protein (CETP) inhibitor. The decision followed a thorough review of the clinical profile of anacetrapib, including discussions with external experts.
Also in 2017, Merck made a strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the treatment of HCV infection. This decision was made based on a review of available Phase 2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available for patients with chronic HCV infection, including Zepatier, which is currently marketed by the Company for the treatment of adult patients with chronic HCV infection.

16


The chart below reflects the Company’s research pipeline as of February 23, 2018. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to Keytruda) and additional claims, line extensions or formulations for in-line products are not shown.
Phase 2
Phase 3 (Phase 3 entry date)
Under Review
Cancer
MK-3475 Keytruda
Advanced Solid Tumors
Ovarian
Prostate
Chronic Cough
MK-7264
Diabetes Mellitus
MK-8521(2)
HIV Infection
MK-8591
Pneumoconjugate Vaccine
V114
Schizophrenia
MK-8189
Bacterial Infection
MK-7655A (relebactam+imipenem/cilastatin)
 (October 2015)
Cancer
MK-3475 Keytruda 
Breast (October 2015)
Colorectal (November 2015)
Esophageal (December 2015)
Gastric (May 2015) (EU)
Head and Neck (November 2014) (EU)
Hepatocellular (May 2016)
Nasopharyngeal (April 2016)
Renal (October 2016)
Small-Cell Lung (May 2017)
MK-7339 Lynparza(1)
Pancreatic (December 2014)
Prostate (April 2017)
MK-5618 (selumetinib) (1)
Thyroid (June 2013)
Ebola Vaccine
V920 (March 2015)
Heart Failure
MK-1242 (vericiguat) (September 2016)(1)
Herpes Zoster
V212 (inactivated VZV vaccine)
(December 2010)(2)
HIV
MK-1439 (doravirine) (December 2014) (EU)
MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate) (June 2015) (EU)
New Molecular Entities/Vaccines
Diabetes Mellitus
MK-0431J (sitagliptin+ipragliflozin) (Japan)(1)
MK-8835 (ertugliflozin) (EU)(1)
MK-8835A (ertugliflozin+sitagliptin) (EU)(1)
MK-8835B (ertugliflozin+metformin) (EU)(1)
HIV
MK-1439 (doravirine) (U.S.)
MK-1439A (doravirine/lamivudine/tenofovir disoproxil fumarate) (U.S.)
Pediatric Hexavalent Combination Vaccine
V419 (U.S.)(3)


Certain Supplemental Filings
MK-3475 Keytruda
Relapsed or Refractory Primary Mediastinal B‑Cell Lymphoma (PMBCL) (U.S.)
MK-7339 Lynparza(1)
Broader Approval for Ovarian Cancer (EU)

Footnotes:
(1)  Being developed in a collaboration.
(2)  Development is currently on hold.
(3)  V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi. In November 2015, the FDA issued a CRL with respect to V419. Both companies are working to provide additional data requested by the FDA.

Employees
As of December 31, 2017, the Company had approximately 69,000 employees worldwide, with approximately 26,700 employed in the United States, including Puerto Rico. Approximately 29% of worldwide employees of the Company are represented by various collective bargaining groups.
Restructuring Activities
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. Since inception of the programs through December 31, 2017, Merck has eliminated approximately 43,350 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company has substantially completed the actions under these programs.
Environmental Matters
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

17


environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $11 million in 2017, and are estimated at $56 million in the aggregate for the years 2018 through 2022. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and, in management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $82 million and $83 million at December 31, 2017 and 2016, respectively. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $63 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
Merck believes that climate change could present risks to its business. Some of the potential impacts of climate change to its business include increased operating costs due to additional regulatory requirements, physical risks to the Company’s facilities, water limitations and disruptions to its supply chain. These potential risks are integrated into the Company’s business planning including investment in reducing energy, water use and greenhouse gas emissions. The Company does not believe these risks are material to its business at this time.
Geographic Area Information
The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United States as a percentage of total Company sales were 57% of sales in 2017, 54% of sales in 2016 and 56% of sales in 2015.
The Company’s worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions.
Merck has operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time.
Financial information about geographic areas of the Company’s business is provided in Item 8. “Financial Statements and Supplementary Data” below.
Available Information
The Company’s Internet website address is www.merck.com. The Company will make available, free of charge at the “Investors” portion of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). In addition, the Company will provide without charge a copy of its Annual Report on Form 10-K, including financial statements and schedules, upon the written request of any shareholder to Merck Shareholder Services, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, NJ 07033 U.S.A.
The Company’s corporate governance guidelines and the charters of the Board of Directors’ four standing committees are available on the Company’s website at www.merck.com/about/leadership and all such information is available in print to any stockholder who requests it from the Company.
Item 1A.
Risk Factors.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these

18


forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.
The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely affected.
Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of human health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.
Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or claims by third parties of infringement against the Company. The Company defends its patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note 11. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file abbreviated NDAs with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned or licensed by the Company. The Company normally responds by defending its patent, including by filing lawsuits alleging patent infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other companies’ patents, potential legislation relating to patents, as well as regulatory initiatives may result in a more general weakening of intellectual property protection.
If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement products.
A chart listing the patent protection for certain of the Company’s marketed products, and U.S. patent protection for candidates under review and Phase 3 candidates is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”
As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.
The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales for that product, as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of market exclusivity can have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects. For example, pursuant to an agreement with a generic manufacturer, that manufacturer launched in the United States a generic version of Zetia in December 2016. In addition, the Company lost U.S. patent protection for Vytorin in April 2017. As a result, the Company experienced a significant and rapid loss of sales of Zetia and Vytorin in the United States in 2017, which the Company expects will continue in 2018. In addition, the patent that provides U.S. market exclusivity for NuvaRing will expire in April 2018 and the Company anticipates a significant decline in U.S. NuvaRing sales thereafter.

19


Key products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material and negative impact on results of operations and cash flows.
The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as Januvia, Janumet, Keytruda, Gardasil/Gardasil 9 and Isentress. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant adverse impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-approval trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. Such events could have a material adverse effect on the sales of any such products.
For example, in 2018, the Company anticipates that sales of Zepatier will be materially unfavorably affected by increasing competition and declining patient volumes. The Company also anticipates that sales of Zostavax will be materially unfavorably affected due to competition.
The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that have lost patent protection.
Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products each year. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products that it may develop through collaborations and joint ventures and products that it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.
For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals, therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the regulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.
The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.

20


The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.
Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:
findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;
failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, and uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;
failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;
lack of economic feasibility due to manufacturing costs or other factors; and
preclusion from commercialization by the proprietary rights of others.
In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with acquisitions.
Failure to successfully develop and market new products in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.
The Company’s products, including products in development, cannot be marketed unless the Company obtains and maintains regulatory approval.
The Company’s activities, including research, preclinical testing, clinical trials and manufacturing and marketing its products, are subject to extensive regulation by numerous federal, state and local governmental authorities in the United States, including the FDA, and by foreign regulatory authorities, including in the EU and Japan. In the United States, the FDA is of particular importance to the Company, as it administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, cost reduction. The FDA and foreign regulatory authorities have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.
Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.
Developments following regulatory approval may adversely affect sales of the Company’s products.
Even after a product reaches market, certain developments following regulatory approval, including results in post-approval Phase 4 trials or other studies, may decrease demand for the Company’s products, including the following:
the re-review of products that are already marketed;
the recall or loss of marketing approval of products that are already marketed;


21


changing government standards or public expectations regarding safety, efficacy or labeling changes; and
greater scrutiny in advertising and promotion.
In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, following in the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and Japan’s Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities.
The Company faces intense competition from lower cost generic products.
In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures that encourage the use of generic and biosimilar products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial position and prospects.
The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.
The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such an event, the competitors’ products may be safer or more effective, more convenient to use or more effectively marketed and sold than the Company’s products. Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial position and prospects. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.

