UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2019

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.

(Exact name of registrant as specified in its charter)

New Jersey	22-1918501
(State or other jurisdiction of incorporation)	(I.R.S Employer Identification No.)
2000 Galloping Hill Road, Kenilworth, NJ	07033
(Address of principal executive offices)	(Zip code)
(Registrant’s telephone number, including area code) (908) 740-4000

	Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)

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 every Interactive Data File required to be submitted 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 such files).  Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☐	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 ☒

Securities Registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock ($0.50 par value)	MRK	New York Stock Exchange
1.125% Notes due 2021	MRK/21	New York Stock Exchange
0.500% Notes due 2024	MRK 24	New York Stock Exchange
1.875% Notes due 2026	MRK/26	New York Stock Exchange
2.500% Notes due 2034	MRK/34	New York Stock Exchange
1.375% Notes due 2036	MRK 36A	New York Stock Exchange

The number of shares of common stock outstanding as of the close of business on April 30, 2019: 2,574,644,410

Part I - Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited, $ in millions except per share amounts)

	Three Months Ended   March 31,
	2019			2018
Sales	$	10,816		$	10,037
Costs, Expenses and Other
Cost of sales	3,052			3,184
Selling, general and administrative	2,425			2,508
Research and development	1,931			3,196
Restructuring costs	153			95
Other (income) expense, net	188			(291		)
	7,749			8,692
Income Before Taxes	3,067			1,345
Taxes on Income	205			604
Net Income	2,862			741
Less: Net (Loss) Income Attributable to Noncontrolling Interests	(53		)	5
Net Income Attributable to Merck & Co., Inc.	$	2,915		$	736
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders	$	1.13		$	0.27
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders	$	1.12		$	0.27

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited, $ in millions)

	Three Months Ended   March 31,
	2019			2018
Net Income Attributable to Merck & Co., Inc.	$	2,915		$	736
Other Comprehensive Income Net of Taxes:
Net unrealized loss on derivatives, net of reclassifications	(48		)	(70		)
Net unrealized gain (loss) on investments, net of reclassifications	82			(99		)
Benefit plan net gain and prior service credit, net of amortization	15			36
Cumulative translation adjustment	150			257
	199			124
Comprehensive Income Attributable to Merck & Co., Inc.	$	3,114		$	860

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

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MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited, $ in millions except per share amounts)

	March 31, 2019			December 31, 2018
Assets
Current Assets
Cash and cash equivalents	$	8,076		$	7,965
Short-term investments	722			899
Accounts receivable (net of allowance for doubtful accounts of $116 in 2019 and $119 in 2018)	7,608			7,071
Inventories (excludes inventories of $1,398 in 2019 and $1,417 in 2018 classified in Other assets - see Note 6)	5,712			5,440
Other current assets	3,233			4,500
Total current assets	25,351			25,875
Investments	5,621			6,233
Property, Plant and Equipment, at cost, net of accumulated depreciation of $16,623 in 2019 and $16,324 in 2018	13,506			13,291
Goodwill	18,170			18,253
Other Intangibles, Net	10,999			11,431
Other Assets	8,707			7,554
	$	82,354		$	82,637
Liabilities and Equity
Current Liabilities
Loans payable and current portion of long-term debt	$	3,175		$	5,308
Trade accounts payable	3,018			3,318
Accrued and other current liabilities	10,081			10,151
Income taxes payable	807			1,971
Dividends payable	1,462			1,458
Total current liabilities	18,543			22,206
Long-Term Debt	22,721			19,806
Deferred Income Taxes	1,835			1,702
Other Noncurrent Liabilities	11,585			12,041
Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2019 and 2018	1,788			1,788
Other paid-in capital	38,768			38,808
Retained earnings	44,065			42,579
Accumulated other comprehensive loss	(5,346		)	(5,545		)
	79,275			77,630
Less treasury stock, at cost: 994,032,308 shares in 2019 and 984,543,979 shares in 2018	51,736			50,929
Total Merck & Co., Inc. stockholders’ equity	27,539			26,701
Noncontrolling Interests	131			181
Total equity	27,670			26,882
	$	82,354		$	82,637

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

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MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited, $ in millions)

	Three Months Ended   March 31,
	2019			2018
Cash Flows from Operating Activities
Net income	$	2,862		$	741
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	898			1,137
Intangible asset impairment charges	104			—
Charge for future payments related to collaboration license options	—			650
Deferred income taxes	194			(30		)
Share-based compensation	93			80
Other	120			50
Net changes in assets and liabilities	(2,935		)	(1,473		)
Net Cash Provided by Operating Activities	1,336			1,155
Cash Flows from Investing Activities
Capital expenditures	(595		)	(450		)
Purchases of securities and other investments	(974		)	(1,326		)
Proceeds from sales of securities and other investments	1,899			1,848
Other	38			(269		)
Net Cash Provided by (Used in) Investing Activities	368			(197		)
Cash Flows from Financing Activities
Net change in short-term borrowings	(4,135		)	(1		)
Payments on debt	—			(1,003		)
Proceeds from issuance of debt	4,958			—
Purchases of treasury stock	(1,090		)	(566		)
Dividends paid to stockholders	(1,428		)	(1,299		)
Proceeds from exercise of stock options	173			230
Other	(92		)	(83		)
Net Cash Used in Financing Activities	(1,614		)	(2,722		)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	20			154
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	110			(1,610		)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of $2 million at January 1, 2019 included in Other Assets)	7,967			6,096
Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $1 million at March 31, 2019 included in Other Assets)	$	8,077		$	4,486

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

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Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Merck & Co., Inc. (Merck or the Company) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck’s Form 10-K filed on February 27, 2019.

The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair statement of these interim statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to the current presentation.

Recently Adopted Accounting Standards

In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases (ASU 2016-02) and subsequently issued several updates to the new guidance (ASC 842 or new guidance). The new guidance requires that lessees recognize a right-of-use asset and a lease liability for each of its leases (other than leases that meet the definition of a short-term lease). Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases), while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The Company adopted the new standard on January 1, 2019 using a modified retrospective approach. Merck elected the transition method that allows for application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company also elected available practical expedients. Upon adoption, the Company recognized $1.1 billion of additional assets and related liabilities on its consolidated balance sheet (see Note 7). The adoption of the new guidance did not impact the Company’s consolidated statements of income or cash flows.

