-----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, IPPeV+3+9sGIS4NvIvahZhPLENRncVpYDbpvMqgQtYHZrCTPd0Md+0idElKlnryE r/2S3b7d0ZnySf5duqi8tA== 0000950130-97-001093.txt : 19970320 0000950130-97-001093.hdr.sgml : 19970320 ACCESSION NUMBER: 0000950130-97-001093 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 SROS: NYSE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03305 FILM NUMBER: 97559141 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-K 1 FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1997 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ----------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the Fiscal Year Ended December 31, 1996 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from ________ to ________ COMMISSION FILE NO. 1-3305 MERCK & CO., INC. One Merck Drive Whitehouse Station, N. J. 08889-0100 (908) 423-1000 Incorporated in New Jersey I.R.S. Employer Identification No. 22-1109110 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class on which Registered ___________________ ___________________ Common Stock New York and Philadelphia Stock Exchanges (no par value) Number of shares of Common Stock (no par value) outstanding as of February 28, 1997: 1,209,992,221. Aggregate market value of Common Stock (no par value) held by non- affiliates on December 31, 1996 based on closing price on February 28, 1997: $111,113,000,000. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] DOCUMENTS INCORPORATED BY REFERENCE: Document Part of Form 10-K -------- ----------------- Annual Report to stockholders for the fiscal year Parts I and II ended December 31, 1996 Proxy Statement for the Annual Meeting of Part III Stockholders to be held April 23, 1997 ================================================================================ PART I ITEM 1. BUSINESS. Merck & Co., Inc. is a leading research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products and services. The Company's industry segment is the Human and Animal Health Products and Services segment, which includes Merck-Medco Managed Care, L.L.C. (formerly Medco Containment Services, Inc.) ("Merck-Medco"), acquired in November 1993. The following table shows the sales of various classes of the Company's products and services:
($ IN MILLIONS) 1996 1995 1994 --------------- ----- ---- ---- Elevated cholesterol $ 4,055.9 $ 3,211.1 $ 2,599.0 Hypertension/heart failure 3,512.4 3,021.3 2,752.6 Anti-ulcerants 1,143.6 1,019.8 1,565.7 Antibiotics 822.3 848.3 827.4 Ophthalmologicals 693.1 570.6 482.3 Vaccines/biologicals 586.8 529.9 485.3 Benign prostatic hyperplasia 450.1 405.8 322.7 Osteoporosis 281.8 45.2 4.6 Other Merck human health 71.3 221.3 376.7 Other human health 7,167.3 5,726.7 4,103.9 Animal health/crop protection 1,044.1 1,041.9 1,027.4 Specialty chemical - 39.2 422.2 --------- --------- --------- Total $19,828.7 $16,681.1 $14,969.8 ========= ========= =========
Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are elevated cholesterol products, which include Zocor (simvastatin) and Mevacor (lovastatin); hypertension/heart failure products which include Vasotec (enalapril maleate), the largest-selling product among this group, Prinivil (lisinopril) and Vaseretic (enalapril maleate and hydrochlorothiazide), as well as Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), both of which were launched in 1995; anti-ulcerants, of which Pepcid (famotidine) is the largest-selling, succeeding Prilosec (omeprazole), the largest-selling prior to its 1994 transfer to the Astra Merck joint venture; antibiotics, of which Primaxin (imipenem and cilastatin sodium) and Noroxin (norfloxacin) are the largest-selling; ophthalmologicals, of which Timoptic (timolol maleate), Timoptic-XE (timolol maleate ophthalmic gel forming solution) and Trusopt (dorzolamide hydrochloride) are the largest-selling; vaccines/biologicals, of which M-M-R II (measles, mumps and rubella virus vaccine live), Recombivax HB (hepatitis B vaccine recombinant) and Varivax (varicella virus vaccine live (Oka/Merck)), a live virus vaccine for the prevention of chickenpox, are the largest-selling; benign prostatic hyperplasia, which includes Proscar (finasteride), a treatment for symptomatic benign prostate enlargement; osteoporosis, which includes Fosamax (alendronate sodium), for treatment in postmenopausal women, launched in the United States in October 1995; and other Merck human health products, which include Crixivan (indinavir sulfate), an HIV protease inhibitor, cleared for marketing in the United States by the U.S. Food and Drug Administration ("FDA") in March 1996, anti- inflammatories/analgesics, psychotherapeutics and a muscle relaxant. Also included in this category are rebates and discounts on Company pharmaceutical products. Other human health primarily includes Merck-Medco sales of non-Merck products and Merck-Medco human health services, principally managed prescription drug programs. Animal health/crop protection products include medicinals used to control and alleviate disease in livestock, small animals and poultry. These products are primarily antiparasitics, of which Ivomec (ivermectin), for the control of internal and external parasites in livestock, and Heartgard-30 (ivermectin), for the prevention of canine heartworm disease, are the largest-selling. The animal health/crop protection group also includes crop protection products, coccidiostats for the treatment of poultry diseases, and poultry breeding stock. Specialty chemical products are used in health care, food processing, oil exploration, paper, textiles and personal care. All specialty chemical businesses were fully divested by the first quarter of 1995. 