22


The Company faces continued pricing pressure with respect to its products.
The Company faces continued pricing pressure globally and, particularly in mature markets, from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and institutional and governmental purchasers, (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the ACA, and (iii) state activities aimed at increasing price transparency. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. In addition, in the U.S., larger customers may, in the future, ask for and receive higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the managed care organization.
In order to provide information about the Company’s pricing practices, the Company recently posted  on its website its Pricing Action Transparency Report for the United States for the years 2010 - 2017. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010.  The report shows that the Company’s average annual net price increases (after taking sales deductions such as rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits from 2010 - 2016. In 2017, the average net price across the Company’s portfolio declined by 1.9%, reflecting specific in-year dynamics, including the impact of loss of patent protection for three major Merck medicines. Additionally, the weighted average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of the ACA. In 2017, the Company’s gross U.S. sales were reduced by 45.1% as a result of rebates, discounts and returns.
Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in funding health care and, in that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with respect to its products.
The Company expects pricing pressures to continue in the future.
The health care industry in the United States will continue to be subject to increasing regulation and political action.
The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by the Executive branch, Congress and state legislatures.
In 2010, the United States enacted major health care reform legislation in the form of the ACA. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program.
The law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). In 2017, the Company’s revenue was reduced by $385 million due to this requirement. Beginning in 2019, the 50% point of service discount will increase to a 70% point of service discount in the coverage gap, as a result of the Balanced Budget Act of 2018. In addition, the 70% point of service discount will be extended to biosimilar products. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $4.0 billion in 2017 and will be $4.1 billion in 2018. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. In 2017, the Company recorded $210 million of costs for this annual fee.
On January 21, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug

23


manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck, at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The Company will evaluate the financial impact of these two elements when they become effective.
The Company cannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have on the Company’s results of operations, financial condition or business.
The Company is increasingly dependent on sophisticated software applications and computing infrastructure. In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. The Company could be a target of future cyber-attacks.
The Company is increasingly dependent on sophisticated software applications and complex information technology systems and computing infrastructure (collectively, “IT systems”) to conduct critical operations. Disruption, degradation, or manipulation of these IT systems through intentional or accidental means could impact key business processes. Cyber-attacks against the Company’s IT systems could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Misuse of these IT systems could result in the disclosure of sensitive personal information or the theft of trade secrets, intellectual property, or other confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency of its business processes; the use of which can create new risks.
On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. All of the Company’s manufacturing sites are now operational, manufacturing active pharmaceutical ingredient (API), formulating, packaging and shipping product. The Company’s external manufacturing was not impacted. Throughout this time, Merck continued to fulfill orders and ship product.
Due to the cyber-attack, as anticipated, the Company was unable to fulfill orders for certain products in certain markets, which had an unfavorable effect on sales in 2017 of approximately $260 million. In addition, the Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in Materials and Production costs, as well as expenses related to remediation efforts in Marketing and Administrative expenses and Research and Development expenses, which aggregated $285 million in 2017, net of insurance recoveries of approximately $45 million. Due to a residual backlog of orders, the Company anticipates that in 2018 sales will be unfavorably affected in certain markets by approximately $200 million from the cyber-attack. Merck does not expect a significant impairment to the value of intangible assets related to marketed products or inventories as a result of the cyber-attack.
The Company has insurance coverage insuring against costs resulting from cyber-attacks and has received proceeds. However, there may be disputes with the insurers about the availability of the insurance coverage for claims related to this incident.
Additionally, the temporary production shut-down from the cyber-attack contributed to the Company’s inability to meet higher than expected demand for Gardasil 9, which resulted in Merck’s decision to borrow doses of Gardasil 9 from the U.S. Centers for Disease Control and Prevention Pediatric Vaccine Stockpile. The Company subsequently replenished a portion of the borrowed doses in 2017. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million in 2017. The Company anticipates it will replenish the remaining borrowed doses in the second half of 2018.
The Company has implemented a variety of measures to further enhance its systems to guard against similar attacks in the future, and also is pursuing an enterprise-wide effort to enhance the Company's resiliency against future cyber-attacks, including incidents similar to the June 2017 attack. The objective of these efforts is not only to protect against future cyber-attacks, but also to improve the speed of the Company’s recovery from such attacks and enable continued business operations to the greatest extent possible during any recovery period.
Although the aggregate impact of cyber-attacks and network disruptions, including the June 2017 cyber-attack, on the Company’s operations and financial condition has not been material to date, the Company continues to be a

24


target of events of this nature and expects them to continue. The Company monitors its data, information technology and personnel usage of Company IT systems to reduce these risks and continues to do so on an ongoing basis for any current or potential threats. There can be no assurance that the Company’s efforts to protect its data and IT systems will be successful in preventing disruptions to its operations, including its manufacturing, research and sales operations. Any such disruption could result in loss of revenue, or the loss of critical or sensitive information from the Company’s or the Company’s third party providers’ databases or IT systems and could also result in financial, legal, business or reputational harm to the Company and potentially substantial remediation costs.
Changes in laws and regulations could materially adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.
In particular, there is significant uncertainty about the future of the ACA and health care laws in general in the United States. The Company is participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of operations, financial condition or business.
The uncertainty in global economic conditions together with austerity measures being taken by certain governments could negatively affect the Company’s operating results.
Uncertainty in global economic and geopolitical conditions may result in a slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, pricing pressures continue on many of the Company’s products and, in several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2017. The Company anticipates these pricing actions, including the biennial price reductions in Japan that will occur again in 2018, and other austerity measures will continue to negatively affect revenue performance in 2018.
If credit and economic conditions worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.
The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material negative impact on the Company’s results of operations.
The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:
changes in medical reimbursement policies and programs and pricing restrictions in key markets;
multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;
trade protection measures and import or export licensing requirements, including the imposition of trade sanctions or similar restrictions by the United States or other governments;
foreign exchange fluctuations;

25


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. For example, in 2017, the Company’s lone manufacturing plant in Puerto Rico was negatively affected by Hurricane Maria.
On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit”. As a result of the referendum, the British government has begun negotiating the terms of the UK’s future relationship with the EU. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the UK and EU countries, increased regulatory complexities, and cross boarder labor issues that could adversely impact the Company’s business operations in the UK.
Failure to attract and retain highly qualified personnel could affect its ability to successfully develop and commercialize products.
The Company’s success is largely dependent on its continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical research and development, governmental regulation and commercialization. Competition for qualified personnel in the pharmaceutical industry is intense. The Company cannot be sure that it will be able to attract and retain quality personnel or that the costs of doing so will not materially increase.
In the past, the Company has experienced difficulties and delays in manufacturing certain of its products, including vaccines.
Merck has, in the past, experienced difficulties in manufacturing certain of its products, including vaccines. In addition, the network cyber-attack experienced by the Company in June 2017 led to a disruption of the Company’s operations, including its manufacturing operations. The Company may, in the future, experience difficulties and delays inherent in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in product manufacturing; (ii) construction delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. Manufacturing difficulties can result in product shortages, leading to lost sales and reputational harm to the Company.
The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its sales in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in these markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and, if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.
In addition, in China, commercial and economic conditions may adversely affect the Company’s growth prospects in that market. While the Company continues to believe that China represents an important growth opportunity, these events, coupled with heightened scrutiny of the health care industry, may continue to have an impact on product pricing and market access generally. The Company anticipates that the reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in China may continue.

26


For all these reasons, sales within emerging markets carry significant risks. However, a failure to maintain the Company’s presence in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into acquisition, licensing, borrowings or other financial transactions that may give rise to currency and interest rate exposure.
Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates and interest rates could negatively affect the Company’s results of operations, financial position and cash flows as occurred with respect to Venezuela in 2015 and 2016.
In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.
The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.
The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
In addition, the Company may be affected by changes in tax laws, such as tax rate changes, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.
Further, on December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (TCJA) became law. The final impact of the TCJA on the Company may differ from the estimates reported, possibly materially, due to such factors as changes in interpretations and assumptions made, additional guidance that may be issued, and actions taken by the Company as a result of the TCJA, among others.
Pharmaceutical products can develop unexpected safety or efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.
Reliance on third party relationships and outsourcing arrangements could adversely affect the Company’s business.
The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third party service providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its information technology systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.
Negative events in the animal health industry could have a negative impact on future results of operations.
Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as Bovine Spongiform Encephalopathy or mad cow disease, could lead to their widespread death and precautionary

27


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.
Biologics and vaccines carry unique risks and uncertainties, which could have a negative impact on future results of operations.
The successful development, testing, manufacturing and commercialization of biologics and vaccines, particularly human and animal health vaccines, is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics and vaccines, including:
There may be limited access to, and supply of, normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.
The development, manufacturing and marketing of biologics and vaccines are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both preclinical and clinical trial data and extensive data regarding the manufacturing procedures, is required for human vaccine candidates, and FDA approval is generally required for the release of each manufactured commercial lot.
Manufacturing biologics and vaccines, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic and vaccine must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.
Biologics and vaccines are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics and vaccines cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
The use of biologically derived ingredients can lead to variability in the manufacturing process and could lead to allegations of harm, including infections or allergic reactions, which allegations would be reviewed through a standard investigation process that could lead to closure of product facilities due to possible contamination. Any of these events could result in substantial costs.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. The Company is subject to a substantial number of product liability claims. See Item 8. “Financial Statements and Supplementary Data,” Note 11. “Contingencies and Environmental Liabilities” below for more information on the Company’s current product liability litigation. With respect to product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely

28


benefits of the coverage that is available and, as such, has no insurance for certain product liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.
Social media platforms present risks and challenges.
The inappropriate and/or unauthorized use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company or its products on any social networking web site could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely secure and protect information. Identifying new points of entry as social media continues to expand also presents new challenges.

Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning, or negative variations of any of the foregoing. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential, and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:
Competition from generic and/or biosimilar products as the Company’s products lose patent protection.
Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.
The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.
Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.
Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.