Recently Issued Accounting Standards Not Yet Adopted

In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019, including adoption in any interim period. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In April 2018, the FASB issued new guidance on the accounting for costs incurred to implement a cloud computing arrangement that is considered a service arrangement. The new guidance requires the capitalization of such costs, aligning it with the accounting for costs associated with developing or obtaining internal-use software. The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. Prospective adoption for eligible costs incurred on or after the date of adoption or retrospective adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In November 2018, the FASB issued new guidance for collaborative arrangements intended to reduce diversity in practice by clarifying whether certain transactions between collaborative arrangement participants should be accounted for under the recently issued guidance on revenue recognition (ASC 606). The new guidance is effective for interim and annual periods beginning in 2020. Early adoption is permitted, including adoption in any interim period. The new guidance is to be applied on a retrospective basis through a cumulative-effect adjustment directly to retained earnings. The Company does not anticipate the adoption of this standard will have a material effect on its consolidated financial statements.

2. Acquisitions, Research Collaborations and License Agreements

The Company continues to pursue acquisitions and the establishment of external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share arrangements, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.

In April 2019, Merck acquired Antelliq Corporation (Antelliq) from funds advised by BC Partners. Antelliq is a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

gather critical data to improve management, health and well-being of livestock and pets. Merck paid $2.3 billion to acquire all outstanding shares of Antelliq and spent $1.3 billion to repay Antelliq’s debt. The transaction will be accounted for as an acquisition of a business. The Company is in the process of determining the preliminary fair value of assets acquired and liabilities assumed for this transaction.

In April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease, for $301 million in cash. Immune Design’s proprietary technologies, GLAAS and ZVex, are engineered to activate the immune system’s natural ability to generate and/or expand antigen-specific cytotoxic immune cells to fight cancer and other chronic diseases. The transaction will be accounted for as an acquisition of a business. The Company is in the process of determining the preliminary fair value of assets acquired and liabilities assumed for this transaction.

In March 2018, Merck and Eisai Co., Ltd. (Eisai) entered into a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai (see Note 3).

3.    Collaborative Arrangements

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

AstraZeneca

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

Gross profits from Lynparza and selumetinib product sales generated through monotherapies or combination therapies are shared equally. Merck will fund all development and commercialization costs of Keytruda in combination with Lynparza or selumetinib. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or selumetinib. AstraZeneca is the principal on Lynparza sales transactions. Merck records its share of Lynparza product sales, net of cost of sales and commercialization costs, as alliance revenue within the Pharmaceutical segment and its share of development costs associated with the collaboration as part of Research and development costs. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs.

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

Since inception of the collaboration agreement, Merck has accrued $700 million of sales-based milestone payments. Each of these milestones was accrued when the achievement of the milestone was deemed probable based on the sales of Lynparza. The recognition of these liabilities resulted in corresponding increases to the intangible asset related to Lynparza. Of these amounts, $250 million has been paid to AstraZeneca. Potential future sales-based milestone payments of $3.4 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In April 2019, Lynparza received regulatory approval in the European Union as a monotherapy for the treatment of certain adult patients with advanced breast cancer, triggering a $30 million capitalized milestone payment from Merck to AstraZeneca. In 2018, Lynparza received regulatory approvals triggering capitalized milestone payments of $140 million in the aggregate from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.73 billion remain under the agreement.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $724 million at March 31, 2019 and is included in Other Assets on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.

Summarized information related to this collaboration is as follows:

	Three Months Ended   March 31,
($ in millions)	2019		2018
Alliance revenue	$	79	$	33
Cost of sales (1)	19		12
Selling, general and administrative	27		7
Research and development	45		29
($ in millions)	March 31, 2019		December 31, 2018
Receivables from AstraZeneca included in Other current assets	$	80	$	52
Payables to AstraZeneca included in Accrued and other current liabilities (2)	584		405
Payables to AstraZeneca included in Other Noncurrent Liabilities (2)	—		250

⁽¹⁾ Represents amortization of capitalized milestone payments.

⁽²⁾ Includes accrued milestone and license option payments.

Eisai

In March 2018, Merck and Eisai announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima, an orally available tyrosine kinase inhibitor discovered by Eisai. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Merck’s anti-PD-1 therapy, Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share gross profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development, including for studies evaluating Lenvima as monotherapy, are shared equally by the two companies and reflected in Research and development costs.

Under the agreement, Merck made an upfront payment to Eisai of $750 million and will make payments of up to $650 million for certain option rights through 2021 (of which $325 million was paid in March 2019, $200 million is expected to be paid in March 2020 and $125 million is expected to be paid in March 2021). The Company recorded an aggregate charge of $1.4 billion in Research and development expenses in the first quarter of 2018 related to the upfront payment and future option payments. In addition, the agreement provides for Eisai to receive up to $385 million associated with the achievement of certain clinical and regulatory milestones and up to $3.97 billion for the achievement of milestones associated with sales of Lenvima.

In the first quarter of 2019, Merck determined it was probable that annual sales of Lenvima in the future would trigger $282 million of sales-based milestone payments from Merck to Eisai. Accordingly, in the first quarter of 2019, Merck recorded $282 million of liabilities and corresponding increases to the intangible asset related to Lenvima and also recognized $35 million of cumulative amortization expense within Cost of sales. Merck previously accrued sales-based milestone payments aggregating $268 million in 2018. Potential future sales-based milestone payments of $3.42 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In 2018, Lenvima received regulatory approvals triggering capitalized milestone payments of $250 million in the aggregate from Merck to Eisai. Potential future regulatory milestone payments of $135 million remain under the agreement.

The asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $711 million at March 31, 2019 and is included in Other Assets on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Summarized information related to this collaboration is as follows:

	Three Months Ended   March 31,
($ in millions)	2019		2018
Alliance revenue	$	74	$	—
Cost of sales (1)	51		—
Selling, general and administrative	19		—
Research and development (2)	47		1,400
($ in millions)	March 31, 2019		December 31, 2018
Receivables from Eisai included in Other current assets	$	75	$	71
Payables to Eisai included in Accrued and other current liabilities(3)	557		375
Payables to Eisai included in Other Noncurrent Liabilities(3)	325		543

⁽¹⁾ Represents amortization of capitalized milestone payments.