2 In January 1996, the Company submitted a New Drug Application ("NDA") to the FDA for Crixivan. On March 1, 1996, an FDA Advisory Committee recommended that the FDA, under the provisions of an accelerated review process, clear Crixivan for marketing. On March 13, 1996, the FDA cleared Crixivan for marketing in the United States for treatment of HIV infection in adults when antiretroviral therapy is warranted. In April 1996, Vaqta (hepatitis A vaccine), a new vaccine for the prevention of hepatitis A, was cleared for marketing and launched in the United States. The Company has also submitted licensing applications for Vaqta in Canada, China, the United Kingdom and Germany (where it was cleared and launched in 1995). The Company filed on April 29, 1996 a supplement with the FDA for a new indication for Fosamax for the prevention of osteoporosis in postmenopausal women. In February 1997, an FDA Advisory Committee unanimously recommended that the FDA clear for marketing Fosamax for this new indication. The FDA is not bound by the decision of its advisory committee. Fosamax is licensed to the Company by Istituto Gentili of Italy. On October 4, 1996, the FDA cleared Comvax (haemophilus b conjugate ----------- (meningococcal protein conjugate) and hepatitis B (recombinant) vaccine), a combination vaccine indicated for protection against diseases caused by haemophilus influenzae type b and hepatitis B, for marketing in the United - ----------- ---------- States. Divestitures -- In January 1995, the Company sold its Calgon Vestal Laboratories business to Bristol-Myers Squibb for $261.5 million. In February 1995, the Company sold its Kelco business to Monsanto Company for $1.075 billion. The decision to divest these specialty chemicals businesses, which were not significant to the Company's financial position, liquidity or results of operations, reflects the Company's intention to focus its resources more fully on its core human and animal health business. Following these divestitures, the Company is no longer engaged in the specialty chemicals business. In a continued effort to focus on its core business, in October 1995, the Company sold Medco Behavioral Care Corporation ("MBC"), a managed mental health care service business which was acquired as part of Medco, to MBC management and Kohlberg Kravis Roberts & Co. for $340.0 million. Strategic Alliances -- In 1982, the Company entered into an agreement with Astra AB ("Astra") to develop and market Astra products in the United States. In July 1993, the Company's total sales of Astra products reached the level that triggered the first step in the establishment of a separate entity for operations related to Astra products in the United States. On November 1, 1994, Astra paid the Company $820.0 million for an interest in a joint venture business carried on by Astra Merck Inc., in which the Company and Astra each own a 50% share. The joint venture develops and markets Astra's new prescription medicines in the United States. Joint venture sales consist primarily of Prilosec, the first of a class of medications known as proton pump inhibitors which slow the production of acid from the cells of the stomach lining. In December 1996, the FDA cleared Prilosec for use as initial therapy in the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease. In 1989, the Company formed a joint venture with Johnson & Johnson to develop, market and manufacture consumer healthcare products in the United States. In April 1995, the joint venture obtained FDA clearance in the United States for marketing Pepcid AC Acid Controller (famotidine), an over-the-counter form of the Company's ulcer medication Pepcid. This 50% owned joint venture was expanded into Europe in 1993, and Canada in 1996. The European extension currently markets and sells over-the-counter pharmaceutical products in France, Germany, Spain and the United Kingdom. In January 1994, the Company and Johnson & Johnson acquired all of the stock of Laboratoires J.P. Martin, a leading self- medication business in France. In 1991, the Company and E.I. du Pont de Nemours and Company ("DuPont") entered into a joint venture to form a worldwide pharmaceutical company for the research, marketing, manufacturing and sale of pharmaceutical and imaging agent products. DuPont contributed its entire worldwide pharmaceutical and radiopharmaceutical imaging agents businesses and is providing administrative services. The Company contributed cash and European marketing rights to several of its prescription medicines and is providing research and development funding and expertise and international industry expertise. In January 1995, the joint venture began co-promotion of the Company's prescription medicines, Prinivil and Prinzide (lisinopril and hydrochlorothiazide), in the United States. 