29


Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.
Significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage.
Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.
Cyber-attacks on the Company’s information technology systems, which could disrupt the Company’s operations.
Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.
Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.
Changes in tax laws including changes related to the taxation of foreign earnings.
Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.
Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The Company’s corporate headquarters is located in Kenilworth, New Jersey. The Company’s U.S. commercial operations are headquartered in Upper Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania and Kenilworth, New Jersey. The Company’s vaccines business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania. Merck’s Animal Health global headquarters is located in Madison, New Jersey. Principal U.S. research facilities are located in Rahway and Kenilworth, New Jersey, West Point, Pennsylvania, Palo Alto, California, Boston, Massachusetts, and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in Switzerland and China. Merck’s manufacturing operations are headquartered in Whitehouse Station, New Jersey. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.
Capital expenditures were $1.9 billion in 2017, $1.6 billion in 2016 and $1.3 billion in 2015. In the United States, these amounted to $1.2 billion in 2017, $1.0 billion in 2016 and $879 million in 2015. Abroad, such expenditures amounted to $728 million in 2017, $594 million in 2016 and $404 million in 2015.
The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company believes that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing

30


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 11. “Contingencies and Environmental Liabilities”.
Item 4.
Mine Safety Disclosures.
Not Applicable.

31



Executive Officers of the Registrant (ages as of February 1, 2018)
All officers listed below serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and any other person(s).
Name
Age
Offices and Business Experience
Kenneth C. Frazier
63
Chairman, President and Chief Executive Officer (since December 2011)
Sanat Chattopadhyay
58
Executive Vice President and President, Merck Manufacturing Division (since March 2016); Senior Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)
Robert M. Davis
51
Executive Vice President, Chief Financial Officer & Global Services (since April 2016); Executive Vice President and Chief Financial Officer (April 2014-April 2016); Corporate Vice President and President, Medical Products, Baxter International, Inc. (2010-March 2014)
Richard R. DeLuca, Jr.
55
Executive Vice President and President, Merck Animal Health (since September 2011)
Julie L. Gerberding
62
Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health (since July 2016); Executive Vice President for Strategic Communications, Global Public Policy and Population Health (January 2015-July 2016); President, Merck Vaccines (January 2010-January 2015)
Mirian M. Graddick-Weir
63
Executive Vice President, Human Resources (since November 2009)
Michael J. Holston*
55
Executive Vice President and General Counsel (since July 2015); Executive Vice President and Chief Ethics and Compliance Officer (June 2012-July 2015)
Rita A. Karachun
54
Senior Vice President Finance - Global Controller (since March 2014); Assistant Controller (November 2009-March 2014)
Roger M. Perlmutter, M.D., Ph.D.
65
Executive Vice President and President, Merck Research Laboratories (since April 2013)
Adam H. Schechter
53
Executive Vice President and President, Global Human Health (since May 2010)
Ashley Watson
49
Senior Vice President, Chief Ethics and Compliance Officer (since March 2015); Senior Vice President, Deputy General Counsel and Chief Ethics & Compliance Officer, Hewlett-Packard Company (January 2011 - March 2015)

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

32


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

 
4th Q

 
3rd Q

 
2nd Q

 
1st Q

 
2017
$
1.88

 
$
0.47

 
$
0.47

 
$
0.47

 
$
0.47

 
2016
$
1.84

 
$
0.46

 
$
0.46

 
$
0.46

 
$
0.46

 
Common Stock Market Prices
 
 
2017
 
 
4th Q

 
3rd Q

 
2nd Q

 
1st Q

 
High
 
 
64.90

 
66.41

 
66.40

 
66.80

 
Low
 
 
53.63

 
61.16

 
61.87

 
59.05

 
2016
 
 
 
 
 
 
 
 
 
 
High
 
 
$
65.46

 
$
64.00

 
$
57.87

 
$
53.60

 
Low
 
 
$
58.29

 
$
57.18

 
$
52.44

 
$
47.97


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

Issuer purchases of equity securities for the three months ended December 31, 2017 were as follows:
Issuer Purchases of Equity Securities
 
 
 
 
 
 
($ 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
 
2,172,335
 
$63.38
 
$2,605
November 1 — November 30
 
11,850,338
 
$55.03
 
$1,953
December 1 — December 31
 
16,285,000
 
$56.05
 
$11,040
Total
 
30,307,673
 
$56.17
 
$11,040

(1) 
All shares purchased during the period were made as part of a plan approved by the Board of Directors in March 2015 to purchase up to $10 billion in Merck shares. In November 2017, the Board of Directors authorized additional purchases of up to $10 billion of Merck’s common stock for its treasury. Shares are approximated.

33


Performance Graph
The following graph assumes a $100 investment on December 31, 2012, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of major pharmaceutical companies, which are: AbbVie Inc., Amgen Inc., AstraZeneca plc, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, GlaxoSmithKline plc, Novartis AG, Pfizer Inc., Roche Holding AG, and Sanofi SA.
Comparison of Five-Year Cumulative Total Return*
Merck & Co., Inc., Composite Peer Group and S&P 500 Index
 
End of
Period Value
 
2017/2012
CAGR**
MERCK
$162
 
10%
PEER GRP.**
185
 
13%
S&P 500
208
 
16%

mrk1231201_chart-58501a04.jpg
 
2012
2013
2014
2015
2016
2017
MERCK
100.00
126.90
148.70
142.70
164.30
161.80
PEER GRP.
100.00
134.60
150.20
154.70
151.60
184.70
S&P 500
100.00
132.40
150.50
152.50
170.80
208.10

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

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

34


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)
 
2017 (1)
 
2016 (2)
 
2015 (3)
 
2014 (4)
 
2013
Results for Year:
 
 
 
 
 
 
 
 
 
Sales
$
40,122

 
$
39,807

 
$
39,498

 
$
42,237

 
$
44,033

Materials and production
12,775

 
13,891

 
14,934

 
16,768

 
16,954

Marketing and administrative
9,830

 
9,762

 
10,313

 
11,606

 
11,911

Research and development
10,208

 
10,124

 
6,704

 
7,180

 
7,503

Restructuring costs
776

 
651

 
619

 
1,013

 
1,709

Other (income) expense, net
12

 
720

 
1,527

 
(11,613
)
 
411

Income before taxes
6,521

 
4,659

 
5,401

 
17,283

 
5,545

Taxes on income
4,103

 
718

 
942

 
5,349

 
1,028

Net income
2,418

 
3,941

 
4,459

 
11,934

 
4,517

Less: Net income attributable to noncontrolling interests
24

 
21

 
17

 
14

 
113

Net income attributable to Merck & Co., Inc.
2,394

 
3,920

 
4,442

 
11,920

 
4,404

Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
$
0.88

 
$
1.42

 
$
1.58

 
$
4.12

 
$
1.49

Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
$
0.87

 
$
1.41

 
$
1.56

 
$
4.07

 
$
1.47

Cash dividends declared
5,177

 
5,135

 
5,115

 
5,156

 
5,132

Cash dividends declared per common share
$
1.89

 
$
1.85

 
$
1.81

 
$
1.77

 
$
1.73

Capital expenditures
1,888

 
1,614

 
1,283

 
1,317

 
1,548

Depreciation
1,455

 
1,611

 
1,593

 
2,471

 
2,225

Average common shares outstanding (millions)
2,730

 
2,766

 
2,816

 
2,894

 
2,963

Average common shares outstanding assuming dilution (millions)
2,748

 
2,787

 
2,841

 
2,928

 
2,996

Year-End Position:
 
 
 
 
 
 
 
 
 
Working capital
$
6,152

 
$
13,410

 
$
10,550

 
$
14,198

 
$
17,461

Property, plant and equipment, net
12,439

 
12,026

 
12,507

 
13,136

 
14,973

Total assets
87,872

 
95,377

 
101,677

 
98,096

 
105,370

Long-term debt
21,353

 
24,274

 
23,829

 
18,629

 
20,472

Total equity
34,569

 
40,308

 
44,767

 
48,791

 
52,326

Year-End Statistics:
 
 
 
 
 
 
 
 
 
Number of stockholders of record
121,700

 
129,500

 
135,500

 
142,000

 
149,400

Number of employees
69,000

 
68,000

 
68,000

 
70,000

 
77,000

(1) 
Amounts for 2017 include a provisional net tax charge related to the enactment of U.S. tax legislation and a charge related to the formation of a collaboration with AstraZeneca.
(2) 
Amounts for 2016 include a charge related to the settlement of worldwide patent litigation related to Keytruda.
(3) 
Amounts for 2015 include a net charge related to the settlement of Vioxx shareholder class action litigation, foreign exchange losses related to Venezuela, gains on the dispositions of businesses and other assets and the favorable benefit of certain tax items.
(4) 
Amounts for 2014 reflect the divestiture of Merck’s Consumer Care business on October 1, 2014, including a gain on the sale, as well as a gain recognized on an option exercise by AstraZeneca, gains on the dispositions of other businesses and assets, and a loss on extinguishment of debt.




