Segment Reporting

9 Months Ended

Sep. 30, 2012

Segment Reporting

17. Segment Reporting

The Company’s operations are principally managed on a products basis and are comprised of four operating segments – Pharmaceutical, Animal Health, Consumer Care and Alliances (which includes revenue and equity income from the Company’s relationship with AZLP). The Animal Health, Consumer Care and Alliances segments are not material for separate reporting. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. A large component of pediatric and adolescent vaccines is sold to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Additionally, the Company has consumer care operations that develop, manufacture and market over-the-counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets.

Sales of the Company’s products were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
($ in millions)	2012		2011		2012		2011
Primary Care and Women’s Health
Cardiovascular
Zetia	$	645	$	614	$	1,891	$	1,788
Vytorin		423		469		1,312		1,407
Diabetes and Obesity
Januvia		975		846		2,952		2,364
Janumet		405		350		1,207		977
Respiratory
Singulair		602		1,336		3,373		4,018
Nasonex		292		266		960		962
Clarinex		64		128		337		492
Asmanex		42		42		141		149
Dulera		52		22		140		59
Women’s Health and Endocrine
Fosamax		152		215		522		644
NuvaRing		156		159		459		455
Follistim AQ		111		129		352		404
Implanon		93		80		254		220
Cerazette		64		74		202		199
Other
Maxalt		166		156		476		460
Arcoxia		109		108		338		321
Avelox		30		59		146		227
Hospital and Specialty
Immunology
Remicade		490		561		1,527		2,156
Simponi		86		74		236		203
Infectious Disease
Isentress		399		343		1,133		972
PegIntron		165		163		510		482
Cancidas		163		150		474		476
Victrelis		149		31		387		53
Invanz		118		107		329		296
Primaxin		109		124		301		397
Noxafil		66		61		191		171
Oncology
Temodar		227		223		688		704
Emend		111		98		358		305
Other
Cosopt/Trusopt		102		124		331		360
Bridion		68		52		186		141
Integrilin		48		53		160		172
Diversified Brands
Cozaar/Hyzaar		295		404		969		1,236
Propecia		104		112		312		330
Zocor		86		110		285		345
Claritin Rx		47		55		181		240
Remeron		52		65		175		181
Proscar		55		58		160		171
Vasotec/Vaseretic		42		57		144		173
Vaccines (1)
Gardasil		581		445		1,189		935
ProQuad/M-M-R II/Varivax		396		391		967		927
RotaTeq		150		184		433		457
Zostavax		202		108		426		254
Pneumovax		160		133		372		276
Other pharmaceutical (2)		1,023		1,015		3,031		2,975
Total Pharmaceutical segment sales		9,875		10,354		30,517		30,534
Other segment sales (3)		1,556		1,586		4,830		4,908
Total segment sales		11,431		11,940		35,347		35,442
Other (4)		57		82		183		311
	$	11,488	$	12,022	$	35,530	$	35,753

⁽¹⁾  These amounts do not reflect sales of vaccines sold in most major European markets through the Company’s joint venture, Sanofi Pasteur MSD, the results of which are reflected in Equity income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur MSD.

⁽²⁾  Other pharmaceutical primarily includes sales of other human health pharmaceutical products not listed separately.

⁽³⁾ Reflects other non-reportable segments, including Animal Health and Consumer Care, and revenue from the Company’s relationship with AZLP primarily relating to sales of Nexium. Revenue from AZLP was $255 million and $299 million for the third quarter of 2012 and 2011, respectively, and $664 million and $928 million for the first nine months of 2012 and 2011, respectively.

⁽⁴⁾ Other revenues are primarily comprised of miscellaneous corporate revenues, third-party manufacturing sales, sales related to divested products or businesses and supply sales not included in segment results. The declines in other revenues in the third quarter and first nine months of 2012 as compared with the same periods of 2011 reflect lower third-party manufacturing sales, which for the year-to-date period were attributable in part to the divestiture of certain manufacturing facilities in the first quarter of 2011.

A reconciliation of segment profits to Income before taxes is as follows:

	Three Months Ended            September 30,				Nine Months Ended            September 30,
($ in millions)	2012		2011		2012		2011
Segment profits:
Pharmaceutical segment	$	6,265	$	6,355	$	19,767	$	19,014
Other segments		819		783		2,397		2,300
Total segment profits		7,084		7,138		22,164		21,314
Other (losses) profits		(4)		5		(32)		(9)
Unallocated:
Interest income		47		32		177		102
Interest expense		(178)		(176)		(524)		(522)
Equity income from affiliates		(5)		(1)		(14)		(82)
Depreciation and amortization		(486)		(619)		(1,620)		(1,814)
Research and development		(1,689)		(1,712)		(5,263)		(5,330)
Amortization of purchase accounting adjustments		(1,232)		(1,284)		(3,687)		(3,788)
Restructuring costs		(110)		(119)		(473)		(773)
Arbitration settlement charge		-		-		-		(500)
Other unallocated, net		(1,209)		(912)		(3,323)		(2,845)
	$	2,218	$	2,352	$	7,405	$	5,753

Segment profits are comprised of segment sales less standard costs and certain operating expenses directly incurred by the segments. For internal management reporting presented to the chief operating decision maker, Merck does not allocate materials and production costs, other than standard costs, the majority of research and development expenses or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to segments.

Other (losses) profits are primarily comprised of miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales, divested products or businesses and other supply sales.

Other unallocated, net includes expenses from corporate and manufacturing cost centers, product intangible asset impairment charges, gains or losses on sales of businesses and assets and other miscellaneous income or expense items.