-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ei2BYo58L/kxBNCmYmYdboszVXestXE2Nc4h66K7MtMx0WJ1xnANGUCF+TLQKLV5 dQNPGnOKaHr3vRs88BRgCw== 0000950123-99-010095.txt : 19991115 0000950123-99-010095.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950123-99-010095 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCK & CO INC CENTRAL INDEX KEY: 0000064978 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221109110 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03305 FILM NUMBER: 99748537 BUSINESS ADDRESS: STREET 1: ONE MERCK DR STREET 2: P O BOX 100 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 BUSINESS PHONE: 9084234044 MAIL ADDRESS: STREET 1: ONE MERCK DR STREET 2: PO BOX 100 WS3AB-05 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 10-Q 1 MERCK & CO., INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------ 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. 1-3305 MERCK & CO., INC. P. O. Box 100 One Merck Drive Whitehouse Station, N.J. 08889-0100 (908) 423-1000 Incorporated in New Jersey I.R.S. Employer Identification No. 22-1109110 The number of shares of common stock outstanding as of the close of business on October 29, 1999: Class Number of Shares Outstanding ----- ---------------------------- Common Stock 2,337,422,721 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 X No --- --- 2 Part I - Financial Information MERCK & CO., INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENT OF INCOME THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 ($ in millions except per share amounts)
Three Months Nine Months Ended September 30 Ended September 30 -------------------------------- -------------------------- 1999 1998 1999 1998 -------- -------- --------- --------- Sales $8,195.7 $6,838.3 $23,750.6 $19,367.5 -------- -------- --------- --------- Costs, Expenses and Other Materials and production 4,365.9 3,544.1 12,890.2 10,163.1 Marketing and administrative 1,272.7 1,087.2 3,611.3 3,141.2 Research and development 516.0 450.4 1,440.5 1,279.9 Acquired research 51.1 1,039.5 51.1 1,039.5 Equity income from affiliates (227.1) (210.5) (581.5) (707.7) Gain on sale of business - (2,147.7) - (2,147.7) Other (income) expense, net (17.6) 360.0 (69.1) 422.6 -------- -------- --------- --------- 5,961.0 4,123.0 17,342.5 13,190.9 -------- -------- --------- --------- Income Before Taxes 2,234.7 2,715.3 6,408.1 6,176.6 Taxes on Income 695.1 1,348.3 2,090.8 2,329.1 -------- -------- --------- --------- Net Income $1,539.6 $1,367.0 $ 4,317.3 $ 3,847.5 ======== ======== ========= ========= Basic Earnings per Common Share $.65 $.57 $1.83 $1.61 Earnings per Common Share Assuming Dilution $.64 $.56 $1.79 $1.57 Dividends Declared per Common Share $.29 $.27 $ .83 $ .72
The accompanying notes are an integral part of this consolidated financial statement. - 1 - 3 MERCK & CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 ($ in millions)
September 30 December 31 1999 1998 ------------ ----------- ASSETS Current Assets Cash and cash equivalents $ 2,103.4 $ 2,606.2 Short-term investments 1,676.5 749.5 Accounts receivable 3,498.2 3,374.1 Inventories 2,746.7 2,623.9 Prepaid expenses and taxes 990.1 874.8 --------- --------- Total current assets 11,014.9 10,228.5 --------- --------- Investments 4,579.8 3,607.7 Property, Plant and Equipment, at cost, net of allowance for depreciation of $4,557.9 in 1999 and $4,042.8 in 1998 9,038.0 7,843.8 Goodwill and Other Intangibles, net of accumulated amortization of $1,395.6 in 1999 and $1,123.9 in 1998 7,673.1 8,287.2 Other Assets 2,281.7 1,886.2 --------- --------- $34,587.5 $31,853.4 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 3,765.3 $ 3,682.1 Loans payable and current portion of long-term debt 1,600.8 624.2 Income taxes payable 1,625.4 1,125.1 Dividends payable 678.4 637.4 --------- --------- Total current liabilities 7,669.9 6,068.8 --------- --------- Long-Term Debt 3,213.6 3,220.8 --------- --------- Deferred Income Taxes and Noncurrent Liabilities 6,981.0 6,057.0 --------- --------- Minority Interests 3,866.4 3,705.0 --------- --------- Stockholders' Equity Common stock Authorized - 5,400,000,000 shares Issued - 2,967,957,858 shares -1999 - 2,967,851,980 shares -1998 29.7 29.7 Other paid-in capital 5,571.1 5,614.5 Retained earnings 22,551.6 20,186.7 Accumulated other comprehensive income (loss) 9.8 (21.3) --------- --------- 28,162.2 25,809.6 Less treasury stock, at cost 630,411,132 shares - 1999 607,399,428 shares - 1998 15,305.6 13,007.8 --------- --------- Total stockholders' equity 12,856.6 12,801.8 --------- --------- $34,587.5 $31,853.4 ========= =========