35


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Description of Merck’s Business
Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable segment.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. On December 31, 2016, Merck and Sanofi Pasteur S.A. (Sanofi) terminated their equally-owned joint venture, Sanofi Pasteur MSD (SPMSD), which developed and marketed vaccines in Europe. Beginning in 2017, Merck is recording vaccine sales and incurring costs as a result of operating its vaccines business in the European markets that were previously part of the SPMSD joint venture, which was accounted for as an equity method affiliate.
The Company also has an Animal Health segment that discovers, develops, manufactures and markets animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients.
Overview
During 2017, Merck continued to bring innovation to patients and physicians, expanding its focus in oncology and advancing other programs in its late-stage pipeline. Throughout 2017, Keytruda, the Company’s anti-PD-1 (programmed death receptor-1) therapy, received approval for several additional indications globally, including U.S. Food and Drug Administration (FDA) approval in combination with pemetrexed and carboplatin, a commonly used chemotherapy regimen, for the first-line treatment of metastatic nonsquamous non-small-cell lung cancer (NSCLC), irrespective of PD-L1 expression. Keytruda is the only anti-PD-1 treatment approved in the first-line setting as both monotherapy and combination therapy for appropriate patients with metastatic NSCLC. In addition, Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor, which is being developed in a collaboration, received FDA approval for the treatment of patients with germline BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy. Additionally, in November 2017, the FDA approved Prevymis for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease, and in December 2017, the FDA approved Steglatro, Steglujan and Segluromet for the treatment of type 2 diabetes. In January 2018, Prevymis was also approved in the European Union (EU).
Worldwide sales were $40.1 billion in 2017, an increase of 1% compared with 2016. Sales growth was driven primarily by the launches of Keytruda, Zepatier and Bridion, as well as positive performance from Merck’s Animal Health business. In addition, revenue in 2017 benefited from the sale of vaccines in the markets that were previously part of the now-terminated SPMSD vaccines joint venture. Growth in these areas was largely offset by the effects of generic and biosimilar competition that resulted in sales declines for products including Zetia, Vytorin, Cubicin and Remicade.
Augmenting Merck’s portfolio and pipeline with external innovation remains an important component of the Company’s overall strategy. In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza for multiple cancer types. Lynparza is an oral PARP inhibitor currently approved for certain types of ovarian and breast cancer. The companies will develop and commercialize Lynparza both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD‑L1 medicines. The companies will also jointly develop and commercialize AstraZeneca’s selumetinib, an oral, potent, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being

36


developed for multiple indications including thyroid cancer. In addition, in October 2017, Merck acquired Rigontec GmbH (Rigontec), a leader in accessing the retinoic acid-inducible gene I pathway, part of the innate immune system, as a novel and distinct approach in cancer immunotherapy to induce both immediate and long-term anti-tumor immunity. Also, in March 2017, Merck acquired a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil.
Merck continues to prioritize resources to maximize opportunities for ongoing and upcoming product launches. Keytruda is launching around the world in multiple indications. In 2017, Merck achieved multiple additional regulatory milestones for Keytruda, including approval from the FDA as combination therapy for appropriate patients with metastatic NSCLC as noted above, as well as monotherapy approval for the treatment of certain patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma; for the treatment of certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer; for the treatment of adult and pediatric patients with classical Hodgkin lymphoma (cHL); and for the treatment of adult and pediatric patients with unresectable or metastatic, microsatellite instability-high (MSI-H) or mismatch repair deficient solid tumors. During 2017, Keytruda also received approval in the EU for the treatment of certain patients with cHL and urothelial carcinoma.
Merck continues to evaluate its pipeline, focusing its research efforts on the opportunities it believes have the greatest potential to address unmet medical needs. In addition to the recent regulatory approvals discussed above, the Company has continued to advance other programs in its late-stage pipeline with several regulatory submissions. MK-1439, doravirine, an investigational, non-nucleoside reverse transcriptase inhibitor for the treatment of HIV-1 infection, and MK-1439A, doravirine with lamivudine and tenofovir disoproxil fumarate, are currently under review with the FDA. In addition, the FDA accepted for review a supplemental Biologics License Application (BLA) for Keytruda for the treatment of adult and pediatric patients with refractory primary mediastinal B-cell lymphoma (PMBCL) that is refractory to or has relapsed after two prior lines of therapy. Additionally, Steglatro, Steglujan and Segluromet are under review in the EU.
The Company’s Phase 3 oncology programs include Keytruda in the therapeutic areas of breast, colorectal, esophageal, gastric, head and neck, hepatocellular, nasopharyngeal, renal and small-cell lung cancers; Lynparza for pancreatic and prostate cancer; and selumetinib for thyroid cancer. Additionally, the Company has candidates in Phase 3 clinical development in several other therapeutic areas (see “Research and Development” below).
The Company continues to support its innovation strategy by remaining disciplined and prioritizing resources wherever possible to not only fund investment in the many opportunities in Merck’s pipeline that it believes can help drive long-term growth, but also fund near-term opportunities to grow revenue. Research and development expenses in 2017 reflect increased clinical development spending as the Company continues to invest in the pipeline.
In November 2017, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.48 per share from $0.47 per share. During 2017, the Company returned $9.2 billion to shareholders through dividends and share repurchases.
Earnings per common share assuming dilution attributable to common shareholders (EPS) for 2017 were $0.87 compared with $1.41 in 2016. EPS in both years reflect the impact of acquisition and divestiture-related costs, which in 2016 includes a charge related to the uprifosbuvir clinical development program, as well as restructuring costs and certain other items, which in 2017 include a provisional net tax charge related to the recent enactment of U.S. tax legislation and an aggregate charge related to the formation of a collaboration with AstraZeneca. Non-GAAP EPS, which exclude these items, were $3.98 in 2017 and $3.78 in 2016 (see “Non-GAAP Income and Non-GAAP EPS” below).
Cyber-attack
On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. All of the Company’s manufacturing sites are now operational, manufacturing active pharmaceutical ingredient (API), formulating, packaging and shipping product. The Company’s external manufacturing was not impacted. Throughout this time, Merck continued to fulfill orders and ship product.
Due to the cyber-attack, as anticipated, the Company was unable to fulfill orders for certain products in certain markets, which had an unfavorable effect on sales in 2017 of approximately $260 million. In addition, the

37


Company recorded manufacturing-related expenses, primarily unfavorable manufacturing variances, in Materials and production costs, as well as expenses related to remediation efforts in Marketing and administrative expenses and Research and development expenses, which aggregated approximately $285 million in 2017, net of insurance recoveries of approximately $45 million. Due to a residual backlog of orders for certain products, the Company anticipates that in 2018 sales will be unfavorably affected in certain markets by approximately $200 million from the cyber-attack. Merck does not expect a significant impairment to the value of intangible assets related to marketed products or inventories as a result of the cyber-attack.
As referenced above, the Company has insurance coverage insuring against costs resulting from cyber-attacks and has received insurance proceeds. However, there may be disputes with the insurers about the availability of the insurance coverage for claims related to this incident.
Additionally, the temporary production shut-down from the cyber-attack contributed to the Company’s inability to meet higher than expected demand for Gardasil 9, which resulted in Merck’s decision to borrow doses of Gardasil 9 from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile. The Company subsequently replenished a portion of the borrowed doses in 2017. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million in 2017. The Company anticipates it will replenish the remaining borrowed doses in the second half of 2018.
Hurricane Maria
In September 2017, Hurricane Maria made direct landfall on Puerto Rico. The Company has one plant in Puerto Rico that makes a limited number of its pharmaceutical products, and the Company also works with contract manufacturers on the island. Merck’s plant did not sustain substantial damage, and production activities at the plant have resumed. While power has been restored to the facility, it is not yet fully reliable and the plant continues to be prepared to use alternative sources of power and water. The Company is making progress to fully restore normal operations despite the significant damage to the island’s infrastructure. Supply chains within Puerto Rico are improving, but are not yet fully restored. There was an immaterial impact to sales in 2017 and the Company expects an immaterial impact to sales in 2018.
Operating Results
Sales
Worldwide sales were $40.1 billion in 2017, an increase of 1% compared with 2016. Sales growth in 2017 was driven primarily by higher sales of recently launched products including Keytruda, Zepatier and Bridion. Additionally, sales in 2017 benefited from the December 31, 2016 termination of SPMSD, which marketed vaccines in most major European markets. In 2017, Merck began recording vaccine sales in the markets that were previously part of the SPMSD joint venture resulting in incremental vaccine sales of approximately $400 million during 2017. Higher sales of Pneumovax 23 and Adempas, as well as animal health products also contributed to revenue growth in 2017. These increases were largely offset by the effects of generic competition for certain products including Zetia, which lost U.S. market exclusivity in December 2016, Vytorin, which lost U.S. market exclusivity in April 2017, Cubicin due to U.S. patent expiration in June 2016, and Cancidas, which lost EU patent protection in April 2017. Revenue growth was also offset by continued biosimilar competition for Remicade and ongoing generic erosion for products including Singulair and Nasonex. Collectively, the sales decline attributable to the above products affected by generic and biosimilar competition was $3.3 billion in 2017. Lower sales of other products within the Diversified Brands franchise that includes certain products approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, including Dulera Inhalation Aerosol, as well as lower combined sales of the diabetes franchise of Januvia and Janumet, and declines in sales of Isentress/Isentress HD also partially offset revenue growth. Additionally, sales in 2017 were reduced by $125 million due to a borrowing the Company made from the CDC Pediatric Vaccine Stockpile of doses of Gardasil 9 as discussed below. Also, as anticipated, the Company was unable to fulfill orders for certain products in certain markets due to the cyber-attack, which had an unfavorable effect on sales in 2017 of approximately $260 million.
Sales in the United States were $17.4 billion in 2017, a decline of 6% compared with $18.5 billion in 2016. The decrease was driven primarily by the effects of generic competition for Zetia and Vytorin, Cubicin, and declines of products within Diversified Brands including Nasonex and Dulera Inhalation Aerosol. Lower sales of Januvia/Janumet, Gardasil/Gardasil 9, Isentress/Isentress HD and Zostavax, also contributed to the U.S. sales decline in 2017.