3 In December 1994, the Company agreed to arrangements that, among other things, eliminated the Company's right to offset the consequences of disproportionate allocations of the DuPont Merck joint venture income and expense against the Company's right to receive a disproportionate share of income arising from its 1989 long-term research and marketing agreement with DuPont. Accordingly, the Company recorded a $499.6 million provision for an obligation to the joint venture. This obligation is a function of the favorable performance of assets contributed by DuPont to the joint venture through December 31, 1994 and certain Company contractual commitments. This obligation was discharged in 1996. Effective April 1992, the Company, through the Merck Vaccine Division, and Connaught Laboratories, Inc. ("Connaught"), recently renamed Pasteur Merieux Connaught USA ("PMC USA"), an affiliate of Pasteur Merieux Serums et Vaccins ("Pasteur Merieux"), recently renamed Pasteur Merieux Connaught ("PMC"), which is part of the Rhone-Poulenc group, agreed to collaborate on the development and marketing of combination pediatric vaccines and to promote selected vaccines in the United States. The research and marketing collaboration enables the companies to pool their resources to expedite the development of vaccines combining several different antigens to protect children against a variety of diseases, including haemophilus influenzae type b, hepatitis B, diphtheria, ----------- ---------- tetanus, pertussis and poliomyelitis. In addition, the Company and Connaught have agreed that PMC USA will promote selected Company vaccine products. In 1994, the Company, through the Merck Vaccine Division, and PMC formed a joint venture to market human vaccines and to collaborate in the development of new combination vaccines for distribution in the European Union ("EU") and the European Free Trade Association. The Company and PMC contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Merieux MSD, S.N.C. The joint venture is subject to monitoring by the EU, to which the partners made certain undertakings in return for an exemption from European Competition Law, effective until December 2006. The joint venture is active through affiliates in Belgium, Denmark, Italy, Germany, Spain and the United Kingdom, and through distributors throughout the rest of Europe. In 1995, Merck-Medco entered into a joint venture with Wyeth-Ayerst Laboratories, a division of American Home Products Corporation, to develop, market and implement health management programs for certain conditions, including several involving women's health. The joint venture company, Innovative Health Solutions, L.P., will introduce its first health management programs in 1997. In December 1996, Merck and Rhone-Poulenc announced plans to combine their respective animal health and poultry genetics businesses to form an equally owned joint venture to be called Merial. The joint venture, which is subject to approval by European, French and U.S. authorities, is expected to be fully operational by the second quarter of 1997. The Company also announced in December 1996 that it intends to divest its crop protection business. Competition -- The markets in which the Company's business is conducted are highly competitive and, in many cases, highly regulated. Such competition involves an intensive search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well prepared to compete in the search for technological innovations. Additional resources to meet competition include quality control, flexibility to meet exact customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through joint ventures and licenses and has been expanding its sales and marketing efforts to further address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product replacements, even for products protected by patents. For example, the number of compounds available to treat diseases typically increases over time and has resulted in slowing the growth in sales of certain of the Company's products. In addition, particularly in the area of human pharmaceutical products, legislation enacted in all states allows, encourages or, in a few instances, in the absence of specific instructions from the prescribing physician, mandates the use of "generic" products (those containing the same active chemical as an innovator's product) rather than "brand-name" products. Governmental and other pressures toward the dispensing of generic products 4 have significantly reduced the sales of certain of the Company's products no longer protected by patents, such as Clinoril (sulindac) and Aldomet (methyldopa), and slowed the growth of certain other products. In 1992, the Company formed a new division, West Point Pharma, to market the generic form of its product Dolobid (diflunisal). In 1993, West Point Pharma began marketing an additional 11 off-patent Company drugs in more than 20 different packages. In December 1994, the Company entered into a distribution agreement with Endo Laboratories, L.L.C. ("Endo"), a wholly-owned subsidiary of The DuPont Merck Pharmaceutical Company, effectively transferring most of its generics business to Endo. Merck-Medco's pharmacy benefit management business is highly competitive. Merck-Medco competes with other pharmacy benefit managers, insurance companies and other providers of health care and/or administrators of healthcare programs. Merck-Medco competes primarily on the basis of its ability to design and administer innovative programs which contain a plan sponsor's overall prescription drug costs, its flexibility in handling integrated prescription drug programs resulting from its ability to dispense drugs through