The accompanying notes are an integral part of this consolidated financial statement. - 2 - 4 MERCK & CO., INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 ($ in millions)
Nine Months Ended September 30 ---------------------------------- 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Income before taxes $ 6,408.1 $ 6,176.6 Adjustments to reconcile income before taxes to cash provided from operations before taxes: Acquired research 51.1 1,039.5 Gain on sale of business - (2,147.7) Depreciation and amortization 862.5 763.0 Other (561.9) 316.7 Net changes in assets and liabilities (300.5) (444.7) ---------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES BEFORE TAXES 6,459.3 5,703.4 INCOME TAXES PAID (1,669.0) (1,639.0) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,790.3 4,064.4 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,739.6) (1,297.5) Purchase of securities, subsidiaries and other investments (31,198.7) (21,671.1) Proceeds from sale of securities, subsidiaries and other investments 29,395.2 19,964.6 Proceeds from relinquishment of certain AstraZeneca product rights 1,679.9 - Proceeds from sale of business - 2,586.2 Other (13.6) 423.3 ---------- ---------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,876.8) 5.5 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in short-term borrowings 979.1 (465.6) Proceeds from issuance of debt 11.6 1,879.3 Payments on debt (16.6) (87.1) Purchase of treasury stock (2,605.7) (2,770.9) Dividends paid to stockholders (1,911.4) (1,613.1) Other 147.0 290.0 ---------- ---------- NET CASH USED BY FINANCING ACTIVITIES (3,396.0) (2,767.4) ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (20.3) 1.7 ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (502.8) 1,304.2 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,606.2 1,125.1 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,103.4 $ 2,429.3 ========== ==========
The accompanying notes are an integral part of this consolidated financial statement. Notes to Consolidated Financial Statements 1. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the full year 1999; in the Company's opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. All share and per share amounts for current and prior periods presented in these financial statements reflect a two-for-one stock split of the Company's common stock, effective February 1999. Certain reclassifications have been made to prior year amounts to conform with current year presentation. - 3 - 5 Notes to Consolidated Financial Statements (continued) 2. In April 1999, Astra AB (Astra) merged with Zeneca Group Plc (Zeneca). As a result of this merger, Astra was required to make two one-time payments to Merck totaling approximately $1.8 billion. In exchange for Merck's relinquishment of option rights to future Astra products with no existing or pending U.S. patents at the time of the merger, Astra paid $967.4 million (the Advance Payment), which is subject to a true-up calculation in 2008 that may require repayment of all or a portion of this amount. The true up cannot reasonably be estimated because it is directly dependent on the fair market value in 2008 of the Astra product rights retained by the Company which extend to compounds currently in development as well as compounds that have not as yet entered development. Accordingly, the Company has deferred recognition of this contingent income until the realizable amount, if any, is determinable, which is not anticipated prior to 2008. In connection with the Company's July 1998 acquisition of Astra's one-half interest in Astra Merck, Inc. (renamed KBI), the Company agreed to relinquish rights to the pharmaceutical products of any company that would merge with or acquire Astra. These rights, which protected the value of KBI's perpetual interest in Astra's pipeline, were relinquished in exchange for a payment (the Lump Sum