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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, 2020
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
New Jersey
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, 2020: 2,524,101,191
 






Table of Contents

 
 
 
 
Page No.
PART I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
 
 
 
 
PART II
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 






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,
 
2020
 
2019
Sales
$
12,057

 
$
10,816

Costs, Expenses and Other
 
 
 
Cost of sales
3,312

 
3,052

Selling, general and administrative
2,555

 
2,425

Research and development
2,209

 
1,931

Restructuring costs
72

 
153

Other (income) expense, net
71

 
188

 
8,219

 
7,749

Income Before Taxes
3,838

 
3,067

Taxes on Income
619

 
205

Net Income
3,219

 
2,862

Less: Net Loss Attributable to Noncontrolling Interests

 
(53
)
Net Income Attributable to Merck & Co., Inc.
$
3,219

 
$
2,915

Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders
$
1.27

 
$
1.13

Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders
$
1.26

 
$
1.12

 
MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited, $ in millions)
 
 
Three Months Ended 
 March 31,
 
2020
 
2019
Net Income Attributable to Merck & Co., Inc.
$
3,219

 
$
2,915

Other Comprehensive (Loss) Income Net of Taxes:
 
 
 
Net unrealized gain (loss) on derivatives, net of reclassifications
104

 
(48
)
Net unrealized (loss) gain on investments, net of reclassifications
(18
)
 
82

Benefit plan net gain and prior service credit, net of amortization
60

 
15

Cumulative translation adjustment
(344
)
 
150

 
(198
)
 
199

Comprehensive Income Attributable to Merck & Co., Inc.
$
3,021

 
$
3,114

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

- 3 -




MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, $ in millions except per share amounts)
 
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
7,425

 
$
9,676

Short-term investments
7

 
774

Accounts receivable (net of allowance for doubtful accounts of $89 in 2020
and $86 in 2019)
8,182

 
6,778

Inventories (excludes inventories of $1,630 in 2020 and $1,480 in 2019
classified in Other assets - see Note 6)
5,846

 
5,978

Other current assets
4,714

 
4,277

Total current assets
26,174

 
27,483

Investments
555

 
1,469

Property, Plant and Equipment, at cost, net of accumulated depreciation of $17,706
in 2020 and $17,686 in 2019
15,269

 
15,053

Goodwill
19,767

 
19,425

Other Intangibles, Net
16,096

 
14,196

Other Assets
7,052

 
6,771

 
$
84,913

 
$
84,397

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Loans payable and current portion of long-term debt
$
6,361

 
$
3,610

Trade accounts payable
3,572

 
3,738

Accrued and other current liabilities
10,932

 
12,549

Income taxes payable
1,033

 
736

Dividends payable
1,585

 
1,587

Total current liabilities
23,483

 
22,220

Long-Term Debt
21,637

 
22,736

Deferred Income Taxes
1,943

 
1,470

Other Noncurrent Liabilities
11,550

 
11,970

Merck & Co., Inc. Stockholders’ Equity
 
 
 
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2020 and 2019
1,788

 
1,788

Other paid-in capital
39,697

 
39,660

Retained earnings
48,272

 
46,602

Accumulated other comprehensive loss
(6,391
)
 
(6,193
)
 
83,366

 
81,857

Less treasury stock, at cost:
1,053,090,194 shares in 2020 and 1,038,087,496 shares in 2019
57,161

 
55,950

Total Merck & Co., Inc. stockholders’ equity
26,205

 
25,907

Noncontrolling Interests
95

 
94

Total equity
26,300

 
26,001

 
$
84,913

 
$
84,397

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

- 4 -




MERCK & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, $ in millions)
 
 
Three Months Ended 
 March 31,
 
2020
 
2019
Cash Flows from Operating Activities
 
 
 
Net income
$
3,219

 
$
2,862

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
821

 
898

Intangible asset impairment charges

 
104

Deferred income taxes
82

 
194

Share-based compensation
108

 
93

Other
143

 
120

Net changes in assets and liabilities
(3,666
)
 
(2,935
)
Net Cash Provided by Operating Activities
707

 
1,336

Cash Flows from Investing Activities
 
 
 
Capital expenditures
(986
)
 
(595
)
Purchases of securities and other investments
(49
)
 
(974
)
Proceeds from sales of securities and other investments
1,816

 
1,899

Acquisition of ArQule, Inc., net of cash acquired
(2,545
)
 

