Restructuring

9 Months Ended

Sep. 30, 2011

2. Restructuring

Merger Restructuring Program

In February 2010, the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. On July 29, 2011, the Company announced the latest phase of the Merger Restructuring Program during which the Company expects to reduce its workforce measured at the time of the Merger by an additional 12% to 13% across the Company worldwide. A majority of the workforce reductions in this phase of the Merger Restructuring Program relate to manufacturing (including Animal Health), administrative and headquarters organizations. Previously announced workforce reductions of approximately 17% in earlier phases of the program primarily reflect the elimination of positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company will continue to hire employees in strategic growth areas of the business as necessary. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis which may result in future restructuring actions.

The Company recorded total pretax restructuring costs of $255 million and $384 million in the third quarter of 2011 and 2010, respectively, and $1.2 billion and $1.5 billion for the first nine months of 2011 and 2010, respectively, related to this program. Since inception of the Merger Restructuring Program through September 30, 2011, Merck has recorded total pretax accumulated costs of approximately $4.5 billion and eliminated approximately 14,200 positions comprised of employee separations, as well as the elimination of contractors and more than 2,500 positions that were vacant at the time of the Merger. The restructuring actions under the Merger Restructuring Program are expected to be substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related, which are expected to be completed by 2015, with the total cumulative pretax costs estimated to be approximately $5.8 billion to $6.6 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

2008 Global Restructuring Program

In October 2008, Old Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions — 6,800 active employees and 400 vacancies — across the Company worldwide. Pretax restructuring costs of $20 million were recorded in the third quarter of 2011 and $25 million and $130 million in the first nine months of 2011 and 2010, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through September 30, 2011, Merck has recorded total pretax accumulated costs of $1.6 billion and eliminated approximately 6,090 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program is expected to be completed by the end of 2011, with the exception of certain manufacturing-related actions, with the total cumulative pretax costs estimated to be up to $2.0 billion. The Company estimates that two-thirds of the cumulative pretax costs relate to cash outlays, primarily from employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

For segment reporting, restructuring charges are unallocated expenses.

The following tables summarize the charges related to Merger Restructuring Program and 2008 Restructuring Program activities by type of cost:


	Three Months Ended September 30, 2011											Nine Months Ended September 30, 2011
	Separation		Accelerated									Separation			Accelerated
($ in millions)	Costs		Depreciation			Other			Total			Costs			Depreciation		Other			Total

Merger Restructuring Program

Materials and production	$	—	$	81		$	7		$	88		$	—		$	233	$	12		$	245
Marketing and administrative		—		22			9			31			—			67		10			77
Research and development		—		27			1			28			—			107		(18	)		89
Restructuring costs		63		—			45			108			670			—		95			765

		63		130			62			255			670			407		99			1,176


2008 Restructuring Program

Materials and production		—		10			(1	)		9			—			16		1			17
Restructuring costs		5		—			6			11			(3	)		—		11			8

		5		10			5			20			(3	)		16		12			25

	$	68	$	140		$	67		$	275		$	667		$	423	$	111		$	1,201


	Three Months Ended September 30, 2010											Nine Months Ended September 30, 2010
	Separation		Accelerated									Separation			Accelerated
($ in millions)	Costs		Depreciation			Other			Total			Costs			Depreciation		Other			Total

Merger Restructuring Program

Materials and production	$	—	$	13	⁽¹⁾	$	41	⁽²⁾	$	54		$	—		$	188	$	62		$	250
Marketing and administrative		—		123	⁽¹⁾		11			134			—			123		11			134
Research and development		—		153			—			153			—			266		37			303
Restructuring costs		67		(41	) ⁽¹⁾		17			43			650			—		160			810

		67		248			69			384			650			577		270			1,497


2008 Restructuring Program

Materials and production		—		19			(33	)⁽²⁾		(14	)		—			59		3			62
Marketing and administrative		—		—			(4	)		(4	)		—			—		(4	)		(4	)
Research and development		—		10			—			10			—			10		—			10

Restructuring costs		10		—			(3	)		7			41			—		21			62

		10		29			(40	)		(1	)		41			69		20			130

	$	77	$	277		$	29		$	383		$	691		$	646	$	290		$	1,627


⁽¹⁾		Amounts reflect third quarter reclassifications of certain accelerated depreciation charges, recorded in the second quarter, from Materials and production and Restructuring costs to Marketing and administrative.

⁽²⁾		Reflects the reclassification of a second quarter $36 million charge from the 2008 Restructuring Program to the Merger Restructuring Program.

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In the first nine months of 2011, separation costs for the Merger Restructuring Program include a reduction of separation reserves of approximately $50 million resulting from the Company’s decision in the first quarter to retain approximately 380 employees at its Oss, Netherlands research facility that had previously been expected to be separated. In the third quarter of 2011 and 2010, approximately 1,300 positions and 2,175 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 110 positions and 180 positions, respectively, were eliminated under the 2008 Restructuring Program. In the first nine months of 2011 and 2010, approximately 2,635 positions and 9,760 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 290 positions and 955 positions, respectively, were eliminated under the 2008 Restructuring Program. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.

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 site, based upon the anticipated date the site will be closed or divested, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates, and since future cash flows were sufficient to recover the respective book values, Merck was required to accelerate depreciation of the site assets rather than write them off immediately.

Other activity in 2011 and 2010 includes asset abandonment, shut-down and other related costs. Additionally, other activity includes employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans (see Note 12) and share-based compensation costs.

The following table summarizes the charges and spending relating to Merger Restructuring Program and 2008 Restructuring Program activities for the nine months ended September 30, 2011:


	Separation			Accelerated
($ in millions)	Costs			Depreciation			Other			Total

Merger Restructuring Program

Restructuring reserves January 1, 2011	$	859		$	—		$	64		$	923
Expense		670			407			99			1,176
(Payments) receipts, net		(417	)		—			(121	)		(538	)
Non-cash activity		—			(407	)		7			(400	)

Restructuring reserves September 30, 2011 ⁽¹⁾	$	1,112		$	—		$	49		$	1,161

2008 Restructuring Program

Restructuring reserves January 1, 2011	$	196		$	—		$	—		$	196
Expense		(3	)		16			12			25
(Payments) receipts, net		(53	)		—			(11	)		(64	)
Non-cash activity		—			(16	)		(1	)		(17	)

Restructuring reserves September 30, 2011 ⁽¹⁾	$	140		$	—		$	—		$	140


⁽¹⁾		The cash outlays associated with the Merger Restructuring Program and the 2008 Restructuring Program are expected to be substantially completed by the end of 2013 and 2011, respectively, with the exception of certain actions, principally manufacturing-related, which are expected to be completed by 2015.

Legacy Schering-Plough Program

Prior to the Merger, Schering-Plough commenced a Productivity Transformation Program which was designed to reduce and avoid costs and increase productivity. The Company recorded accelerated depreciation costs included in Materials and production of $2 million and $4 million for the third quarter of 2011 and 2010, respectively, and $18 million and $13 million for the first nine months of 2011 and 2010, respectively. In addition, the first nine months of 2010 includes a net gain of $8 million reflected in Restructuring costs primarily related to the sale of a manufacturing facility. The remaining reserve associated with this program was $30 million at September 30, 2011.