Payment) to be made in the event of the merger or acquisition of Astra. The Company estimates that it is entitled to receive a Lump Sum Payment of $822.0 million as the result of the merger of Astra and Zeneca. In the second quarter of 1999, Astra paid $712.5 million of the Lump Sum Payment and is disputing its obligation to pay the remainder. The Company is in arbitration seeking to enforce its rights under the agreement with respect to the disputed amount. Although the Company retains an interest in current and future Astra products with an existing or pending U.S. patent, this merger effectively curtailed the Company's perpetual interest in Astra's pipeline and, thus, reduced the going concern value acquired by the Company in July 1998. Accordingly, one-half of the expected payment was an adjustment to the purchase price paid by the Company for Astra's one-half interest in KBI reducing goodwill by $411.0 million. The balance represents compensation to the Company for the reduction of the value of its original one-half interest in KBI and was recorded in Other (income) expense, net. Because the reduction in goodwill is not tax-effected and the Lump Sum Payment is fully taxable, this transaction, net of a reserve relating to disputed proceeds, yielded an after-tax gain of $74.6 million. This gain was largely offset on an after-tax basis by $110.0 million of pretax charges ($66.2 million after tax) also recorded in Other (income) expense, net. (See Note 7.) The merger of Astra and Zeneca also triggers a partial redemption in 2008 of Merck's limited partnership interest in AstraZeneca LP (formerly Astra Pharmaceuticals, L.P.), the U.S. limited partnership formed in July 1998 as part of the restructuring of the Company's joint venture with Astra. Additionally, Astra's option to buy the Company's interest in the KBI products is now only exercisable in 2010 and the Company now has the right to require Astra to purchase such interest at fair market value in 2008. As a result of the merger, the $1.4 billion note issued to Astra in July 1998, originally due in 2038, is payable in 2008. 3. On September 2, 1999, the Company acquired the controlling interest in the outstanding common stock of SIBIA Neurosciences, Inc. (SIBIA) and on November 12, 1999, the Company completed the acquisition by obtaining the remaining shares. The purchase price is approximately $97.4 million, consisting of cash of $88.0 million and employee stock options valued at $9.4 million. SIBIA is engaged in the discovery and development of novel molecule therapeutics for the treatment of neurodegenerative, neuropsychiatric and neurological disorders. The acquisition was accounted for by the purchase method and, accordingly, SIBIA's results of operations have been included with the Company's since the acquisition date. Pro forma information is not provided as the impact of the transaction does not have a material effect on the Company's results of operations for 1999 or 1998. The purchase price allocation resulted in assets acquired of $61.4 million, liabilities assumed of $15.1 million and a charge for acquired research of $51.1 million associated with research projects for which, at the acquisition date, technological feasibility had not been established and no alternative future use existed. 4. Inventories consisted of:
($ in millions) ------------------------------- September 30 December 31 1999 1998 ------------- ----------- Finished goods $1,574.4 $1,701.2 Raw materials and work in process 1,092.1 851.6 Supplies 80.2 71.1 -------- -------- Total (approximates current cost) 2,746.7 2,623.9 Reduction to LIFO cost - - -------- -------- $2,746.7 $2,623.9 ======== ========
- 4 - 6 Notes to Consolidated Financial Statements (continued) 5. The Company, along with numerous other defendants, is a party in several antitrust actions brought by retail pharmacies and consumers, alleging conspiracies in restraint of trade and challenging pricing and/or purchasing practices, one of which has been certified as a federal class action and a number of which have been certified as state class actions. In 1996, the Company and several other defendants finalized an agreement to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims, pursuant to which the Company paid $51.8 million. Since that time, the Company has entered into other settlements on satisfactory terms. The Company has not engaged in any conspiracy, and no admission of wrongdoing was made nor was included in the final agreements. While it is not feasible to predict or determine the final outcome of these proceedings, management does not believe that they should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. 6. Sales consisted of:
($ in millions) ------------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 ---------------------- --------------------------- 1999 1998 1999 1998 ---------- ---------- ----------- ----------- Elevated cholesterol $1,273.7 $1,180.1 $ 3,684.1 $ 3,382.6 Hypertension/heart failure 1,070.3 931.6 3,362.6 3,072.7 Osteoporosis 280.7 192.0 755.3 539.4 Anti-ulcerants 224.3 273.4 676.4 823.4 Vaccines/biologicals 252.9 251.0 645.8 654.0 Antibiotics 189.0 167.7 565.8 538.8 Human immunodeficiency virus (HIV) 169.8 156.4 495.6 491.5 Ophthalmologicals 162.3 153.0 476.4 451.5 Other Merck products 768.2 620.1 1,950.6 1,011.3 Merck-Medco 3,804.5 2,913.0 11,138.0 8,402.3 -------- -------- --------- --------- $8,195.7 $6,838.3 $23,750.6 $19,367.5 ======== ======== ========= =========
Other Merck products include sales of other human pharmaceuticals, continuing sales to divested businesses and pharmaceutical and animal health supply sales to the Company's joint ventures and, as of July 1, 1998, supply sales to AstraZeneca LP. 7. Other (income) expense, net, consisted of:
($ in millions) --------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 -------------------- -------------------- 1999 1998 1999 1998 --------- -------- ------- -------- Interest income $ (95.2) $(100.0) $(264.1) $(225.6) Interest expense 79.0 56.9 219.3 138.8 Exchange gains (20.9) (9.7) (18.8) (22.4) Minority interests 61.8 19.6 168.5 84.8 Amortization of goodwill and other intangibles 77.8 84.3 239.0 180.8 Other, net (120.1) 308.9 (413.0) 266.2 -------- ------- -------- ------- $ (17.6) $ 360.0 $ (69.1) $ 422.6 ======== ======= ======== =======
Minority interests include third parties' share of exchange gains and losses arising from translation of the financial statements into U.S. dollars. The increase in minority interests for the three- and nine-month periods reflects dividends paid to AstraZeneca on $2.4 billion par value preferred stock of a subsidiary beginning in July 1998. Other, net, for the three- and nine-month periods ended September 30, 1999 includes income of $77.9 million resulting from the reversal of a restructuring reserve established in 1995 for the anticipated 1999 closure of a manufacturing facility. As a result of favorable incentives agreed to in July 1999 with local authorities combined with changes in available production capacity across plant sites, management has decided to continue operating the facility. Other, net, for the nine-month period ended September 30, 1999 also includes income of $411.0 million associated with the Lump Sum Payment from Astra, offset by a reserve relating to disputed proceeds (see Note 2) and charges of $110.0 million primarily for endowment of both The Merck Company Foundation and The Merck Genome Research Institute and provisions for the settlement of claims. - 5 - 7 Notes to Consolidated Financial Statements (continued) Interest paid for the nine-month periods ended September 30, 1999 and 1998 was $205.4 million and $97.0 million, respectively. 8. Income taxes paid for the nine-month periods ended September 30, 1999 and 1998 were $1,669.0 million and $1,639.0 million, respectively. 9. The net income effect of dilutive securities was not significant to the Company's calculation of Earnings per common share assuming dilution. A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows:
Three Months Nine Months Ended September 30 Ended September 30 -------------------- -------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Average common shares outstanding 2,343.0 2,376.8 2,353.6 2,384.6 Common shares issuable(1) 51.4 61.5 56.5 62.2 ------- -------- ------- ------- Average common shares outstanding assuming dilution 2,394.4 2,438.3 2,410.1 2,446.8 ======= ======= ======= ======= (1) Issuable primarily under stock option plans.