mail service and act as retail prescription drug manager, and the sophistication and quality of its systems, procedures and services. See also the description of the effect upon competition of the Drug Price Competition and Patent Term Restoration Act of 1984 ("PTRA") on page 7. It is generally the Company's position to limit individual product price increases of its human health products in the United States to the projected Consumer Price Index ("CPI") plus 1 percent on an annual basis and to limit the net weighted average price change for all human health products to the projected general rate of inflation as measured by the CPI. Distribution -- The Company sells its human health products to drug wholesalers and retailers, hospitals, clinics, government agencies and managed healthcare providers such as health maintenance organizations and other institutions. The Company's professional representatives communicate the effectiveness, safety and value of the Company's products to healthcare professionals in private practice, group practices and managed-care organizations. Animal health/crop protection products are sold to veterinarians, distributors, wholesalers, retailers, feed manufacturers, veterinary suppliers and laboratories. Raw Materials -- Raw materials and supplies are normally available in quantities adequate to meet the needs of the Company's business. Government Regulation and Investigation -- The pharmaceutical industry is subject to global regulation by country, state and local agencies. Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States, although revised regulations are designed to reduce somewhat the time for approval of new products. In 1992, the Prescription Drug User Fee Act was passed, under which the FDA collects revenues through user fees. The FDA has pledged to devote these revenues to its process for reviewing and approving applications for new drugs, antibiotics and biological products. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. Although a federal reform bill has not been enacted by Congress, some states have passed reform legislation and further federal and state developments are expected. In 1995, Congress did pass certain measures, which were vetoed by President Clinton, restructuring the existing Medicaid program and substituting block grants to the states for many federal entitlements, including the Vaccines for Children program. The debate on reforms to the healthcare system will be protracted. Although the Company is positioned to respond to evolving market forces, it cannot predict the outcome or effect of legislation resulting from the reform process. For some years the pharmaceutical industry has been under federal and state oversight with the new drug approval system, drug safety, advertising and promotion, drug purchasing and reimbursement programs and formularies variously under review. The Company believes that it will continue to be able to bring new drugs to 5 market in this regulatory environment. One federal initiative to contain costs is the prospective payment system, established under the Social Security Amendments of 1983 to hold down the growth of Medicare payments to hospitals, which provides a flat rate for reimbursement to hospitals in advance of the care for patients. The system establishes a number of patient classifications -- Diagnosis Related Group(s) ("DRG"). A hospital receives the flat rate as full payment for each Medicare patient treated within a given DRG regardless of whether the hospital's actual costs are higher or lower than the flat rate. This system and other cost-cutting programs have caused hospitals, health maintenance organizations and other customers of the Company to be more cost conscious in their treatment programs and to implement cost-containment measures, including cost containment for the drugs they administer. Additionally, Congress and the regulatory agencies have sought to reduce the cost of drugs paid for with federal funds. In 1990, the Company initiated its Equal Access to Medicines Program ("EAMP") on its single source products, under which it generally offered its "best price" discount to state Medicaid programs that grant open access to the Company's products. The Omnibus Budget Reconciliation Act of 1990 ("OBRA") largely reflects the Company's best price approach. As a result of a national agreement, effective January 1, 1991, signed by the Company with the Secretary of Health and Human Services and administered by the Health Care Financing Administration ("HCFA") pursuant to OBRA, Medicaid received a minimum rebate of 12.5% off average manufacturer's price ("AMP") through September 30, 1992, and has received a minimum rebate of 15.1% off AMP since January 1, 1996, on the Company's outpatient drugs reimbursed under Medicaid. In conjunction with implementation of the federal program under OBRA, the Company's separate EAMP agreements with individual states have been permitted to lapse or have been terminated. Effective in 1992, the terms of the federal HCFA rebate agreement were generally substituted for the EAMP agreements. In January 1992, the Company announced that it would provide discounts on its single-source prescription medicines to non-profit health centers for the poor that are federally funded under sections 329-330 of the Public Health Service Act that qualify for the Company's program and agree to assure