2.	Restructuring

Merger Restructuring Program

In February 2010, subsequent to the Merck and Schering-Plough Corporation (“Schering-Plough”) merger (the “Merger”), 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. In July 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 also 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 $150 million and $255 million in the third quarter of 2012 and 2011, respectively, and $718 million and $1.2 billion in the first nine months of 2012 and 2011, respectively, related to this program. Since inception of the Merger Restructuring Program through September 30, 2012, Merck has recorded total pretax accumulated costs of approximately $5.8 billion and eliminated approximately 20,750 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. 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 substantially completed by 2016. The Company now expects the estimated total cumulative pretax costs for this program to be approximately $7.2 billion to $7.5 billion. The increase from original estimates primarily reflects accelerated depreciation related to additional facility closures identified during the Company’s ongoing assessment of worldwide capacity requirements for its manufacturing, research and administrative facilities subsequent to the Merger, including the recently announced move of the Company’s worldwide headquarters to Summit, New Jersey. 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, 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 $13 million and $20 million were recorded in the third quarter of 2012 and 2011, respectively, and $23 million and $25 million were recorded in the first nine months of 2012 and 2011, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through September 30, 2012, Merck has recorded total pretax accumulated costs of $1.6 billion and eliminated approximately 6,400 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program was substantially completed in 2011, with the exception of certain manufacturing-related actions, which are expected to be completed by 2015, 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, 2012										Nine Months Ended September 30, 2012
($ in millions)	Separation Costs			Accelerated Depreciation			Other		Total		Separation Costs			Accelerated Depreciation		Other		Total


Merger Restructuring Program

Materials and production	$	-		$	42		$	13	$	55	$	-		$	75	$	50	$	125
Marketing and administrative		-			16			3		19		-			59		5		64
Research and development		-			(33	) ⁽¹⁾		1		(32)		-			49		5		54
Restructuring costs		59			-			49		108		363			-		112		475

		59			25			66		150		363			183		172		718


2008 Restructuring Program

Materials and production		-			1			4		5		-			4		15		19
Marketing and administrative		-			6			-		6		-			6		-		6
Restructuring costs		(1	)		-			3		2		(12	)		-		10		(2)

		(1	)		7			7		13		(12	)		10		25		23

	$	58		$	32		$	73	$	163	$	351		$	193	$	197	$	741


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

⁽¹⁾

In the third quarter of 2012, the Company recorded an adjustment to accelerated depreciation costs included in research and development expenses revising previously recorded amounts for certain facilities.

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In the third quarter of 2012 and 2011, approximately 525 positions and 1,300 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 10 and 110 positions, respectively, were eliminated under the 2008 Restructuring Program. In the first nine months of 2012 and 2011, approximately 2,325 positions and 2,635 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 150 positions and 290 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. 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 2012 and 2011 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 13) 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, 2012:


($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total


Merger Restructuring Program


Restructuring reserves January 1, 2012	$	1,144	$	-	$	51	$	1,195
Expense		363		183		172		718
(Payments) receipts, net		(742)		-		(131)		(873)
Non-cash activity		-		(183)		(74)		(257)

Restructuring reserves September 30, 2012 ⁽¹⁾	$	765	$	-	$	18	$	783


2008 Restructuring Program


Restructuring reserves January 1, 2012	$	126	$	-	$	-	$	126
Expense		(12)		10		25		23
(Payments) receipts, net		(19)		-		(8)		(27)
Non-cash activity		-		(10)		(17)		(27)

Restructuring reserves September 30, 2012 ⁽¹⁾	$	95	$	-	$	-	$	95

⁽¹⁾

The cash outlays associated with 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 substantially completed by 2016. The cash outlays associated with the remaining restructuring reserves for the 2008 Restructuring Program are primarily manufacturing-related and are expected to be completed by the end of 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 costs of $2 million for the third quarter of 2011 and $4 million and $18 million for the first nine months of 2012 and 2011, respectively. The remaining reserve associated with this program, which is substantially complete, was $17 million at September 30, 2012.