Other
136

 
38

Net Cash (Used in) Provided by Investing Activities
(1,628
)
 
368

Cash Flows from Financing Activities
 
 
 
Net change in short-term borrowings
3,583

 
(4,135
)
Payments on debt
(1,951
)
 

Proceeds from issuance of debt

 
4,958

Purchases of treasury stock
(1,281
)
 
(1,090
)
Dividends paid to stockholders
(1,551
)
 
(1,428
)
Proceeds from exercise of stock options
26

 
173

Other
(316
)
 
(92
)
Net Cash Used in Financing Activities
(1,490
)
 
(1,614
)
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash
(63
)
 
20

Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash
(2,474
)
 
110

Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted
cash of $258 million at January 1, 2020 included in Other Assets)
9,934

 
7,967

Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash
of $35 million at March 31, 2020 included in Other Assets)
$
7,460

 
$
8,077

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

- 5 -

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 (GAAP) 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 26, 2020.
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.
Planned Spin-Off of Women’s Health, Legacy Brands and Biosimilars into New Company
In February 2020, Merck announced its intention to spin-off products from its women’s health, trusted legacy brands and biosimilars businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The legacy brands included in the transaction consist of dermatology, non-opioid pain, respiratory, and select cardiovascular products including Zetia (ezetimibe) and Vytorin (ezetimibe and simvastatin), as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs will continue to be owned and developed within Merck as planned. Organon will have development capabilities initially focused on late-stage development and life-cycle management and is expected over time to develop research capabilities in selected therapeutic areas. The spin-off is expected to be completed in the first half of 2021, subject to market and certain other conditions. Subsequent to the spin-off, the historical results of the women’s health, legacy brands and biosimilars businesses will be reflected as discontinued operations in the Company’s consolidated financial statements.
Recently Adopted Accounting Standards
In June 2016, the FASB issued new guidance on the accounting for credit losses on financial instruments. The new 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 Company adopted the new guidance effective January 1, 2020. There was no impact to the Company’s consolidated financial statements upon adoption.
In November 2018, the FASB issued new guidance for collaborative arrangements intended to reduce diversity in practice by clarifying whether certain transactions between collaborative arrangement participants should be accounted for under revenue recognition guidance (ASC 606). The Company adopted the new guidance effective January 1, 2020, which resulted in minor changes to the presentation of information related to the Company’s collaborative arrangements.
Recently Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued amended guidance on the accounting and reporting of income taxes. The guidance is intended to simplify the accounting for income taxes by removing exceptions related to certain intraperiod tax allocations and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination; and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The amended guidance is effective for interim and annual periods in 2021. Early adoption is permitted. The amendments in the new guidance are to be applied on a retrospective basis, on a modified retrospective basis through a cumulative-effect adjustment to retained earnings or prospectively, depending on the amendment. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In January 2020, the FASB issued new guidance intended to clarify certain interactions between accounting standards related to equity securities, equity method investments and certain derivatives. The guidance addresses accounting for the transition into and out of the equity method of accounting and measuring certain purchased options and forward contracts to acquire investments. The new guidance is effective for interim and annual periods in 2021 and is to be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In March 2020, the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The optional guidance is effective upon issuance and can be applied on a prospective basis at any time between January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of adoption on its consolidated financial statements.


- 6 -

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

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 January 2020, Merck acquired ArQule, Inc. (ArQule), a publicly traded biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases. Total consideration paid of $2.7 billion included $138 million of share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of ArQule. The Company incurred $95 million of transaction costs directly related to the acquisition of ArQule, consisting almost entirely of share-based compensation payments to settle non-vested equity awards attributable to postcombination service. These costs were included in Selling, general and administrative expenses in the first quarter of 2020. ArQule’s lead investigational candidate, MK-1026 (formerly ARQ 531), is a novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies.
The estimated fair value of assets acquired and liabilities assumed from ArQule is as follows:
 
 
($ in millions)
January 16, 2020
Cash and cash equivalents
$
145

IPR&D MK-1026 (formerly ARQ 531) (1)
2,280

IPR&D MK-7075 (formerly ARQ 092) (1)
170

Licensing arrangement for ARQ 087
80

Deferred income tax liabilities
(434
)
Other assets and liabilities, net
35

Total identifiable net assets
2,276

Goodwill (2)
414

Consideration transferred
$
2,690

(1) 
The fair values of the identifiable intangible assets related to in-process research and development (IPR&D) were determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 12.5%. Actual cash flows are likely to be different than those assumed.
(2) 
The goodwill was allocated to the Pharmaceutical segment and is not deductible for tax purposes.
 