access to the Company's drugs. The discounts were largely based on those that the Company provided Medicaid under the federal "best price" legislation. The discounts were ultimately provided to such centers for single-source, outpatient prescription drugs (not reimbursed by Medicaid) purchased directly from the Company by the centers for their patients. The Federal Veterans Health Care Act of 1992 was enacted on November 4, 1992, superseding the Company's Public Health Service initiative and mandating Medicaid rebate-equivalent discounts on covered outpatient drugs purchased by certain Public Health Service entities and "disproportionate share hospitals" (hospitals meeting certain qualification criteria). The Act further mandates minimum discounts of 24% off non-federal AMP to the Veterans Administration, Federal Supply Schedule and certain other federal sector purchasers on their pharmaceutical drug purchases. The Omnibus Budget Reconciliation Act of 1993 established a new Federal Vaccines for Children entitlement program, under which the U.S. Centers for Disease Control and Prevention ("CDC") funds and purchases recommended pediatric vaccines at a capped public sector price for the immunization of Medicaid- eligible, uninsured, native American and certain underinsured children. The Company was awarded five CDC contracts in 1996 for the supply of its pediatric vaccines for this program. The Company encounters similar regulatory and legislative issues in most of the foreign countries where it does business. There, too, the primary thrust of governmental inquiry and action is toward determining drug safety and effectiveness, often with mechanisms for controlling the prices of prescription drugs and the profits of prescription drug companies. The EU has adopted directives concerning the classification, labeling, advertising, wholesale distribution and approval for marketing of medicinal products for human use. The Company's policies and procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company's business. The Company is subject to the jurisdiction of various regulatory agencies and is, therefore, subject to potential administrative actions. Such actions may include product recalls, seizures of products and other civil and criminal sanctions. Under certain circumstances, the Company may deem it advisable to initiate product recalls voluntarily. Although it is difficult to predict the ultimate effect of these activities and legislative, administrative 6 and regulatory requirements and proposals, the Company believes that its development of new and improved products should enable it to compete effectively within this environment. There are extensive federal and state regulations applicable to the practice of pharmacy and the administration of managed healthcare programs. Each state in which Merck-Medco operates a pharmacy has laws and regulations governing its operation and the licensing of and standards of professional practice by its pharmacists. These regulations are issued by an administrative body in each state (typically, a pharmacy board), which is empowered to impose sanctions for non-compliance. The policies and procedures of the Company comply with these regulations. Patents, Trademarks and Licenses -- Patent protection is considered, in the aggregate, to be of material importance in the Company's marketing of human and animal health products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products or the uses of products. Protection for individual products extends for varying periods in accordance with the date of grant and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. Patent portfolios developed for products introduced by the Company normally provide marketing exclusivity. This is the case with the following major products in the United States: Chibroxin (norfloxacin), Cozaar, Crixivan, Enacard (enalapril maleate) for use in dogs, ivermectin-containing products, Fosamax, Hyzaar, Mefoxin (cefoxitin sodium), Mevacor, Noroxin, PedvaxHIB (haemophilus b conjugate vaccine), Pepcid, Primaxin, Proscar, Timoptic, Trusopt, ----------- Vaseretic, Vasotec and Zocor. Prinivil is subject to a license to a third party and is not marketed exclusively by the Company. Product patent protection in the United States has expired for the following human and animal pharmaceutical products: Aldomet, Aldoril (methyldopa and hydrochlorothiazide), Amprol (amprolium), Blocadren (timolol maleate), Clinoril, Decadron (dexamethasone), Diuril (chlorothiazide), Dolobid, Flexeril (cyclobenza-prine hydrochloride), HydroDiuril (hydrochlorothiazide), Indocin (indomethacin), Moduretic (amiloride HCl and hydrochlorothiazide), Sinemet (carbidopa and levodopa), and TBZ and Thibenzole (thiabendazole). While the expiration of a product patent normally results in the loss of marketing exclusivity for the covered product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to special compositions and formulations; and (iv) marketing exclusivity that may be available under the PTRA. The effect of product patent expiration also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries. The PTRA in the United States permits restoration of up to five years of the patent term for new products to compensate for patent term lost during the regulatory review process. Additionally, under the PTRA new chemical entities approved after September 