38


These declines were partially offset by higher sales of Keytruda, Zepatier, Bridion, and Pneumovax 23, along with higher sales of animal health products.
International sales were $22.7 billion in 2017, an increase of 6% compared with $21.3 billion in 2016, primarily reflecting growth in Keytruda and Zepatier, and higher sales of vaccines due to the termination of the SPMSD joint venture, as well as higher sales of animal health products. Sales growth was partially offset by ongoing biosimilar competition for Remicade, as well as generic erosion for Cancidas and products within Diversified Brands. International sales represented 57% and 54% of total sales in 2017 and 2016, respectively.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, pricing pressures continue on many of the Company’s products and, in several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2017. The Company anticipates these pricing actions, including the biennial price reductions in Japan that will occur again in 2018, and other austerity measures will continue to negatively affect revenue performance in 2018.
Worldwide sales were $39.8 billion in 2016, an increase of 1% compared with 2015. Foreign exchange unfavorably affected global sales performance by 2% in 2016, which includes a lower benefit from revenue hedging activities as compared with 2015. Revenue growth primarily reflects higher sales of Keytruda, the launch of the HCV treatment Zepatier, and growth in vaccine products, including Gardasil/Gardasil 9, Varivax and Pneumovax 23. Also contributing to sales growth in 2016 were higher sales of hospital acute care products including Bridion and Noxafil, growth within the diabetes franchise of Januvia and Janumet, as well as higher sales of animal health products, particularly Bravecto. These increases were largely offset by sales declines attributable to the ongoing effects of generic and biosimilar competition for certain products, including Remicade and Nasonex, along with other products within Diversified Brands. Declines in Isentress and Dulera Inhalation Aerosol also partially offset revenue growth in 2016. Sales performance in 2016 reflects a decline of approximately $625 million due to reduced operations by the Company in Venezuela as a result of the economic conditions and volatility in that country.

39


Sales of the Company’s products were as follows:
($ in millions)
2017
 
2016
 
2015
 
U.S.
 
Int’l
 
Total
 
U.S.
 
Int’l
 
Total
 
U.S.
 
Int’l
 
Total
Primary Care and Women’s Health
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cardiovascular
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Zetia
$
352

 
$
992

 
$
1,344

 
$
1,588

 
$
972

 
$
2,560

 
$
1,612

 
$
914

 
$
2,526

Vytorin
124

 
627

 
751

 
473

 
668

 
1,141

 
479

 
771

 
1,251

Atozet

 
225

 
225

 
1

 
146

 
146

 
2

 
34

 
36

Adempas

 
300

 
300

 

 
169

 
169

 

 
30

 
30

Diabetes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Januvia
2,153

 
1,584

 
3,737

 
2,286

 
1,622

 
3,908

 
2,263

 
1,601

 
3,863

Janumet
863

 
1,296

 
2,158

 
984

 
1,217

 
2,201

 
976

 
1,175

 
2,151

General Medicine and Women’s Health
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NuvaRing
564

 
197

 
761

 
576

 
202

 
777

 
515

 
216

 
732

Implanon/Nexplanon
496

 
191

 
686

 
420

 
186

 
606

 
367

 
221

 
588

Follistim AQ
123

 
174

 
298

 
157

 
197

 
355

 
160

 
223

 
383

Hospital and Specialty
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hepatitis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Zepatier
771

 
888

 
1,660

 
488

 
67

 
555

 

 

 

HIV
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Isentress/Isentress HD
565

 
639

 
1,204

 
721

 
666

 
1,387

 
797

 
714

 
1,511

Hospital Acute Care
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bridion
239

 
465

 
704

 
77

 
405

 
482

 

 
353

 
353

Noxafil
309

 
327

 
636

 
284

 
312

 
595

 
212

 
275

 
487

Invanz
361

 
241

 
602

 
329

 
233

 
561

 
322

 
247

 
569

Cancidas
20

 
402

 
422

 
25

 
533

 
558

 
24

 
548

 
573

Cubicin (1)
189

 
193

 
382

 
906

 
181

 
1,087

 
1,030

 
97

 
1,127

Primaxin
10

 
270

 
280

 
4

 
293

 
297

 
8

 
305

 
313

Immunology
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Remicade

 
837

 
837

 

 
1,268

 
1,268

 

 
1,794

 
1,794

Simponi

 
819

 
819

 

 
766

 
766

 

 
690

 
690

Oncology
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Keytruda
2,309

 
1,500

 
3,809

 
792

 
610

 
1,402

 
393

 
173

 
566

Emend
342

 
213

 
556

 
356

 
193

 
549

 
326

 
209

 
535

Temodar
16

 
256

 
271

 
15

 
268

 
283

 
7

 
306

 
312

Diversified Brands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Respiratory
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Singulair
40

 
692

 
732

 
40

 
874

 
915

 
39

 
892

 
931

Nasonex
54

 
333

 
387

 
184

 
352

 
537

 
449

 
409

 
858

Dulera
261

 
26

 
287

 
412

 
24

 
436

 
515

 
21

 
536

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cozaar/Hyzaar
18

 
466

 
484

 
16

 
494

 
511

 
30

 
637

 
667

Arcoxia

 
363

 
363

 

 
450

 
450

 

 
471

 
471

Fosamax
6

 
235

 
241

 
5

 
279

 
284

 
12

 
347

 
359

Vaccines (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gardasil/Gardasil 9
1,565

 
743

 
2,308

 
1,780

 
393

 
2,173

 
1,520

 
388

 
1,908

ProQuad/M-M-R II/Varivax
1,374

 
303

 
1,676

 
1,362

 
279

 
1,640

 
1,290

 
214

 
1,505

Pneumovax 23
581

 
240

 
821

 
447

 
193

 
641

 
378

 
164

 
542

RotaTeq
481

 
204

 
686

 
482

 
169

 
652

 
447

 
163

 
610

Zostavax
422

 
246

 
668

 
518

 
168

 
685

 
592

 
157

 
749

Other pharmaceutical (3)
1,246

 
3,049

 
4,295

 
1,345

 
3,228

 
4,574

 
1,473

 
3,785

 
5,256

Total Pharmaceutical segment sales
15,854


19,536


35,390


17,073


18,077


35,151


16,238


18,544


34,782

Other segment sales (4)
1,486

 
2,785

 
4,272

 
1,374

 
2,489

 
3,862

 
1,213

 
2,454

 
3,667

Total segment sales
17,340


22,321


39,662


18,447


20,566


39,013


17,451


20,998


38,449

Other (5)
84

 
377

 
460

 
31

 
763

 
794

 
68

 
981

 
1,049

 
$
17,424


$
22,698


$
40,122


$
18,478


$
21,329


$
39,807


$
17,519


$
21,979


$
39,498

U.S. plus international may not equal total due to rounding.
(1) 
Sales of Cubicin in 2015 represent sales subsequent to the Cubist acquisition date.
(2) 
On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which marketed vaccines in most major European markets (see Note 9). Accordingly, vaccine sales in 2017 include sales in the European markets that were previously part of SPMSD. Amounts for 2016 and 2015 do not include sales of vaccines sold through SPMSD, the results of which are reflected in equity income from affiliates included in Other (income) expense, net. Amounts for 2016 and 2015 do, however, include supply sales to SPMSD.
(3) 
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(4)  
Represents the non-reportable segments of Animal Health, Healthcare Services and Alliances.
(5) 
Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other in 2017 and 2016 also includes $85 million and $170 million, respectively, related to the sale of the marketing rights to certain products.