⁽²⁾ Amount in 2018 reflects the upfront payment and future option payments.

⁽³⁾ Includes accrued milestone and option payments.

Bayer AG

In 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas, which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies have implemented a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development by Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. Under the agreement, Bayer leads commercialization of Adempas in the Americas, while Merck leads commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead commercialization in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. In 2016, Merck began promoting and distributing Adempas in Europe. Transition from Bayer in other Merck territories, including Japan, continued in 2017. Revenue from Adempas includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.

In the first quarter of 2018, Merck made a $350 million sales-based milestone payment to Bayer, which was accrued for in 2016 when Merck deemed the payment to be probable. In 2018, Merck determined it was probable that annual worldwide sales of Adempas in the future would trigger a $375 million sales-based milestone payment from Merck to Bayer; accordingly, Merck recorded a $375 million liability and a corresponding increase to the intangible asset related to Adempas. There is an additional $400 million potential future sales-based milestone payment that has not yet been accrued as it is not deemed by the Company to be probable at this time.

The intangible asset balance related to Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments) was $977 million at March 31, 2019 and is included in Other Intangibles, Net on the Consolidated Balance Sheet. The amount is being amortized over its estimated useful life through 2027 as supported by projected future cash flows, subject to impairment testing.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Summarized information related to this collaboration is as follows:

	Three Months Ended   March 31,
($ in millions)	2019		2018
Net product sales recorded by Merck	$	48	$	43
Merck’s profit share from sales in Bayer’s marketing territories	42		25
Total sales	90		68
Cost of sales (1)	29		27
Selling, general and administrative	8		8
Research and development	30		28
($ in millions)	March 31, 2019		December 31, 2018
Receivables from Bayer included in Other current assets	$	33	$	32
Payables to Bayer included in Other Noncurrent Liabilities(2)	375		375

⁽¹⁾ Includes amortization of intangible assets.

⁽²⁾ Includes accrued milestone payments.

4. Restructuring

Merck recently approved a new global restructuring program (the “2019 Restructuring Program”) as part of a worldwide initiative focused primarily on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization and builds on prior restructuring programs. The Company will continue to evaluate its global footprint and overall operating model, which could result in the identification of additional actions over time. The actions contemplated under the 2019 Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $800 million to $1.2 billion. The Company estimates that approximately 55% of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately 45% of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects to record charges of approximately $500 million in 2019 related to the program. Actions under previous global restructuring programs have been substantially completed.

The Company recorded total pretax costs of $187 million and $104 million in the first quarter of 2019 and 2018, respectively, related to restructuring program activities. For segment reporting, restructuring charges are unallocated expenses.

The following tables summarize the charges related to restructuring program activities by type of cost:

	Three Months Ended March 31, 2019
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total
Cost of sales	$	—	$	34	$	—	$	34
Selling, general and administrative	—		—		—		—
Research and development	—		—		—		—
Restructuring costs	128		—		25		153
	$	128	$	34	$	25	$	187

	Three Months Ended March 31, 2018
($ in millions)	Separation Costs		Accelerated Depreciation			Other		Total
Cost of sales	$	—	$	—		$	6	$	6
Selling, general and administrative	—		1			—		1
Research and development	—		(3		)	5		2
Restructuring costs	55		—			40		95
	$	55	$	(2	)	$	51	$	104

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.

Other activity in 2019 and 2018 includes asset abandonment, shut-down and other related costs, as well as pretax gains and losses resulting from sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 11) and share-based compensation.

The following table summarizes the charges and spending relating to restructuring program activities for the three months ended March 31, 2019:

($ in millions)	Separation Costs			Accelerated Depreciation			Other			Total
Restructuring reserves January 1, 2019	$	443		$	—		$	91		$	534
Expense	128			34			25			187
(Payments) receipts, net	(69		)	—			(32		)	(101		)
Non-cash activity	—			(34		)	(3		)	(37		)
Restructuring reserves March 31, 2019 (1)	$	502		$	—		$	81		$	583

⁽¹⁾  The remaining cash outlays are expected to be substantially completed by the end of 2023.

5. Financial Instruments

Derivative Instruments and Hedging Activities

The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.

A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.

Foreign Currency Risk Management

The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.

The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts and purchased collar options.

The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other comprehensive income (OCI), depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the unrealized gains or losses on these contracts is recorded in Accumulated other comprehensive income (AOCI) and reclassified into Sales when the hedged anticipated revenue is recognized. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.

- 10 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The Company manages operating activities and net asset positions at each local subsidiary in order to mitigate the effects of exchange on monetary assets and liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.

Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.

The Company also uses forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign operations. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI, and remain in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded component). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded component on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed Consolidated Statement of Cash Flows.

Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.

The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:

	Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)						Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
	Three Months Ended March 31,						Three Months Ended March 31,
($ in millions)	2019			2018			2019			2018
Net Investment Hedging Relationships
Foreign exchange contracts	$	(11	)	$	(2	)	$	(8	)	$	—
Euro-denominated notes	(30		)	178			—			—

⁽¹⁾ No amounts were reclassified from AOCI into income related to the sale of a subsidiary.

Interest Rate Risk Management

The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.

At March 31, 2019, the Company was a party to 19 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.

	March 31, 2019
($ in millions)	Par Value of Debt	Number of Interest Rate Swaps Held	Total Swap Notional Amount
1.85% notes due 2020	1,250	5	1,250
3.875% notes due 2021	1,150	5	1,150
2.40% notes due 2022	1,000	4	1,000
2.35% notes due 2022	1,250	5	1,250

- 11 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense along with the offsetting fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.