10. Comprehensive income for the three months ended September 30, 1999 and 1998, representing all changes in Stockholders' equity during the period other than changes resulting from the Company's stock, was $1,573.0 million and $1,371.3 million, respectively. Comprehensive income for the nine months ended September 30, 1999 and 1998 was $4,348.4 million and $3,850.4 million, respectively. 11. The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Merck Pharmaceutical and Merck-Medco. Merck Pharmaceutical products consist of therapeutic agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived from the filling and management of prescriptions and health management programs. All Other includes non-reportable human and animal health segments. Revenues and profits for these segments are as follows:
($ in millions) ------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 --------------------- ---------------------- 1999 1998 1999 1998 -------- -------- --------- --------- Segment revenues: Merck Pharmaceutical $3,524.6 $3,086.6 $10,410.3 $ 9,223.3 Merck-Medco 4,504.4 3,620.0 13,234.1 10,451.9 All Other 826.2 792.2 2,068.7 1,600.4 -------- -------- --------- --------- $8,855.2 $7,498.8 $25,713.1 $21,275.6 ======== ======== ========= ========= Segment profits: Merck Pharmaceutical $2,111.6 $1,842.9 $ 6,306.7 $ 5,585.2 Merck-Medco 146.0 110.7 397.4 333.2 All Other 800.2 709.4 1,933.6 1,824.6 -------- -------- --------- --------- $3,057.8 $2,663.0 $ 8,637.7 $ 7,743.0 ======== ======== ========= =========
Segment profits are comprised of segment revenues less certain elements of materials and production costs and operating expenses, including components of equity income (loss) from joint ventures and depreciation and amortization expenses. The vast majority of indirect production costs, research and development expenses and general and administrative expenses, all predominantly related to the Merck Pharmaceutical business, as well as the cost of financing these activities, are not included in the marketing segment profits. The vast majority of goodwill and other intangibles amortization, as well as the cost of financing capital employed, are not included in Merck-Medco segment profits. - 6 - 8 Notes to Consolidated Financial Statements (continued) A reconciliation of total segment profits to consolidated income before taxes is as follows:
($ in millions) --------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 ----------------------- ---------------------- 1999 1998 1999 1998 -------- --------- --------- --------- Segment profits $3,057.8 $ 2,663.0 $ 8,637.7 $ 7,743.0 Other profits 17.8 24.2 63.2 65.7 Adjustments 57.5 45.2 146.2 121.6 Unallocated: Gain on sale of business - 2,147.7 - 2,147.7 Interest income 95.2 100.0 264.1 225.6 Interest expense (79.0) (56.9) (219.3) (138.8) Equity income (loss) from affiliates 59.9 73.7 205.5 (60.4) Depreciation and amortization expenses (223.1) (227.1) (678.5) (582.7) Acquired research (51.1) (1,039.5) (51.1) (1,039.5) Research and development expenses (516.0) (450.4) (1,440.5) (1,279.9) Other expenses, net (184.3) (564.6) (519.2) (1,025.7) -------- --------- --------- --------- $2,234.7 $ 2,715.3 $ 6,408.1 $ 6,176.6 ======== ========= ========= =========
Other profits primarily represent operating income related to divested products or businesses. Adjustments represent the elimination of the effect of double counting certain items of income and expense. Equity income (loss) from affiliates includes taxes paid at the joint venture level and a portion of equity income that is not reported in segment profits. Other expenses, net, include expenses from corporate and manufacturing cost centers and other miscellaneous income (expense), net. 12. Legal proceedings to which the Company is a party are discussed in Part 1 Item 3, Legal Proceedings, in the Annual Report on Form 10-K. There were no material developments in the nine-month period ended September 30, 1999. - 7 - 9 MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION Earnings per share for the third quarter of 1999 were $.64, an increase of 14% over the third quarter of 1998. Third quarter net income increased 13% to $1,539.6 million. Sales for the quarter were $8.2 billion, up 20% over the same period last year. For the first nine months, earnings per share were $1.79, an increase of 14% over the first nine months of 1998. Net income was $4,317.3 million for the first nine months of 1999, an increase of 12% over the first