40


Pharmaceutical Segment
Primary Care and Women’s Health
Cardiovascular
Combined global sales of Zetia (marketed in most countries outside the United States as Ezetrol), Vytorin (marketed outside the United States as Inegy), and Atozet (marketed in certain countries outside of the United States), medicines for lowering LDL cholesterol, were $2.3 billion in 2017, a decline of 40% compared with 2016. The sales decline was driven by lower volumes and pricing of Zetia and Vytorin in the United States as a result of generic competition. By agreement, a generic manufacturer launched a generic version of Zetia in the United States in December 2016. The U.S. patent and exclusivity periods for Zetia and Vytorin otherwise expired in April 2017. Accordingly, the Company is experiencing rapid and substantial declines in U.S. Zetia and Vytorin sales and expects the declines to continue. The Company will lose market exclusivity in major European markets for Ezetrol in April 2018 and for Inegy in April 2019 and anticipates sales declines in these markets thereafter. Sales of Ezetrol and Inegy in these markets were $552 million and $457 million, respectively, in 2017. Combined worldwide sales of Zetia, Vytorin and Atozet were $3.8 billion in 2016, growth of 1% compared with 2015, reflecting volume growth in Europe and higher pricing in the United States, largely offset by lower sales in Venezuela due to reduced operations by the Company in that country and lower volumes in the United States reflecting in part generic competition for Zetia.
Pursuant to a collaboration with Bayer AG (Bayer) (see Note 4 to the consolidated financial statements), Merck has lead commercial rights for Adempas, a cardiovascular drug for the treatment of pulmonary arterial hypertension, in countries outside the Americas while Bayer has lead rights in the Americas, including the United States. The companies share profits equally under the collaboration. In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck territories, including Japan, continued in 2017. Merck recorded sales for Adempas of $300 million in 2017, $169 million in 2016 and $30 million in 2015, which includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.
Diabetes
Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $5.9 billion in 2017, a decline of 3% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily by ongoing pricing pressure partially offset by continued volume growth globally. Combined global sales of Januvia and Janumet were $6.1 billion in 2016, an increase of 2% compared with 2015. Sales growth was driven primarily by higher volumes in the United States, Europe and Canada, partially offset by pricing pressures in the United States and Europe, and lower sales in Venezuela due to the Company’s reduced operations in that country.
In April 2017, Merck announced that the FDA issued a Complete Response Letter (CRL) regarding Merck’s supplemental New Drug Applications (NDA) for Januvia, Janumet and Janumet XR (sitagliptin and metformin HCl extended-release). With these applications, Merck is seeking to include data from TECOS (Trial Evaluating Cardiovascular Outcomes with Sitagliptin) in the prescribing information of sitagliptin-containing medicines. Merck is taking actions to respond to the CRL.
In December 2017, the FDA approved Steglatro (ertugliflozin) tablets, an oral sodium-glucose cotransporter 2 (SGLT2) inhibitor, and the fixed-dose combination Steglujan (ertugliflozin and sitagliptin) tablets, the only fixed-dose combination of an SGLT2 inhibitor and dipeptidyl peptidase-4 inhibitor Januvia (sitagliptin). The FDA also approved the fixed-dose combination Segluromet (ertugliflozin and metformin hydrochloride). Steglatro, Steglujan and Segluromet are indicated to improve glycemic control in adults with type 2 diabetes mellitus. These products are part of a worldwide (except Japan) collaboration between Merck and Pfizer Inc. (Pfizer) for the co-development and co-promotion of ertugliflozin. As a result of FDA approval, Merck will make a $60 million payment to Pfizer, which was accrued for in the fourth quarter of 2017. The amount was capitalized and will be amortized over its estimated useful life, subject to impairment testing. Merck will exclusively promote Steglatro and the two fixed-dose combination products in the United States. Merck and Pfizer will share revenues and certain costs on a 60%/40% basis, with Merck having the 60% share, and Pfizer may be entitled to additional milestone payments. In January 2018, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending approval of ertugliflozin and the two fixed-dose combination products. The CHMP positive opinion will be considered by the European Commission (EC). If approval of any of the products in the EU is received, Merck will make an additional $40 million milestone payment to Pfizer.

41


General Medicine and Women’s Health 
Worldwide sales of NuvaRing, a vaginal contraceptive product, were $761 million in 2017, a decline of 2% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily by lower sales in the United States reflecting lower volumes that were partially offset by higher pricing, and lower demand in Europe. Global sales of NuvaRing were $777 million in 2016, an increase of 6% compared with 2015 including a 1% unfavorable effect from foreign exchange. Sales growth largely reflects higher pricing in the United States, partially offset by volume declines in Europe. The patent that provides U.S. market exclusivity for NuvaRing will expire in April 2018 and the Company anticipates a significant decline in U.S. NuvaRing sales thereafter.
Worldwide sales of Implanon/Nexplanon, single-rod subdermal contraceptive implants, grew to $686 million in 2017, an increase of 13% compared with 2016, primarily reflecting higher pricing and volume growth in the United States. Global sales of Implanon/Nexplanon were $606 million in 2016, an increase of 3% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales growth reflects higher demand in the United States, partially offset by declines in international markets, particularly in Venezuela.

Hospital and Specialty
Hepatitis
Global sales of Zepatier, a treatment for chronic hepatitis C (HCV) infection, were $1.7 billion in 2017 and $555 million in 2016. Sales growth was driven primarily by higher sales in Europe, the United States and Japan following product launch in 2016. Merck has also launched Zepatier in other international markets. The Company is beginning to experience the unfavorable effects of increasing competition and declining patient volumes and anticipates that sales of Zepatier in the future will be materially adversely affected by these factors.
HIV
Worldwide sales of Isentress/Isentress HD, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, were $1.2 billion in 2017, a decline of 13% compared with 2016. The sales decline primarily reflects lower demand in the United States and Europe due to competitive pressures. In May 2017, the FDA approved Isentress HD, a once-daily dose of Isentress. In July 2017, the EC granted marketing authorization for the once-daily dose of Isentress (where it will be marketed as Isentress 600 mg). Global sales of Isentress were $1.4 billion in 2016, a decline of 8% compared with 2015 including a 2% unfavorable effect from foreign exchange. The sales decline was driven primarily by lower volumes in the United States, as well as lower demand and pricing in Europe due to competitive pressures, partially offset by a favorable adjustment to discount reserves in the United States.
Hospital Acute Care
Global sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, were $704 million in 2017, growth of 46% compared with 2016, driven by strong global demand, particularly in the United States. Worldwide sales were $482 million in 2016, growth of 37% compared with 2015 including a 2% favorable effect from foreign exchange. Sales growth reflects volume growth in most markets, including in the United States where it was approved by the FDA in December 2015, partially offset by a decline in Venezuela due to reduced operations by the Company in this country.
Worldwide sales of Noxafil, for the prevention of invasive fungal infections, were $636 million in 2017, an increase of 7% compared with 2016, primarily reflecting higher demand and pricing in the United States, as well as volume growth in Europe. Global sales of Noxafil grew 22% in 2016 to $595 million driven primarily by higher pricing in the United States, volume growth in Europe reflecting an ongoing positive impact from the approval of new formulations, and higher demand in the Asia Pacific region. Foreign exchange unfavorably affected global sales performance by 3% in 2016.
Global sales of Invanz, for the treatment of certain infections, were $602 million in 2017, an increase of 7% compared with 2016, driven primarily by higher sales in the United States, reflecting higher pricing that was partially offset by lower demand, as well as higher demand in Brazil. Worldwide sales of Invanz were $561 million in 2016, a decline of 1% compared with 2015 including a 2% unfavorable effect from foreign exchange. Sales performance in 2016 reflects higher pricing in the United States, largely offset by a decline in Venezuela. The patent that provided U.S.

42


market exclusivity for Invanz expired in November 2017 and the Company anticipates a significant decline in U.S. Invanz sales in future periods.
Global sales of Cancidas, an anti-fungal product sold primarily outside of the United States, were $422 million in 2017, a decline of 24% compared with 2016, driven primarily by generic competition in certain European markets. The EU compound patent for Cancidas expired in April 2017. Accordingly, the Company is experiencing a significant decline in Cancidas sales in these European markets and expects the decline to continue. Worldwide sales of Cancidas were $558 million in 2016, a decline of 3% compared with 2015, reflecting a 4% unfavorable effect from foreign exchange and pricing declines in Europe that were offset by higher volumes in China.
Global sales of Cubicin, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia when caused by designated susceptible organisms, were $382 million in 2017, a decline of 65% compared with 2016, and were $1.1 billion in 2016, a decline of 4% compared with 2015. The U.S. composition patent for Cubicin expired in June 2016. Accordingly, the Company is experiencing a rapid and substantial decline in U.S. Cubicin sales as a result of generic competition and expects the decline to continue. The Company anticipates it will lose market exclusivity for Cubicin in some European markets in early 2018.
In November 2017, Merck announced that the FDA approved Prevymis (letermovir) for prophylaxis (prevention) of CMV infection and disease in adult CMV-seropositive recipients [R+] of an allogeneic hematopoietic stem cell transplant. As a result of FDA approval, Merck made a €105 million ($125 million) milestone payment to AiCuris in 2017. This amount was capitalized and will be amortized over its estimated useful life, subject to impairment testing. In January 2018, Prevymis was approved by the EC and, as a result, Merck will make an additional €30 million milestone payment to AiCuris. Merck also has filed Prevymis for regulatory approval in other markets including Japan.
Immunology
Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $837 million in 2017, a decline of 34% compared with 2016, and were $1.3 billion in 2016, a decline of 29% compared with 2015. Foreign exchange unfavorably affected sales performance by 1% in 2016. The Company lost market exclusivity for Remicade in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.
Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $819 million in 2017, growth of 7% compared with 2016 including a 1% favorable effect from foreign exchange. Sales growth primarily reflects higher demand in Europe. Sales of Simponi were $766 million in 2016, an increase of 11% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales growth was driven primarily by higher volumes in Europe reflecting in part an ongoing positive impact from the ulcerative colitis indication.
Oncology
Sales of Keytruda, an anti-PD-1 therapy, were $3.8 billion in 2017, $1.4 billion in 2016 and $566 million in 2015. The year-over-year increases were driven by volume growth in all markets, particularly in the United States, Europe and Japan as the Company continues to launch Keytruda with multiple new indications globally. U.S. sales of Keytruda were $2.3 billion in 2017, $792 million in 2016 and $393 million in 2015. Sales in the United States continue to build across the multiple approved indications, in particular for the treatment of NSCLC reflecting both the continued adoption of Keytruda in the first-line setting as monotherapy for patients with metastatic NSCLC whose tumors have high PD-L1 expression, as well as the uptake of Keytruda in combination with pemetrexed and carboplatin, a commonly used chemotherapy regimen, for the first-line treatment of metastatic nonsquamous NSCLC with or without PD-L1 expression. Other indications, including melanoma, head and neck cancer, and bladder cancer, also contributed to growth in 2017. Sales growth in international markets reflects positive performance in the melanoma indications, as well as a greater contribution from the treatment of patients with NSCLC as reimbursement is established in additional markets in the first- and second-line settings.
In March 2017, the FDA approved Keytruda for the treatment of adult and pediatric patients with cHL refractory to treatment, or who have relapsed after three or more prior lines of therapy. In May 2017, the EC approved Keytruda for the treatment of adult patients with relapsed or refractory cHL who have failed autologous stem cell transplant and brentuximab vedotin, or who are transplant-ineligible and have failed brentuximab vedotin.