24, 1984 receive a period of five years' exclusivity from the date of NDA approval, during which time an "abbreviated NDA" or "paper NDA" may not be submitted to the FDA. Similarly, in the case of non-new chemical entities approved after September 24, 1984, the applications for which include the new data of clinical investigations conducted or sponsored by the applicant essential to approval, no abbreviated NDA or paper NDA may become effective before three years from NDA approval. However, the PTRA has also resulted in a general increase in the number and use of generic products marketed in the United States because the regulatory requirements for approval of generic versions of off-patent pioneer drugs have significantly lessened. Additionally, the PTRA has increased the incentive for abbreviated NDA applicants to challenge the validity of U.S. patents claiming pioneer drugs because such a challenge could result in an earlier effective approval date for the generic version of the pioneer drug and a six-month period during which other generic versions of the pioneer drug could not be marketed. 7 In Japan, a patent term restoration law enacted in 1988 provides, under specific conditions, up to five years of additional patent life for pharmaceuticals. In 1992, the Council of the European Communities published a regulation which created supplementary protection certificates for medicinal products. Thus, as of January 1993, certain medicinal products sold in the EU became eligible for up to five years of market exclusivity after patent expiration. However, this market exclusivity will expire throughout the EU 15 years after the first product approval in the EU. In February 1993, Canada enacted Bill C91 which significantly modified Canadian patent law by eliminating compulsory licensing of pharmaceutical products after December 20, 1991. Thus, patented pharmaceutical products will have market exclusivity for the full 20- year patent life in Canada. The North American Free Trade Agreement was passed in November 1993. Pursuant to the agreement, Mexico improved its patent law to meet international standards and to provide full patent protection to pharmaceutical products. The General Agreement on Tariff and Trade ("GATT") negotiations were concluded in December 1993 and the U.S. implementing legislation was enacted in December 1994. The required changes in U.S. law became effective in June 1995. The GATT implementing law changed the patent term of new inventions to 20 years from the date of patent filing. Existing patents were granted a patent term of the greater of 17 years from issue or 20 years from filing. Patents on several products of the Company obtained longer life as a result. In a related matter, the Company and several other research-based pharmaceutical companies received a favorable ruling from a Federal District Court in a lawsuit which challenged the U.S. Patent and Trademark Office ("PTO") and the FDA on their interpretation of the new law. The Court held that the PTO and FDA were in error in interpreting the GATT implementing legislation to disallow the adding of previously obtained patent term restoration (as compensation for regulatory delays) to the new GATT 20-year term. Patents on several products of the Company are impacted. The favorable ruling of the Federal District Court was affirmed on appeal to the Federal Circuit Court. A petition for a writ of certiorari to the U.S. Supreme Court filed by other companies was recently denied. The GATT agreement also requires countries to upgrade their intellectual property laws to meet minimum international standards and to provide full patent protection for pharmaceutical products not later than the end of a ten-year transition period. Many countries are in the process of upgrading their patent laws due to the GATT agreement. The Generic Animal Drug and Patent Term Restoration Act, enacted in November 1988, provides for the extension of term of patents claiming new animal drugs approved after enactment. This legislation also establishes a process by which generic versions of new animal drugs can be approved via an Abbreviated New Animal Drug Application procedure. The provisions of this legislation, in general, are parallel to those found in the PTRA covering human health products. Worldwide, all of the Company's important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely. Royalties received during 1996 on patent and know-how licenses and other rights amounted to $105.9 million. The Company also paid royalties amounting to $214.7 million in 1996 under patent and know-how licenses it holds. RESEARCH AND DEVELOPMENT The Company's business is characterized by the introduction of new products or new uses for existing products through a strong research and development program. Approximately 6,995 people are employed in the Company's research activities. Expenditures for the Company's research and development programs were $1,487.3 million in 1996, $1,331.4 million in 1995 and $1,230.6 million in 1994 and will be approximately $1.7 billion in 1997. The Company maintains its ongoing commitment to research over a broad range of therapeutic areas and clinical development in support of new products. Total expenditures for the period 1987 through 1996 exceeded $10.0 billion with a compound annual growth rate of 12%. Research and development costs incurred by the joint ventures in which the Company participates, totaling $440.7 million in 1996, are not included in the Company's consolidated research and development expenses. 