nine months of 1998. Sales rose 23% to $23.8 billion. Sales growth for the quarter and nine months of 1999 was led by the established major products, the newer products, including 'Vioxx', and growth from the Merck-Medco Managed Care business. Solid volume gains in both domestic and international operations contributed to the third quarter results. Sales of Merck human health products increased 13% for the third quarter and 16% for the nine months. The nine month sales increase benefited from the July 1998 Astra Merck, Inc. restructuring. For the nine months year-to-date, sales of Merck human health products outside the United States accounted for 40% of Merck human health sales. Foreign exchange had essentially no effect on the Company's sales growth for the third quarter and nine months. Income growth for the first nine months was driven by strong sales volume gains as well as the effects of ongoing cost controls and productivity improvements in manufacturing and general and administrative expenses. The savings from productivity improvements were partially offset by increases in selling and promotion expenses to support the recent product launches. Results for the first nine months were paced by strong volume gains of 'Zocor', 'Fosamax', 'Cozaar'*, 'Hyzaar'*, and 'Prinivil'. Also contributing to the volume growth was 'Vioxx', introduced to the U.S. market in May 1999, and sales of products introduced in 1998, including 'Singulair', 'Propecia' and 'Maxalt'. Prescription volume growth in the Merck-Medco Managed Care business also contributed significantly to the sales increase. 'Zocor' remains the world's leading statin medicine and sales continue to show solid growth. The U.S. Food and Drug Administration (FDA) approved 'Zocor' on August 9 as the first and only statin to raise levels of "good" cholesterol (HDL) in people with high levels of "bad" cholesterol (LDL). Newly published studies have confirmed that low HDL levels are a significant cardiovascular risk factor, and 'Zocor' has been shown to increase HDL by 8 to 16 percent. 'Fosamax' remains the only non-hormonal medicine proven to treat postmenopausal osteoporosis and to reduce the incidence of hip fractures, the most serious fractures related to osteoporosis. A new study, presented in October at the annual meeting of the American Society for Bone and Mineral Research, suggests that treatment with 'Fosamax' may be beneficial to men with osteoporosis. In this study in men, 'Fosamax' significantly increased bone mineral density at two common sites of fractures, the spine and hip, and reduced height loss. Bone mineral density is an indicator of bone strength, with the risk of fracture increasing as bone mineral density decreases. According to the National Osteoporosis Foundation, approximately 28 million Americans have osteoporosis or are at risk for the disease. Twenty percent are men. 'Cozaar' and its companion agent, 'Hyzaar', rank among our fastest-growing products. 'Cozaar', an angiotensin II antagonist (AIIA), is sold in more than 80 countries and 'Hyzaar' in more than 60. Together, they are the world's most widely prescribed drugs in the AIIA class. In just 20 weeks on the market in the United States, 'Vioxx' has become the country's fastest growing prescription arthritis medicine. U.S. physicians have written more than 2 million prescriptions for Merck's newest medicine, which is used to relieve the signs and symptoms of osteoarthritis, manage acute pain in adults and treat menstrual pain. In September, Merck entered an agreement with CollaGenex, a leader in dental products, to co-promote 'Vioxx' to dentists, periodontists and oral surgeons in the U.S. Dentists in the U.S. write more than 1.8 million prescriptions monthly for the relief of pain. Merck has introduced 'Vioxx' in 22 other countries, including the United Kingdom, Switzerland and Mexico. The Company is conducting extensive clinical studies with 'Vioxx' to evaluate its efficacy in the treatment of rheumatoid arthritis and in the prevention and treatment of Alzheimer's disease. Studies will begin later this year to ascertain whether 'Vioxx' might help prevent colon cancer. In a recent interference decision, the U.S. Patent and Trademark Office held that Merck is entitled to exclusive patent rights covering 'Vioxx' and structurally-related compounds. *'Cozaar' and 'Hyzaar' are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE, USA. - 8 - 10 MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION (continued) Within less than two years of its introduction to the U.S. market, 'Singulair', Merck's once daily tablet for asthma management, has become the third-largest prescription medicine for the control of asthma and the leading medicine in the leukotriene antagonist class. 