43


In May 2017, the FDA approved Keytruda in combination with pemetrexed and carboplatin for the first-line treatment of metastatic nonsquamous NSCLC, irrespective of PD-L1 expression. Keytruda is the only anti-PD-1 treatment approved in the first-line setting as both monotherapy and combination therapy for appropriate patients with metastatic NSCLC. In October 2016, Keytruda was approved by the FDA as monotherapy in the first-line setting for patients with metastatic NSCLC whose tumors have high PD-L1 expression, with no EGFR or ALK genomic tumor aberrations. Keytruda as monotherapy is also indicated for the second-line or greater treatment setting for patients with metastatic NSCLC whose tumors express PD-L1, with disease progression on or after platinum-containing chemotherapy. Patients with EGFR or ALK genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving Keytruda. Additionally, in January 2017, the EC approved Keytruda for the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression with no EGFR or ALK positive tumor mutations.
Also in May 2017, the FDA approved Keytruda for the treatment of certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer. In the first-line setting, Keytruda is approved for the treatment of patients with locally advanced or metastatic urothelial carcinoma who are ineligible for cisplatin-containing chemotherapy. In the second-line setting, Keytruda is approved for the treatment of patients with locally advanced or metastatic urothelial carcinoma who have disease progression during or following platinum-containing chemotherapy or within 12 months of neoadjuvant or adjuvant treatment with platinum-containing chemotherapy. In September 2017, the EC approved Keytruda for use as monotherapy for the treatment of locally advanced or metastatic urothelial carcinoma in adults who have received prior platinum-containing chemotherapy, as well as adults who are not eligible for cisplatin-containing chemotherapy.
Additionally in May 2017, the FDA approved Keytruda for a first-of-its-kind indication: the treatment of adult and pediatric patients with previously treated unresectable or metastatic MSI-H or mismatch repair deficient solid tumors. With this unique indication, Keytruda is the first cancer therapy approved for use based on a biomarker, regardless of tumor type.
In September 2017, the FDA approved Keytruda for the treatment of patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma whose tumors express PD-L1. In December 2017, Merck announced that the pivotal Phase 3 KEYNOTE-061 trial investigating Keytruda, as a second-line treatment for patients with advanced gastric or gastroesophageal junction adenocarcinoma, did not meet its primary endpoint of overall survival (OS) in patients whose tumors expressed PD-L1. Additionally, progression free survival (PFS) in the PD-L1 positive population did not show statistical significance. The safety profile observed in KEYNOTE-061 was consistent with that observed in previously reported studies of Keytruda; no new safety signals were identified. The current indication remains unchanged and the Company continues to evaluate Keytruda for gastric or gastroesophageal junction adenocarcinoma through KEYNOTE-062, a Phase 3 clinical trial studying Keytruda as a monotherapy or in combination with chemotherapy as first-line treatment for patients with PD-L1 positive advanced gastric or gastroesophageal junction cancer, and with KEYNOTE-585, a Phase 3 trial studying Keytruda in combination with chemotherapy in a neoadjuvant/adjuvant setting.
In August 2016, Merck announced that the FDA approved Keytruda for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma (HNSCC) with disease progression on or after platinum-containing chemotherapy. In July 2017, Merck announced that the pivotal Phase 3 KEYNOTE-040 trial investigating Keytruda in previously treated patients with recurrent or metastatic HNSCC did not meet its pre-specified primary endpoint of OS. The safety profile observed in KEYNOTE-040 was consistent with that observed in previously reported studies of Keytruda; no new safety signals were identified. The current indication remains unchanged and clinical trials continue, including KEYNOTE-048, a Phase 3 clinical trial of Keytruda in the first-line treatment of recurrent or metastatic HNSCC.
As a result of the additional approvals received in 2017 as noted above, Keytruda is now approved in the United States and in the EU as monotherapy for the treatment of certain patients with NSCLC, melanoma, cHL and urothelial carcinoma. Keytruda is also approved in the United States as monotherapy for the treatment of certain patients with HNSCC, gastric or gastroesophageal junction adenocarcinoma and MSI-H or mismatch repair deficient cancer, and in combination with pemetrexed and carboplatin in certain patients with NSCLC. Keytruda is also approved in Japan for the treatment of radically unresectable melanoma, PD-L1-positive unresectable advanced or recurrent NSCLC,

44


relapsed or refractory cHL, and radically unresectable urothelial carcinoma. The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).
In January 2017, Merck entered into a settlement and license agreement to resolve worldwide patent infringement litigation related to Keytruda (see Note 11 to the consolidated financial statements). Pursuant to the settlement, the Company will pay royalties of 6.5% on net sales of Keytruda in 2017 through 2023; and 2.5% on net sales of Keytruda in 2024 through 2026.
Lynparza, an oral PARP inhibitor being developed as part of a collaboration formed in July 2017 with AstraZeneca (see Note 4 to the consolidated financial statements), is currently approved for certain types of ovarian and breast cancer. In January 2018, the FDA approved Lynparza for use in patients with BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy in the neoadjuvant, adjuvant or metastatic setting. As a result of this approval, Merck will make a $70 million milestone payment to AstraZeneca (see Note 4 to the consolidated financial statements). Also in January 2018, the Japanese Ministry of Health, Labour and Welfare approved Lynparza for use as a maintenance therapy in patients for platinum-sensitive relapsed ovarian cancer, regardless of their BRCA mutation status, who responded to their last platinum-based chemotherapy. Lynparza is the first PARP inhibitor to be approved in Japan.
Diversified Brands
Merck’s diversified brands include human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the Company’s offering in other markets around the world.
Respiratory
Worldwide sales of Singulair, a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, were $732 million in 2017, a decline of 20% compared with 2016, and were $915 million in 2016, a decrease of 2% compared with 2015. Foreign exchange unfavorably affected global sales performance by 1% in 2017 and favorably affected global sales performance by 2% in 2016. The sales declines were driven by lower volumes in Japan as a result of generic competition. The patents that provided market exclusivity for Singulair in Japan expired in 2016. As a result, the Company is experiencing a significant decline in Singulair sales in Japan and expects the decline to continue. The Company no longer has market exclusivity for Singulair in any major market.
Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were $387 million in 2017, a decline of 28% compared with 2016, and were $537 million in 2016, a decline of 37% compared with 2015. Foreign exchange favorably affected global sales performance by 1% in 2017. The Company is experiencing a substantial decline in U.S. Nasonex sales as a result of generic competition and expects the decline to continue. The decline in global Nasonex sales in 2016 was also driven by lower volumes and pricing in Europe from ongoing generic erosion and lower sales in Venezuela due to reduced operations by the Company in this country.
Global sales of Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, were $287 million in 2017, a decline of 34% compared with 2016, driven by lower sales in the United States reflecting ongoing competitive pricing pressure, as well as lower demand. Worldwide sales of Dulera Inhalation Aerosol were $436 million in 2016, a decline of 19% compared with 2015 including a 1% unfavorable effect from foreign exchange. The decline was driven by lower sales in the United Sales reflecting competitive pricing pressure that was partially offset by higher demand.
Vaccines
On December 31, 2016, Merck and Sanofi terminated their equally-owned joint venture, SPMSD, which developed and marketed vaccines in Europe. Accordingly, vaccine sales in 2017 include sales of Merck vaccines in the European markets that were previously part of the SPMSD joint venture, whereas sales in periods prior to 2017 do not. Prior to 2017, vaccine sales in these European markets were sold through the SPMSD joint venture, the results of which are reflected in equity income from affiliates included in Other (income) expense, net (see Note 15 to the consolidated financial statements). Supply sales to SPMSD, however, are included in vaccine sales in periods prior to 2017. Incremental vaccine sales resulting from the termination of the SPMSD joint venture in 2017 were approximately $400 million, of which approximately $215 million relate to Gardasil/Gardasil 9.