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 (olaparib) for multiple cancer types. Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor currently approved for certain types of advanced ovarian, breast and pancreatic cancers. 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 (pembrolizumab) and Imfinzi. The companies will also jointly develop and commercialize AstraZeneca’s Koselugo (selumetinib), an oral, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed for multiple indications. In April 2020, Koselugo was approved for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 who have symptomatic, inoperable plexiform neurofibromas. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and Koselugo monotherapy and non-PD-L1/PD-1 combination therapy opportunities.
Profits from Lynparza and Koselugo 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

- 7 -

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

Koselugo. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or Koselugo. AstraZeneca is the principal on Lynparza sales transactions. Merck records its share of Lynparza and Koselugo product sales, net of cost of sales and commercialization costs, as alliance revenue and its share of development costs associated with the collaboration as part of Research and development expenses. 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 made payments of $750 million over a multi-year period for certain license options. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.
Prior to 2020, Merck accrued sales-based milestone payments aggregating $1.0 billion related to Lynparza, of which $200 million and $250 million was paid to AstraZeneca in 2019 and 2018, respectively, and $250 million was paid in the first quarter of 2020. Potential future sales-based milestone payments of $3.1 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.
In 2019 and 2018, Lynparza received regulatory approvals triggering capitalized milestone payments of $60 million and $140 million, respectively, in the aggregate from Merck to AstraZeneca. Potential future regulatory milestone payments of $1.7 billion remain under the agreement.
The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was $928 million at March 31, 2020 and is included in Other Intangibles, Net 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 financial information related to this collaboration is as follows:
 
Three Months Ended 
 March 31,
($ in millions)
2020
 
2019
Alliance revenue
$
145

 
$
79

 
 
 
 
Cost of sales (1)
28

 
19

Selling, general and administrative
33

 
27

Research and development
36

 
45

 
 
 
 
($ in millions)
March 31, 2020
 
December 31, 2019
Receivables from AstraZeneca included in Other current assets
$
142

 
$
128

Payables to AstraZeneca included in Accrued and other current liabilities (2)
326

 
577

(1) Represents amortization of capitalized milestone payments.
(2) Includes accrued milestone payments.
Eisai
In March 2018, Merck and Eisai Co., Ltd. (Eisai) announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (lenvatinib), an orally available tyrosine kinase inhibitor discovered by Eisai. Lenvima is currently approved for the treatment of certain types of thyroid cancer, hepatocellular carcinoma, in combination with everolimus for certain patients with renal cell carcinoma, and in combination with Keytruda for the treatment of certain patients with endometrial carcinoma. Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share 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 expenses.
Under the agreement, Merck made an upfront payment to Eisai of $750 million and agreed to make payments of up to $650 million for certain option rights through 2021 (of which $325 million was paid in March 2019, $200 million was paid in March 2020 and $125 million is expected to be paid in March 2021). In addition, the agreement provides for additional contingent payments from Merck to Eisai related to the successful achievement of sales-based and regulatory milestones.
Prior to 2020, Merck accrued sales-based milestone payments aggregating $950 million related to Lenvima. Of these amounts, $50 million was paid to Eisai in 2019 and an additional $300 million was paid in the first quarter of 2020. Potential future sales-based milestone payments of $3.0 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

- 8 -

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

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 intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was $921 million at March 31, 2020 and is included in Other Intangibles, Net 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.
Summarized financial information related to this collaboration is as follows:
 
Three Months Ended 
 March 31,
($ in millions)
2020
 
2019
Alliance revenue
$
128

 
$
74

 
 
 
 
Cost of sales (1)
35

 
51

Selling, general and administrative
11

 
19

Research and development
64

 
47

 
 
 
 
($ in millions)
March 31, 2020
 
December 31, 2019
Receivables from Eisai included in Other current assets
$
140

 
$
150

Payables to Eisai included in Accrued and other current liabilities (2)
425

 
700

Payables to Eisai included in Other Noncurrent Liabilities (3)
300

 
525

(1) Represents amortization of capitalized milestone payments.
(2) Includes accrued milestone and future option payments.
(3) Includes accrued milestone 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 (riociguat), 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 development for the potential treatment of worsening heart failure. Under the agreement, Bayer leads commercialization of Adempas in the Americas, while Merck leads commercialization in the rest of the world. For vericiguat, if approved, Bayer will lead commercialization in the rest of world and Merck will lead in the Americas. Both companies share in development costs and profits on sales and have the right to co-promote in territories where they are not the lead. Merck records sales of Adempas in its marketing territories, as well as alliance revenue, which is Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories. In addition, the agreement provides for additional contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones.
Prior to 2020, Merck accrued $725 million of sales-based milestone payments for this collaboration, of which $350 million was paid to Bayer in 2018. 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 this collaboration (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone payments) was $844 million at March 31, 2020 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.