The table below presents the location of amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:

	Carrying Amount of Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)	March 31, 2019		December 31, 2018		March 31, 2019			December 31, 2018
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt	$	1,237	$	—	$	(12	)	$	—
Long-Term Debt	3,357		4,560		(37		)	(82		)

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:

		March 31, 2019						December 31, 2018
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
($ in millions)	Balance Sheet Caption	Asset		Liability				Asset		Liability
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Accrued and other current liabilities	$	—	$	12	$	1,250	$	—	$	—	$	—
Interest rate swap contracts	Other noncurrent liabilities	—		36		3,400		—		$	81	4,650
Foreign exchange contracts	Other current assets	202		—		6,316		263		—		6,222
Foreign exchange contracts	Other assets	84		—		3,115		75		—		2,655
Foreign exchange contracts	Accrued and other current liabilities	—		8		730		—		7		774
Foreign exchange contracts	Other noncurrent liabilities	—		1		167		—		1		89
		$	286	$	57	$	14,978	$	338	$	89	$	14,390
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	Other current assets	$	98	$	—	$	8,681	$	116	$	—	$	5,430
Foreign exchange contracts	Accrued and other current liabilities	—		138		11,684		—		71		9,922
		$	98	$	138	$	20,365	$	116	$	71	$	15,352
		$	384	$	195	$	35,343	$	454	$	160	$	29,742

As noted above, the Company records its derivatives on a gross basis in the Condensed Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes:

	March 31, 2019						December 31, 2018
($ in millions)	Asset			Liability			Asset			Liability
Gross amounts recognized in the consolidated balance sheet	$	384		$	195		$	454		$	160
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet	(155		)	(155		)	(121		)	(121		)
Cash collateral received	(37		)	—			(107		)	—
Net amounts	$	192		$	40		$	226		$	39

- 12 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging relationships:

	Sales					Other (income) expense, net (1)					Other comprehensive income (loss)
	Three Months Ended March 31,					Three Months Ended March 31,					Three Months Ended March 31,
($ in millions)	2019		2018			2019			2018		2019			2018
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	$	10,816	$	10,037		$	188		(291	)	$	199		$	124
(Gain) loss on fair value hedging relationships
Interest rate swap contracts
Hedged items	—		—			33			(62	)	—			—
Derivatives designated as hedging instruments	—		—			(23		)	62		—			—
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of loss recognized in OCI on derivatives	—		—			—			—		(13		)	(181		)
Increase (decrease) in Sales as a result of AOCI reclassifications	44		(93		)	—			—		(44		)	93
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives	—		—			(1		)	(1	)	—			—
Amount of loss recognized in OCI on derivatives	—		—			—			—		(4		)	(1		)

⁽¹⁾ Interest expense is a component of Other (income) expense, net.

The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:

		Amount of Derivative Pretax (Gain) Loss Recognized in Income
		Three Months Ended March 31,
($ in millions)	Income Statement Caption	2019		2018
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts(1)	Other (income) expense, net	$	118	$	28
Foreign exchange contracts (2)	Sales	10		8

⁽¹⁾ These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.

⁽²⁾ These derivative contracts serve as economic hedges of forecasted transactions.

At March 31, 2019, the Company estimates $141 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCI to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.

- 13 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Investments in Debt and Equity Securities

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

	March 31, 2019									December 31, 2018
	Fair Value		Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized
($ in millions)					Gains		Losses							Gains		Losses
Corporate notes and bonds	$	4,310	$	4,307	$	22	$	(19	)	$	4,920	$	4,985	$	3	$	(68	)
Asset-backed securities	1,094		1,096		3		(5		)	1,275		1,285		1		(11		)
U.S. government and agency securities	832		828		5		(1		)	892		895		2		(5		)
Foreign government bonds	99		99		—		—			166		167		—		(1		)
Mortgage-backed securities	8		8		—		—			8		8		—		—
Total debt securities	$	6,343	$	6,338	$	30	$	(25	)	$	7,261	$	7,340	$	6	$	(85	)
Publicly traded equity securities (1)	636									456
Total debt and publicly traded equity securities	$	6,979								$	7,717

⁽¹⁾ During the first quarter of 2019 and 2018, unrealized net gains of $114 million and $44 million, respectively, were recognized in Other (income) expense, net on equity securities still held at March 31, 2019.

At March 31, 2019, the Company also had $542 million of equity investments without readily determinable fair values included in Other Assets. During the first three months of 2019, the Company recognized unrealized losses of $9 million in Other (income) expense, net related to certain of these investments based on unfavorable observable price changes. Since January 1, 2018, cumulative unrealized gains and cumulative unrealized losses based on observable prices changes for investments in equity investments without readily determinable fair values were $167 million and $20 million, respectively.

Available-for-sale debt securities included in Short-term investments totaled $691 million at March 31, 2019. Of the remaining debt securities, $5.2 billion mature within five years. At March 31, 2019 and December 31, 2018, there were no debt securities pledged as collateral.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities, Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities, Level 3 - Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

- 14 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements Using								Fair Value Measurements Using
	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
($ in millions)	March 31, 2019								December 31, 2018
Assets
Investments
Corporate notes and bonds	$	—	$	4,231	$	—	$	4,231	$	—	$	4,835	$	—	$	4,835
Asset-backed securities (1)	—		1,069		—		1,069		—		1,253		—		1,253
U.S. government and agency securities	—		735		—		735		—		731		—		731
Foreign government bonds	—		99		—		99		—		166		—		166
Publicly traded equity securities	209		—		—		209		147		—		—		147
	209		6,134		—		6,343		147		6,985		—		7,132
Other assets (2)
U.S. government and agency securities	56		41		—		97		55		106		—		161
Corporate notes and bonds	—		79		—		79		—		85		—		85
Asset-backed securities (1)	—		25		—		25		—		22		—		22
Mortgage-backed securities	—		8		—		8		—		8		—		8
Publicly traded equity securities	427		—		—		427		309		—		—		309
	483		153		—		636		364		221		—		585
Derivative assets (3)
Forward exchange contracts	—		194		—		194		—		241		—		241
Purchased currency options	—		190		—		190		—		213		—		213
	—		384		—		384		—		454		—		454
Total assets	$	692	$	6,671	$	—	$	7,363	$	511	$	7,660	$	—	$	8,171
Liabilities
Other liabilities
Contingent consideration	$	—	$	—	$	667	$	667	$	—	$	—	$	788	$	788
Derivative liabilities (3)
Forward exchange contracts	—		144		—		144		—		74		—		74
Interest rate swaps	—		48		—		48		—		81		—		81
Written currency options	—		3		—		3		—		5		—		5
	—		195		—		195		—		160		—		160
Total liabilities	$	—	$	195	$	667	$	862	$	—	$	160	$	788	$	948

⁽¹⁾  Primarily all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily 5 years or less.