45


Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and diseases caused by certain types of human papillomavirus (HPV), were $2.3 billion in 2017, growth of 6% compared with 2016. Sales growth was driven primarily by higher sales in Europe resulting from the termination of the SPMSD joint venture noted above, as well as higher demand in Asia Pacific due in part to the launch in China, partially offset by lower sales in the United States. Lower sales in the United States reflect the timing of public sector purchases. In addition, during 2017, the Company made a request to borrow doses of Gardasil 9 from the CDC Pediatric Vaccine Stockpile, which the CDC granted. The Company’s decision to borrow the doses from the CDC was driven in part by the temporary shutdown resulting from the cyber-attack that occurred in June, as well as by overall higher demand than expected. As a result of the borrowing, the Company reversed the sales related to the borrowed doses and recognized a corresponding liability. The Company subsequently replenished nearly half of the doses borrowed from the stockpile. The net effect of the borrowing and subsequent partial replenishment was a reduction in sales of $125 million in 2017. The Company anticipates it will replenish the remaining borrowed doses in the second half of 2018, which will result in the recognition of sales and a reversal of the remaining liability. Additionally, in October 2016, the FDA approved a 2-dose vaccination regimen for Gardasil 9, for use in girls and boys 9 through 14 years of age, and the CDC’s Advisory Committee on Immunization Practices (ACIP) voted to recommend the 2-dose vaccination regimen for certain 9 through 14 year olds. The Company is experiencing an impact from the transition from a 3-dose vaccine regimen to a 2-dose vaccination regimen; however, increased patient starts are helping to offset the negative effects of the transition. Merck’s sales of Gardasil/Gardasil 9 were $2.2 billion in 2016, growth of 14% compared with 2015. Sales growth was driven primarily by higher volumes and pricing in the United States, as well as higher demand in the Asia Pacific region, partially offset by a decline in government tenders in Brazil. The Company is a party to certain third-party license agreements with respect to Gardasil/Gardasil 9 (including a cross-license and settlement agreement with GlaxoSmithKline). As a result of these agreements, the Company pays royalties on worldwide Gardasil/Gardasil 9 sales of 10% to 18% which vary by country and are included in Materials and production costs.
Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $528 million in 2017, $495 million in 2016 and $454 million in 2015. The increase in 2017 as compared with 2016 was driven primarily by higher pricing and volumes in the United States, as well as volume growth in international markets, particularly in Europe. Sales growth in 2016 as compared with 2015 was driven primarily by higher demand and pricing in the United States.
Worldwide sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, were $382 million in 2017, $353 million in 2016 and $365 million in 2015. Sales growth in 2017 as compared with 2016 was largely attributable to higher sales in Europe resulting from the termination of the SPMSD joint venture. Sales performance in 2016 as compared with 2015 was driven by higher demand in 2015 resulting from measles outbreaks in the United States.
Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $767 million in 2017, $792 million in 2016 and $686 million in 2015. The sales decline in 2017 as compared with 2016 was driven primarily by lower volumes in Brazil due to the loss of a government tender, as well as lower sales in the United States reflecting lower demand partially offset by higher pricing. Higher sales in Europe resulting from the termination of the SPMSD joint venture partially offset the decline. Sales growth in 2016 as compared with 2015 was driven primarily by higher sales in the United States reflecting the effects of public sector purchasing and higher pricing that were partially offset by lower demand. Volume growth in Brazil reflecting the timing of government tenders also contributed to the sales increase in 2016 as compared with 2015.
Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, were $821 million in 2017, an increase of 28% compared with 2016, driven primarily by higher demand and pricing in the United States, as well as higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s sales of Pneumovax 23 were $641 million in 2016, an increase of 18% compared with 2015, driven primarily by higher volumes and pricing in the United States and higher demand in the Asia Pacific region. Foreign exchange unfavorably affected sales performance by 1% in 2017 and favorably affected sales performance by 1% in 2016.
Global sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, were $686 million in 2017, an increase of 5% compared with 2016, driven primarily by higher sales in Europe resulting from the termination of the SPMSD joint venture. Merck’s sales of RotaTeq were $652 million in 2016, an increase of 7% compared with 2015 including a 3% unfavorable effect from foreign exchange. Sales performance was driven

46


primarily by the effects of public sector purchasing in the United States, as well as volume growth in several international markets.
Worldwide sales of Zostavax, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $668 million in 2017, a decline of 2% compared with 2016 including a 1% favorable effect from foreign exchange. The sales decline was driven primarily by lower demand in the United States reflecting the approval of a competitor’s vaccine that received a preferential recommendation from the ACIP in October 2017 for the prevention of shingles over Zostavax. The Company anticipates this competition will have a material adverse effect on sales of Zostavax in future periods. The U.S. sales decline was largely offset by growth in Europe resulting from the termination of the SPMSD joint venture and volume growth in the Asia Pacific region. Merck’s sales of Zostavax were $685 million in 2016, a decline of 9% compared with 2015 including a 1% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States, partially offset by higher pricing in the United States and higher demand in the Asia Pacific region.
Other Segments
The Company’s other segments are the Animal Health, Healthcare Services and Alliances segments, which are not material for separate reporting.
Animal Health
Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. Animal Health sales are affected by competition and the frequent introduction of generic products. Worldwide sales of Animal Health products were $3.9 billion in 2017, $3.5 billion in 2016 and $3.3 billion in 2015. Global sales of Animal Health products grew 11% in 2017 compared with 2016 primarily reflecting higher sales of companion animal products, largely driven by growth in Bravecto, a line of products that kill fleas and ticks in dogs and cats for up to 12 weeks, reflecting both growth in the oral formulation and continued uptake in the topical formulation, which was launched in 2016. Animal Health sales growth was also driven by higher sales of ruminant, poultry and swine products. Worldwide sales of Animal Health products increased 4% in 2016 compared with 2015 including a 4% unfavorable effect from foreign exchange. Sales growth reflects volume growth across most species areas, particularly in products for companion animals, driven primarily by higher sales of Bravecto, as well as in poultry and swine products.
In March 2017, Merck acquired a controlling interest in Vallée, a leading privately held producer of animal health products in Brazil (see Note 3 to the consolidated financial statements).
Costs, Expenses and Other
($ in millions)
2017
 
Change
 
2016
 
Change
 
2015
Materials and production
$
12,775

 
-8
 %
 
$
13,891

 
-7
 %
 
$
14,934

Marketing and administrative
9,830

 
1
 %
 
9,762

 
-5
 %
 
10,313

Research and development
10,208

 
1
 %
 
10,124

 
51
 %
 
6,704

Restructuring costs
776

 
19
 %
 
651

 
5
 %
 
619

Other (income) expense, net
12

 
-98
 %
 
720

 
-53
 %
 
1,527

 
$
33,601

 
-4
 %
 
$
35,148

 
3
 %
 
$
34,097

Materials and Production
Materials and production costs were $12.8 billion in 2017, $13.9 billion in 2016 and $14.9 billion in 2015. Costs include expenses for the amortization of intangible assets recorded in connection with business acquisitions which totaled $3.1 billion in 2017, $3.7 billion in 2016 and $4.7 billion in 2015. Costs in 2017, 2016 and 2015 also include intangible asset impairment charges of $58 million, $347 million and $45 million, respectively, related to marketed products and other intangibles recorded in connection with business acquisitions (see Note 8 to the consolidated financial statements). Costs in 2017 also include a $76 million intangible asset impairment charge related to a licensing agreement. The Company may recognize additional non-cash impairment charges in the future related to intangible assets that were measured at fair value and capitalized in connection with business acquisitions and such charges could be material. In addition, expenses for 2015 include $105 million of amortization of purchase accounting adjustments to Cubist’s

47


inventories. Also included in materials and production costs are expenses associated with restructuring activities which amounted to $138 million, $181 million and $361 million in 2017, 2016 and 2015, respectively, primarily reflecting accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.
Gross margin was 68.2% in 2017 compared with 65.1% in 2016 and 62.2% in 2015. The improvements in gross margin reflect a lower net impact from the amortization of intangible assets, intangible asset impairment charges and restructuring costs as noted above, which reduced gross margin by 8.2 percentage points in 2017, 10.6 percentage points in 2016 and 13.2 percentage points in 2015. The gross margin improvement in 2017 compared with 2016 also reflects the favorable effects of product mix. Manufacturing-related costs associated with the cyber-attack partially offset the gross margin improvement in 2017. The improvement in gross margin in 2016 as compared with 2015 was also driven by lower inventory write-offs and the favorable effects of foreign exchange.
Marketing and Administrative
Marketing and administrative (M&A) expenses were $9.8 billion in 2017, an increase of 1% compared with 2016. Higher administrative costs, including costs associated with the Company operating its vaccines business in the European markets that were previously part of the SPMSD joint venture, remediation costs related to the cyber-attack, and higher promotional expenses related to product launches were partially offset by lower restructuring and acquisition and divestiture-related costs, lower selling expenses and the favorable effect of foreign exchange. M&A expenses were $9.8 billion in 2016, a decline of 5% compared with 2015, driven largely by lower acquisition and divestiture-related costs, the favorable effects of foreign exchange, lower administrative expenses, such as legal defense costs, as well as lower selling costs. Higher promotional spending largely related to product launches and higher restructuring costs partially offset the decline. M&A expenses for 2017, 2016 and 2015 include restructuring costs of $2 million,