- 9 -

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

Summarized financial information related to this collaboration is as follows:
 
Three Months Ended 
 March 31,
($ in millions)
2020
 
2019
Net sales of Adempas recorded by Merck
$
56

 
$
48

Alliance revenue
53

 
42

Total sales
109

 
90

 
 
 
 
Cost of sales (1)
28

 
29

Selling, general and administrative
15

 
8

Research and development
25

 
30

 
 
 
 
($ in millions)
March 31, 2020
 
December 31, 2019
Receivables from Bayer included in Other current assets
$
50

 
$
49

Payables to Bayer included in Other Noncurrent Liabilities (2)
375

 
375

(1) Includes amortization of intangible assets.
(2) Represents accrued milestone payment.
4.
Restructuring
In early 2019, Merck approved a new global restructuring program (Restructuring Program) as part of a worldwide initiative focused 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, builds on prior restructuring programs and does not include any actions associated with the planned spin-off of Organon. As the Company continues to evaluate its global footprint and overall operating model, it subsequently identified additional actions under the Restructuring Program, and could identify further actions over time. The actions currently contemplated under the 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 $2.5 billion. The Company estimates that approximately 60% of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately 40% 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 $800 million in 2020 related to the Restructuring Program. Actions under previous global restructuring programs have been substantially completed.
The Company recorded total pretax costs of $168 million and $187 million in the first quarter of 2020 and 2019, respectively, related to restructuring program activities. Since inception of the Restructuring Program through March 31, 2020, Merck has recorded total pretax accumulated costs of approximately $1.1 billion. 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, 2020
($ in millions)
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
Cost of sales
$

 
$
25

 
$
43

 
$
68

Selling, general and administrative

 
11

 

 
11

Research and development

 
17

 

 
17

Restructuring costs
47

 

 
25

 
72

 
$
47

 
$
53

 
$
68

 
$
168

 
Three Months Ended March 31, 2019
($ in millions)
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
Cost of sales
$

 
$
34

 
$

 
$
34

Restructuring costs
128

 

 
25

 
153

 
$
128

 
$
34

 
$
25

 
$
187


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

- 10 -

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 2020 and 2019 includes asset abandonment, facility shut-down and other related costs, as well as pretax gains and losses resulting from the sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 10) and share-based compensation.
The following table summarizes the charges and spending relating to restructuring program activities for the three months ended March 31, 2020:
($ in millions)
Separation
Costs
 
Accelerated
Depreciation
 
Other
 
Total
Restructuring reserves January 1, 2020
$
690

 
$

 
$
69

 
$
759

Expense
47

 
53

 
68

 
168

(Payments) receipts, net
(168
)
 

 
(122
)
 
(290
)
Non-cash activity

 
(53
)
 
42

 
(11
)
Restructuring reserves March 31, 2020 (1)
$
569

 
$

 
$
57

 
$
626

(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 changes 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, Japanese yen and Chinese renminbi. 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 are 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.

- 11 -

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 a portion of 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 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)
2020
 
2019
 
2020
 
2019
Net Investment Hedging Relationships
 
 
 
 
 
 
 
Foreign exchange contracts
$
(3
)
 
$
(11
)
 
$
(8
)
 
$
(8
)
Euro-denominated notes
(51
)
 
(30
)
 

 

(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.
In February 2020, five interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.25 billion1.85% fixed-rate notes due 2020 to variable rate debt. At March 31, 2020, the Company was a party to 14 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, 2020
($ in millions)
Par Value of Debt
 
Number of Interest Rate Swaps Held
 
Total Swap Notional Amount
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


- 12 -

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, 2020
 
December 31, 2019
 
March 31, 2020
 
December 31, 2019
Balance Sheet Line Item in which Hedged Item is Included
 
 
 
 
 
 
 
Loans payable and current portion of long-term debt
$