⁽²⁾  Investments included in other assets are restricted as to use, primarily for the payment of benefits under employee benefit plans.

⁽³⁾  The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

There were no transfers between Level 1 and Level 2 during the first three months of 2019. As of March 31, 2019, Cash and cash equivalents of $8.1 billion included $7.3 billion of cash equivalents (which would be considered Level 2 in the fair value hierarchy).

- 15 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Contingent Consideration

Summarized information about the changes in liabilities for contingent consideration is as follows:

	Three Months Ended March 31,
($ in millions)	2019			2018
Fair value January 1	$	788		$	935
Changes in estimated fair value (1)	(36		)	36
Additions	—			8
Payments	(85		)	(60		)
Fair value March 31 (2)	$	667		$	919

⁽¹⁾ Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net. Includes cumulative translation adjustments.

⁽²⁾ Balance at March 31, 2019 includes $100 million recorded as a current liability for amounts expected to be paid within the next 12 months.

The decline in the estimated fair value of liabilities for contingent consideration in the first quarter of 2019 primarily relates to a decision not to pursue an acute cough indication for MK-7264 (gefapixant), a program obtained in connection with the acquisition of Afferent Pharmaceuticals. Gefapixant remains in clinical development for other indications, including chronic cough. The payments of contingent consideration in both periods relate to liabilities recorded in connection with the 2016 termination of the Sanofi-Pasteur MSD joint venture.

Other Fair Value Measurements

Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

The estimated fair value of loans payable and long-term debt (including current portion) at March 31, 2019, was $27.1 billion compared with a carrying value of $25.9 billion and at December 31, 2018, was $25.6 billion compared with a carrying value of $25.1 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.

Concentrations of Credit Risk

On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards as specified in the Company’s investment policy guidelines.

The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.

Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. Cash received by the Company from various counterparties was $37 million and $107 million at March 31, 2019 and December 31, 2018, respectively. The obligation to return such collateral is recorded in Accrued and other current liabilities. No cash collateral was advanced by the Company to counterparties as of March 31, 2019 or December 31, 2018.

- 16 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

6. Inventories

Inventories consisted of:

($ in millions)	March 31, 2019			December 31, 2018
Finished goods	$	1,698		$	1,658
Raw materials and work in process	5,217			5,004
Supplies	201			194
Total (approximates current cost)	7,116			6,856
(Decrease) increase to LIFO costs	(6		)	1
	$	7,110		$	6,857
Recognized as:
Inventories	$	5,712		$	5,440
Other assets	1,398			1,417

Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At March 31, 2019 and December 31, 2018, these amounts included $1.3 billion and $1.4 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included $85 million and $7 million at March 31, 2019 and December 31, 2018, respectively, of inventories produced in preparation for product launches.

7. Loans Payable, Long-Term Debt and Leases

Long-Term Debt

In March 2019, the Company issued $5.0 billion principal amount of senior unsecured notes consisting of $750 million of 2.90% notes due 2024, $1.75 billion of 3.40% notes due 2029, $1.0 billion of 3.90% notes due 2039, and $1.5 billion of 4.00% notes due 2049. The Company intends to use the net proceeds from the offering of $5.0 billion for general corporate purposes, including the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities.

Leases

As discussed in Note 1, on January 1, 2019, Merck adopted new guidance for the accounting and reporting of leases. The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. As permitted under the transition guidance in ASC 842, the Company elected a package of practical expedients which, among other provisions, allowed the Company to carry forward historical lease classifications. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial.

Under ASC 842 transition guidance, Merck elected the hindsight practical expedient to determine the lease term for existing leases, which permits companies to consider available information prior to the effective date of the new guidance as to the actual or likely exercise of options to extend or terminate the lease. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of eight years, which include options to extend the leases for up to four years where applicable. Vehicle leases are generally in effect for four years. The Company has made an accounting policy election not to record short-term leases (leases with an initial term of 12 months or less) on the balance sheet; however, Merck currently has no short-term leases.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments. As a practical expedient, the Company has made an accounting policy election not to separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.

Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

- 17 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Operating lease cost was $83 million for the first quarter of 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $73 million for the first quarter of 2019.

Supplemental balance sheet information related to operating leases is as follows:

($ in millions)	March 31, 2019
Assets
Other Assets (1)	$	1,096
Liabilities
Accrued and other current liabilities	248
Other Noncurrent Liabilities	777
Weighted-average remaining lease term (years)	7.5
Weighted-average discount rate	3.4		%

⁽¹⁾ Includes prepaid leases that have no related lease liability.

Maturities of operating leases liabilities are as follows:

($ in millions)	March 31, 2019
2019 (excluding the three months ended March 31, 2019)	$	260
2020	206
2021	164
2022	132
2023	94
Thereafter	308
Total lease payments	1,164
Less: imputed interest	(139		)
	1,025

As of March 31, 2019, the Company has entered into additional real estate operating leases that have not yet commenced. The obligations associated with these leases total $110 million, of which $72 million relates to a lease that will commence in July 2019 and has a lease term of 10 years.

As of December 31, 2018, prior to the adoption of ASC 842, the minimum aggregate rental commitments under noncancellable leases were as follows: 2019, $188 million; 2020, $198 million; 2021, $150 million; 2022, $134 million; 2023, $84 million and thereafter, $243 million.

8. Contingencies

The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including governmental and environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial position, results of operations or cash flows.

Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.

The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities effective August 1, 2004.

Product Liability Litigation

Fosamax

As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Fosamax (Fosamax Litigation). As of March 31, 2019, approximately 3,900 cases have been filed and either are pending or conditionally dismissed (as noted below) against Merck in either federal or state court. Plaintiffs in the vast majority of these cases generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of Fosamax.

In March 2011, Merck submitted a Motion to Transfer to the Judicial Panel on Multidistrict Litigation (JPML) seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. All federal cases involving allegations of Femur Fracture have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL). In the only bellwether case tried to date in the Femur Fracture MDL, Glynn v. Merck, the jury returned a verdict in Merck’s favor. In addition, in June 2013, the Femur Fracture MDL court granted Merck’s motion for judgment as a matter of law in the Glynn case and held that the plaintiff’s failure to warn claim was preempted by federal law.