'Singulair' is approved for children six years of age and older, and, earlier this year, the Company filed an application with the FDA to market a pediatric dosage form for children as young as two. 'Singulair' has been introduced in 57 other countries, including the United Kingdom, Spain, Germany and Canada. In the third quarter of 1999, Other (income) expense, net, includes income of $77.9 million ($48.7 million after tax) resulting from the reversal of a restructuring reserve established in 1995 for the anticipated 1999 closure of a manufacturing facility. As a result of favorable incentives agreed to in July 1999 with local authorities combined with changes in available production capacity across plant sites, management has decided to continue operating the facility. In September 1999, in connection with the acquisition of SIBIA Neurosciences, Inc., the Company recorded a $51.1 million pretax and after-tax charge for acquired research associated with specific research projects for which, at the acquisition date, technological feasibility had not been established and no alternative future use existed (See Note 3 to the consolidated financial statements for further information). In October 1999, Merck-Medco Managed Care, L.L.C., and CVS Corporation announced that the two companies have formed a long-term strategic alliance to collaborate on enhanced internet retail and specialty pharmacy services for Merck-Medco's 51 million health plan members. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which delays the required adoption of FAS 133 to fiscal 2001. The timing of adoption of the Statement and effect of FAS 133 on the Company's financial position or results of operations have not yet been determined. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 1998, the Company initiated a program in 1996 to assess the risks of Year 2000 noncompliance, remediate all noncompliant systems and assess the readiness of key third parties. The Company believes that it has completed all critical aspects of its Year 2000 readiness program. Although the Company designed this program to properly prepare its systems for the Year 2000, there can be no assurance that the Company will not experience business disruptions or incur material costs caused by the failure to detect and remediate all instances of Year 2000 noncompliance in its systems. Contingency plans (including the substitution of systems, use of manual methods and other means to prevent the failure of critical systems from having a material effect on the Company) are nearing completion, particularly for high-risk areas such as those involving supplier and product management. In addition to evaluating and remediating its internal systems, the Company instituted a project, now substantially complete, to assess the readiness of suppliers who provide goods, services and information. Where problems have been identified, the Company has worked with the suppliers to mitigate Year 2000 exposures and, when necessary, approached other suppliers. Some software package suppliers, in preparing for Year 2000, continue to make changes to their programs and the Company is working carefully to evaluate these changes. If a significant number of third parties experience failures in their systems due to Year 2000 noncompliance, it could affect the Company's ability to process transactions, manufacture products, or engage in other business activities. Development of third party-based contingency plans to address the risks of noncompliance, including securing alternate suppliers when available and alternate lines of communication with customers and suppliers, as well as managing our levels of inventory, is nearing completion. The Company continues to evaluate its risks and, as necessary, update contingency plans. Total costs to resolve the Year 2000 issue were not material to the Company's financial position, results of operations or cash flows. - 9 - 11 CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This report and other written reports and oral statements made from time to time by the Company may contain so-called "forward-looking statements," all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as "expects," "plans," "will," "estimates," "forecasts," "projects" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company's growth strategy, financial results, product approvals and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company's forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors described in the Company's filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K (if any). In Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed on March 24, 1999, the Company discusses in more detail various important factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties. - 10 - 12 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Number Description Method of Filing ------ ----------- ---------------- 3(a) Restated Certificate of Incorporated by reference Incorporation of Merck to Form 10-K Annual Report & Co., Inc. (May 6, 1992) for the fiscal year ended December 31, 1992 3(b) Certificate of Amendment to Incorporated by reference the Certificate of to Form 10-K Annual Report Incorporation of Merck & for the fiscal year ended Co., Inc. (as amended December 31, 1998 January 14, 1999, effective February 16, 1999) 3(c) By-Laws of Merck & Co., Inc. Incorporated by reference (as amended effective to Form 10-Q Quarterly February 25, 1997) Report for the period ended March 31, 1997 12 Computation of Ratios of Filed with this document Earnings to Fixed Charges 27 Financial Data Schedule Filed with this document
(b) Reports on Form 8-K During the three-month period ending September 30, 1999, no current reports on Form 8-K were filed. - 11 - 13 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MERCK & CO., INC. Date: November 12, 1999 /s/ Mary McDonald ----------------- MARY MCDONALD Senior Vice President and General Counsel Date: November 12, 1999 /s/ Richard C. Henriques ------------------------ RICHARD C. HENRIQUES Vice President, Controller - 12 - 14 EXHIBIT INDEX Exhibits Number Description 3(a) Restated Certificate of Incorporation of Merck & Co., Inc. (May 6, 1992) - Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1992 3(b) Certificate of Amendment to the Certificate of Incorporation of Merck & Co., Inc. (as amended January 14, 1999, effective February 16, 1999) - Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1998 3(c) By-Laws of Merck & Co., Inc. (as amended effective February 25, 1997) - Incorporated by reference to Form 10-Q Quarterly Report for the period ended March 31, 1997 12 Computation of Ratios of Earnings to Fixed Charges 27 Financial Data Schedule EX-12 2 COMPUTATION OF RATIOS 1 Exhibit 12 MERCK & CO., INC. AND SUBSIDIARIES Computation Of Ratios Of Earnings To Fixed Charges (In millions except ratio data)
Nine Months Ended Years Ended December 31 September 30 --------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 -------------- ------------ ------------ ----------- ----------- ---------- Income Before Taxes $6,408.1 $8,133.1 $6,462.3 $5,540.8 $4,797.2 $4,415.2 Add: One-third of rents 48.9 56.0 47.0 41.0 28.1 36.0 Interest expense, net 162.4 150.6 98.2 103.2 60.3 96.0 Preferred stock dividends 90.3 62.1 49.6 70.0 2.1 - -------- -------- -------- -------- -------- -------- Earnings $6,709.7 $8,401.8 $6,657.1 $5,755.0 $4,887.7 $4,547.2 ======== ======== ======== ======== ======== ======== One-third of rents $ 48.9 $ 56.0 $ 47.0 $ 41.0 $ 28.1 $ 36.0 Interest expense 219.3 205.6 129.5 138.6 98.7 124.4 Preferred stock dividends 90.3 62.1 49.6 70.0 2.1 - -------- -------- -------- -------- -------- -------- Fixed Charges $ 358.5 $ 323.7 $ 226.1 $ 249.6 $ 128.9 $ 160.4 ======== ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 19 26 29 23 38 28 == == == == == ==
For purposes of computing these ratios, "earnings" consist of income before taxes, one-third of rents (deemed by the Company to be representative of the interest factor inherent in rents), interest expense, net of amounts capitalized, and dividends on preferred stock of subsidiary companies. "Fixed charges" consist of one-third of rents, interest expense as reported in the Company's consolidated financial statements and dividends on preferred stock of subsidiary companies. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1999 SEP-30-1999 2,103 1,677 3,498 0 2,747 11,015 13,596 (4,558) 34,588 7,670 3,214 0 0 30 12,827 34,588 23,751 23,751 12,890 12,890 1,441 0 219 6,408 2,091 4,317 0 0 0 4,317 1.83 1.79 NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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