In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the Glynn case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In March 2017, the Third Circuit issued a decision reversing the Femur Fracture MDL court’s preemption ruling and remanding the appealed cases back to the Femur Fracture MDL court. Merck filed a petition for a writ of certiorari to the U.S. Supreme Court in August 2017 seeking review of the Third Circuit’s decision. In December 2017, the Supreme Court invited the Solicitor General to file a brief in the case expressing the views of the United States, and in May 2018, the Solicitor General submitted a brief stating that the Third Circuit’s decision was wrongly decided and recommended that the Supreme Court grant Merck’s cert petition. The Supreme Court granted Merck’s petition in June 2018, and an oral argument before the Supreme Court was held on January 7, 2019. The final decision on the Femur Fracture MDL court’s preemption ruling is now pending before the Supreme Court.

Accordingly, as of March 31, 2019, ten cases were actively pending in the Femur Fracture MDL, and approximately 1,060 cases have either been dismissed without prejudice or administratively closed pending final resolution by the Supreme Court of the appeal of the Femur Fracture MDL court’s preemption order.

As of March 31, 2019, approximately 2,555 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge James Hyland in Middlesex County. The parties selected an initial group of cases to be reviewed through fact discovery. Merck has continued to select additional cases to be reviewed through fact discovery from 2016 to the present.

As of March 31, 2019, approximately 275 cases alleging Femur Fractures have been filed and are pending in California state court. All of the Femur Fracture cases filed in California state court have been coordinated before a single judge in Orange County, California.

Additionally, there are four Femur Fracture cases pending in other state courts.

Discovery is presently stayed in the Femur Fracture MDL and in the state court cases in California. Merck intends to defend against these lawsuits.

Januvia/Janumet

As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Januvia and/or Janumet. As of March 31, 2019, Merck is aware of approximately 1,320 product users alleging that Januvia and/or Janumet caused the development of pancreatic cancer and other injuries.

Most claims have been filed in multidistrict litigation before the U.S. District Court for the Southern District of California (MDL). Outside of the MDL, the majority of claims have been filed in coordinated proceedings before the Superior Court of California, County of Los Angeles (California State Court).

In November 2015, the MDL and California State Court-in separate opinions-granted summary judgment to defendants on grounds of federal preemption.

Plaintiffs appealed in both forums. In November 2017, the U.S. Court of Appeals for the Ninth Circuit vacated the judgment and remanded for further discovery, which is ongoing. In November 2018, the California state appellate court reversed

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

and remanded on similar grounds. In March 2019, the parties in the MDL and the California coordinated proceeding agreed to coordinate and adopt a schedule for completing discovery on general causation and preemption issues and for renewing summary judgment and Daubert motions. Under the stipulated case management schedule, the filing deadline for Daubert and summary judgment motions will take place in May 2020.

As of March 31, 2019, seven product users have claims pending against Merck in state courts other than California, including Illinois. In June 2017, the Illinois trial court denied Merck’s motion for summary judgment based on federal preemption. Merck appealed, and the Illinois appellate court affirmed in December 2018. Merck filed a petition for leave to appeal to the Illinois Supreme Court in February 2019. Merck also filed in March 2019 a motion to stay the Illinois Supreme Court’s consideration of the pending petition to appeal until the United States Supreme Court issues its opinion in Merck Sharp & Dohme Corp. v. Albrecht, No. 17-290 discussed above.

In addition to the claims noted above, the Company has agreed to toll the statute of limitations for approximately 50 additional claims. The Company intends to continue defending against these lawsuits.

Vioxx

As previously disclosed, Merck is a defendant in a lawsuit brought by the attorney General of Utah alleging that Merck misrepresented the safety of Vioxx. The lawsuit is pending in Utah state court. Utah seeks damages and penalties under the Utah False Claims Act. A bench trial in this matter is currently scheduled for April 20, 2020.

Governmental Proceedings

As previously disclosed, the Prosecution Office of Milan, Italy has investigated interactions between the Company’s Italian subsidiary, certain employees of the subsidiary and certain Italian health care providers. The Company understands that this is part of a larger investigation involving engagements between various health care companies and those health care providers. The Company is cooperating with the investigation. On January 8, 2019, the Company learned that the Milan Prosecutor formally requested that the investigation against the Italian subsidiary’s employees be closed without further action. This request is subject to review by the Italian courts before the matter can be officially closed. In addition, on March 1, 2019, the Company learned that the Milan Prosecutor formally archived the investigation against the Italian subsidiary and the investigation as it pertains to the subsidiary is now closed.

As previously disclosed, the United Kingdom (UK) Competition and Markets Authority (CMA) issued a Statement of Objections against the Company and MSD Sharp & Dohme Limited (MSD UK) in May 2017. In the Statement of Objections, the CMA alleged that MSD UK abused a dominant position through a discount program for Remicade over the period from March 2015 to February 2016. The Company and MSD UK contested the CMA’s allegations. On March 14, 2019, the CMA issued a “no grounds for action” decision and closed the matter without further action against MSD UK.

As previously disclosed, the Company’s subsidiaries in China have received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.

As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the United States. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.

Commercial and Other Litigation

Zetia Antitrust Litigation

As previously disclosed, Merck, MSD, Schering Corporation and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action and opt-out lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Rebecca Beach Smith in the Eastern District of Virginia. On December 6, 2018, the court denied the Merck Defendants’ motions to dismiss or stay the direct purchaser putative class actions pending bilateral arbitration. On February 6, 2019, the magistrate judge issued a report and recommendation recommending that the district judge grant in part and deny in part defendants’ motions to dismiss on non-arbitration issues. On February 20, 2019, defendants and retailer opt-out plaintiffs filed objections to the report and recommendation. The parties await a decision from the district judge.

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Rotavirus Vaccines Antitrust Litigation

As previously disclosed, MSD is a defendant in putative class action lawsuits filed in 2018 on behalf of direct purchasers of RotaTeq, alleging violations of federal antitrust laws. The cases were consolidated in the Eastern District of Pennsylvania. On January 23, 2019, the court denied MSD’s motions to compel arbitration and to dismiss the consolidated complaint. On February 19, 2019, MSD appealed the court’s order on arbitration to the Third Circuit. The appellate briefing is currently ongoing, and the district court case is stayed pending the outcome of the appeal.

Merck KGaA Litigation

As previously disclosed, in January 2016, to protect its long-established brand rights in the United States, the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), historically operating as the EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit against the Company in France, the UK, Germany, Switzerland, Mexico, India, Australia, Singapore, Hong Kong, and China alleging, among other things, unfair competition, trademark infringement and/or corporate name infringement. In the UK, Australia, Singapore, Hong Kong, and India, KGaA also alleges breach of the parties’ coexistence agreement. In December 2015, the Paris Court of First Instance issued a judgment finding that certain activities by the Company directed towards France did not constitute trademark infringement and unfair competition while other activities were found to infringe and constitute unfair competition. The Company and KGaA appealed the decision, and the appeal was heard in May 2017. In June 2017, the French appeals court held that certain of the activities by the Company directed to France constituted unfair competition or trademark infringement and, in December 2017, the Company decided not to pursue any further appeal. In January 2016, the UK High Court issued a judgment finding that the Company had breached the co-existence agreement and infringed KGaA’s trademark rights as a result of certain activities directed towards the UK based on use of the word MERCK on promotional and information activity. As noted in the UK decision, this finding was not based on the Company’s use of the sign MERCK in connection with the sale of products or any material pharmaceutical business transacted in the UK. The Company and KGaA have both appealed this decision, and the appeal was heard in June 2017. In November 2017, the UK Court of Appeals affirmed the decision on the co-existence agreement and remitted for re-hearing issues of trademark infringement, the scope of KGaA’s UK trademarks for pharmaceutical products, and the relief to which KGaA would be entitled. The re-hearing was held, and no decision has been handed down.

In November 2018, the District Court in Hamburg, Germany dismissed all of KGaA’s claims concerning KGaA’s EU trademark with respect to the territory of the EU. KGaA appealed this decision. In February 2019, the District Court in Hamburg dismissed all of KGaA’s claims for alleged infringement of its German trademark and trade name rights and breach of unfair competition law brought against the Company in the territory of Germany. In February 2019, the District Court in Hamburg also dismissed most of KGaA’s claims for alleged infringement of its German trademark and trade name rights and breach of unfair competition law brought against MSD Sharp & Dohme GmbH in the territory of Germany. MSD Sharp & Dohme Corp. filed an appeal of this decision, and KGaA appealed both of the February 2019 decisions of the District Court in Hamburg. In January 2019, the Mexican Trademark Office issued a decision on KGaA’s action. The court found no trademark infringement by the Company and dismissed all of KGaA’s claims for trademark infringement. The court ruled against the Company on KGaA’s unfair competition claim. Both KGaA and the Company appealed this decision, and in April 2019, KGaA’s appeal was denied, and the decision was affirmed. The Company expects that KGaA will file a further appeal of the January 2019 Mexican Trademark Office’s decision.

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the U.S. Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions, potentially significant intangible asset impairment charges.

Inegy —The patents protecting Inegy in Europe expired; supplemental protection certificates (SPCs) in many European countries expired in April 2019. The Company filed actions for patent infringement seeking damages against those companies that launched generic products before April 2019.

Noxafil —In August 2015, the Company filed a lawsuit against Actavis Laboratories Fl, Inc. (Actavis) in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil. In October 2017, the district court held the patent valid and infringed. Actavis appealed this decision. While the appeal was pending, the parties reached a settlement, subject to certain terms of the agreement being met, whereby Actavis can launch its generic version prior to expiry of the patent and pediatric exclusivity under certain conditions. In March 2016, the Company filed a lawsuit against Roxane Laboratories, Inc. (Roxane) in the United States in respect of that company’s application to the FDA seeking pre-patent

- 21 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

expiry approval to sell a generic version of Noxafil. In November 2017, the parties reached a settlement whereby Roxane can launch its generic version prior to expiry of the patent under certain conditions. In February 2016, the Company filed a lawsuit against Par Sterile Products LLC, Par Pharmaceutical, Inc., Par Pharmaceutical Companies, Inc. and Par Pharmaceutical Holdings, Inc. (collectively, Par) in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil injection. In October 2016, the parties reached a settlement whereby Par can launch its generic version in January 2023, or earlier under certain conditions. In February 2018, the Company filed a lawsuit against Fresenius Kabi USA, LLC., (Fresenius) in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil injection. In November 2018, the Company reached a settlement with Fresenius, whereby Fresenius can launch its generic version of the intravenous product prior to expiry of the patent under certain conditions. In March 2018, the Company filed a lawsuit against Mylan Laboratories Limited in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Noxafil injection.

Januvia, Janumet, Janumet XR - In February 2019, Par Pharmaceutical, Inc. (Par Pharmaceutical) filed suit against the Company in the U.S. District Court for the District of New Jersey, seeking a declaratory judgment of invalidity of a patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026. In response, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of Januvia, Janumet, and Janumet XR following expiration of key patent protection in 2022, but prior to the expiration of the later-granted patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026, and a later granted patent owned by the Company covering the Janumet formulation which expires in 2028. Par Pharmaceutical dismissed its case in the U.S. District Court for the District of New Jersey against the Company and will litigate the action in the U.S. District Court for the District of Delaware. No schedule for the cases has been set by the court.

Other Litigation

There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial position, results of operations or cash flows either individually or in the aggregate.

Legal Defense Reserves

Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of March 31, 2019 and December 31, 2018 of approximately $250 million and $245 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

- 22 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

9. Equity

	Three Months Ended March 31,
	Common Stock			Other Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock					Non- Controlling Interests			Total
($ and shares in millions)	Shares	Par Value											Shares		Cost
Balance at January 1, 2018	3,577	$	1,788	$	39,902		$	41,350		$	(4,910	)	880		$	(43,794	)	$	233		$	34,569
Net income attributable to Merck & Co., Inc.	—	—		—			736			—			—		—			—			736
Adoption of new accounting standards	—	—		—			322			(274		)	—		—			—			48
Other comprehensive income, net of taxes	—	—		—			—			124			—		—			—			124
Cash dividends declared on common stock ($0.48 per share)	—	—		—			(1,301		)	—			—		—			—			(1,301		)
Treasury stock shares purchased	—	—		—			—			—			10		(566		)	—			(566		)
Share-based compensation plans and other	—	—		(28		)	—			—			(5	)	319			—			291
Net income attributable to noncontrolling interests	—	—		—			—			—			—		—			5			5
Distributions attributable to noncontrolling interests	—	—		—			—			—			—		—			(5		)	(5		)
Balance at March 31, 2018	3,577	$	1,788	$	39,874		$	41,107		$	(5,060	)	885		$	(44,041	)	$	233		$	33,901
Balance at January 1, 2019	3,577	$	1,788	$	38,808		$	42,579		$	(5,545	)	985		$	(50,929	)	$	181		$	26,882
Net income attributable to Merck & Co., Inc.	—	—		—			2,915			—			—		—			—			2,915
Other comprehensive income, net of taxes	—	—		—			—			199			—		—			—			199
Cash dividends declared on common stock ($0.55 per share)	—	—		—			(1,429		)	—			—		—			—			(1,429		)
Treasury stock shares purchased	—	—		—			—			—			14		(1,090		)	—			(1,090		)
Share-based compensation plans and other	—	—		(40		)	—			—			(5	)	283			—			243
Net loss attributable to noncontrolling interests	—	—		—			—			—			—		—			(53		)	(53		)
Other changes in noncontrolling ownership interests	—	—		—			—			—			—		—			3			3
Balance at March 31, 2019	3,577	$	1,788	$	38,768		$	44,065		$	(5,346	)	994		$	(51,736	)	$	131		$	27,670

On October 25, 2018, the Company entered into accelerated share repurchase (ASR) agreements with two third-party financial institutions (Dealers). Under the ASR agreements, Merck agreed to purchase $5 billion of Merck’s common stock, in total, with an initial delivery of 56.7 million shares of Merck’s common stock, based on the then-current market price, made by the Dealers to Merck, and payments of $5 billion made by Merck to the Dealers on October 29, 2018, which were funded with existing cash and investments, as well as short-term borrowings. The payments to the Dealers were recorded as reductions to shareholders’ equity, consisting of a $4 billion increase in treasury stock, which reflected the value of the initial 56.7 million shares received on October 29, 2018, and a $1 billion decrease in other-paid-in capital, which reflected the value of the stock held back by the Dealers pending final settlement. Upon settlement of the ASR agreements in April 2019, Merck received an additional 7.7 million shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program, less a negotiated discount, bringing the total shares received by Merck under this program to 64.4 million. The receipt of the additional shares will be reflected as an increase to treasury stock and an increase to other-paid-in capital in the second quarter of 2019.

10. Share-Based Compensation Plans

The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant.

The following table provides the amounts of share-based compensation cost recorded in the Condensed Consolidated Statement of Income:

	Three Months Ended   March 31,
($ in millions)	2019			2018
Pretax share-based compensation expense	$	93		$	80
Income tax benefit	(14		)	(15		)
Total share-based compensation expense, net of taxes	$	79		$	65

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

During the first three months of 2019 and 2018, the Company granted 70 thousand RSUs with a weighted-average grant date fair value of $77.39 per RSU and 121 thousand RSUs with a weighted-average grant date fair value of $55.88 per RSU, respectively. During the first three months of 2019 and 2018, the Company granted 609 thousand PSUs with a weighted-average grant date fair value of $90.50 per PSU and 831 thousand PSUs with a weighted-average grant date fair value of $56.60 per PSU, respectively.

The Company did not grant any stock options during the first three months of 2019. During the first three months of 2018, the Company granted 46 thousand stock options with a weighted-average exercise price of $55.88 per option and a weighted-average fair value of $7.83 per option. The weighted-average fair value was determined using the following assumptions:

	Three Months Ended   March 31,
	2018
Expected dividend yield	3.4	%
Risk-free interest rate	2.7	%
Expected volatility	19.5	%
Expected life (years)	6.0

At March 31, 2019, there was $906 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted-average period of 2.4 years. The Company typically communicates the value of annual share-based compensation awards to employees during the first quarter, but the related share amounts are not established and communicated until early May. Therefore, while the number of RSU, PSU and stock option grants disclosed above do not reflect any amounts relating to the annual grants, share-based compensation costs for the first quarter of 2019 and 2018 and unrecognized compensation expense at March 31, 2019 reflect an impact relating to the awards communicated to employees. For segment reporting, share-based compensation costs are unallocated expenses.

11. Pension and Other Postretirement Benefit Plans

The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. The net periodic benefit cost of such plans consisted of the following components:

	Three Months Ended   March 31,
	2019						2018
($ in millions)	U.S.			International			U.S.			International
Service cost	$	71		$	60		$	83		$	67
Interest cost	114			45			108			46
Expected return on plan assets	(206		)	(108		)	(214		)	(113		)
Amortization of unrecognized prior service credit	(12		)	(3		)	(13		)	(3		)
Net loss amortization	35			16			56			21
Termination benefits	2			—			11			—
Curtailments	—			—			(2		)	—
Settlements	—			—			1			—
	$	4		$	10		$	30		$	18

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Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The Company provides medical benefits, principally to its eligible U.S. retirees and similar benefits to their dependents, through its other postretirement benefit plans. The net credit of such plans consisted of the following components:

	Three Months Ended   March 31,
($ in millions)	2019			2018
Service cost	$	12		$	14
Interest cost	17			18
Expected return on plan assets	(18		)	(21		)
Amortization of unrecognized prior service credit	(21		)	(21		)
Termination benefits	—			1
Curtailments	—			(4		)
	$	(10	)	$	(13	)

In connection with restructuring actions (see Note 4), termination charges were recorded on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring actions, curtailments and settlements were recorded on pension and other postretirement benefit plans as reflected in the tables above.

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 12), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions as noted above.

12. Other (Income) Expense, Net

Other (income) expense, net, consisted of:

	Three Months Ended   March 31,
($ in millions)	2019			2018
Interest income	$	(89	)	$	(85	)
Interest expense	209			185
Exchange losses	101			7
Loss (income) from investments in equity securities, net (1)	25			(25		)
Net periodic defined benefit plan (credit) cost other than service cost	(141		)	(135		)
Other, net	83			(238		)