8 The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. Projects related to human and animal health are being carried on in various fields such as bacterial and viral infections, cardiovascular functions, cancer, diabetes, inflammation, ulcer therapy, kidney function, mental health, the nervous system, ophthalmic research, prostate therapy, the respiratory system, bone diseases, animal nutrition and production improvement, endoparasitic and ectoparasitic diseases and poultry genetics. In the development of human and animal health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through pre-clinical tests and controlled clinical evaluation. Before a new drug may be marketed in the United States, recorded data on the experience so gained are included in the NDA, the biological Product License Application or the New Animal Drug Application to the FDA for the approval required. The development of certain other products, such as insecticides, is also subject to government regulations covering safety and efficacy in the United States and many foreign countries. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed. New product candidates resulting from this research and development program include Propecia (finasteride), a treatment for male pattern baldness, for which the Company submitted an NDA to the FDA in December 1996; Singulair (montelukast sodium), an oral leukotriene D4 receptor antagonist for the treatment of asthma, for which the Company filed an NDA with the FDA on February 21, 1997; Aggrastat (tirofiban hydrochloride), an intravenous platelet blocker for the treatment of cardiovascular disorders; Maxalt (rizatriptan), a migraine treatment; and Cosopt (dorzolamide hydrochloride and timolol maleate), a combination of Timoptic-XE and Trusopt. Other products in development include an oral growth hormone secretagogue, a new product to treat arthritis pain and inflammation, an injectable antibiotic, an antifungal agent and certain new vaccines. All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned by or licensed to Merck & Co., Inc., its subsidiaries or affiliates; except that Cozaar and Hyzaar are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE. EMPLOYEES At the end of 1996, the Company had 49,100 employees worldwide, with 30,400 employed in the United States, including Puerto Rico. Approximately 29.5% of the Company's worldwide employees are represented by various collective bargaining groups. ENVIRONMENTAL MATTERS The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. The Company has maintained a leadership role in supporting environmental initiatives and fostering pollution prevention by actions including the elimination of, or the application of best available technology to reduce air emissions of known or suspect carcinogens at its facilities worldwide. In 1996, the Company evaluated emission data reported in accordance with Superfund Amendments and Reauthorization Act ("SARA") regulations to the Environmental Protection Agency ("EPA") as adjusted for foreign operations using SARA criteria to determine if the voluntary goal of a 90% reduction from a 1987 baseline of emissions had been attained. Despite a 60% increase in production since 1987, the Company did reduce emissions 90% from the baseline year. In 1996, the Company incurred capital expenditures of approximately $29.2 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $350.0 million for the years 1997 through 2001. In addition, the Company's operating and maintenance expenditures for pollution control were approximately $78.4 million in 1996. Expenditures for this purpose for the years 1997 through 2001 are forecasted to exceed $492.0 million. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for environmental purposes were $18.9 million in 1996 and are estimated at $136.0 million for the years 1997 through 2001. The Company has taken an active role in identifying and providing for these costs; and therefore, management does not believe that these expenditures should result in a materially adverse effect on the Company's financial position, results of operations, liquidity or capital resources. 9 GEOGRAPHIC AREA INFORMATION The Company's operations outside the United States are conducted primarily through subsidiaries. Sales by subsidiaries outside the United States were 30% of sales in 1996 and 32% of sales in 1995 and 1994. The Company's worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions. Over the years, the Company has divested and restructured to reduce its operational exposure in countries where economic conditions or government policies make it difficult to earn fair returns. At the same time, the Company is actively pursuing opportunities in Latin America, Eastern Europe, Asia Pacific and other regions where changes in government, fiscal and regulatory policies are making it possible for the Company to earn fair economic returns. While none of these actions individually has significantly affected operations, the overall impact has been favorable. Financial information about geographic areas of the Company's business is incorporated by reference to page 53 of the Company's 1996 Annual Report to stockholders. ITEM 2. PROPERTIES. The Company's corporate headquarters is located in Whitehouse Station, New Jersey. The human and animal health business is conducted through divisional or subsidiary headquarters located in Montvale, New Jersey; Rahway, New Jersey; Walpole, New Hampshire; West Point, Pennsylvania; and Woodbridge, New Jersey. Principal research facilities for human and animal health products are located in Rahway and West Point. The Company also has production facilities for human and animal health products at 12 locations in the United States. Branch warehouses are conveniently located to provide services throughout the country. Merck-Medco operates its primary businesses through owned or leased facilities in various locations throughout the United States. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Australia, Canada, countries in Western Europe, Central and South America, Africa and the Far East. Capital expenditures for 1996 were $1,196.7 million compared with $1,005.5 million for 1995. In the United States, these amounted to $937.8 million for 1996 and $793.5 million for 1995. Abroad, such expenditures amounted to $258.9 million for 1996 and $212.0 million for 1995. The Company and its subsidiaries own their principal facilities and manufacturing plants under titles which they consider to be satisfactory. The Company considers that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products. ITEM 3. LEGAL PROCEEDINGS. The Company, including Merck-Medco, is party to a number of antitrust suits, certain of which have been certified as class actions, instituted by most of the nation's retail pharmacies and consumers in several states, alleging conspiracies in restraint of trade and challenging the pricing and/or purchasing practices of the Company and Merck-Medco, respectively. A significant number of other pharmaceutical companies and wholesalers have also been sued in the same or similar litigation. These actions, except for several actions pending in state courts, have been consolidated for pre-trial purposes in the United States District Court for the Northern District of Illinois. The Company and several other defendants have entered into 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 is obligated to pay $51.8 million, in four equal annual installments. In April 1996, the court declined to approve the settlement. Subsequently, the Company and several other defendants entered into an amended settlement agreement, which provides for the same monetary payment and addresses the court's concerns 10 as expressed in its April 1996 opinion. In June 1996, the court granted approval of the amended settlement agreement, to which objecting retail class members filed appeals in July 1996. The Company has not engaged in any conspiracy and no admission of wrongdoing has been made or is included in the amended agreement, which was entered into in order to avoid the cost of litigation and the risk of an inaccurate adverse verdict by a jury presented with a case of this size and complexity. While it is not feasible to predict the final outcome of these proceedings, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial position, liquidity or results of operations of the Company. In addition, prior to the Company's merger with Merck-Medco, the Company and Merck- Medco were named in an action by a retail pharmacy seeking to enjoin such merger. This proceeding was settled by the Company in March 1995. The settlement includes a consent order that imposes certain restrictions on the exchange of information between the Company and Merck-Medco and requires that Merck-Medco offer an open formulary. In the opinion of the Company, compliance with the consent order will not have a material adverse effect on the financial position, liquidity or results of operations of the Company. The Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. These proceedings seek to require the operators of hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company's potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the costs of cleanup have not yet been determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial position, results of operations, liquidity or capital resources of the Company. The Company has accrued for these costs and such accruals do not include any reduction for anticipated recoveries of cleanup costs from insurers, former site owners or operators or other recalcitrant potentially responsible parties. In May 1994, Kelco received a Notice of Violation from the EPA Region 9 alleging that Kelco failed to obtain agency pre-construction approvals required by the Clean Air Act for physical and/or process modifications made at its San Diego facility. In November 1996, the Company reached a settlement of this matter with the EPA which included (i) a $1.85 million civil penalty and (ii) capital improvements to be made at the facility in the amount of approximately $5.0 million to establish satisfactory environmental controls. Under the terms of the Kelco Sale Agreement, the Company retained responsibility for the cost of the settlement. In November 1994, the Company, along with other pharmaceutical manufacturers and pharmaceutical benefits managers ("PBMs"), received a notice from the Federal Trade Commission ("FTC") that the FTC intended to investigate agreements, alliances, activities and acquisitions involving pharmaceutical manufacturers and PBMs. In March 1996, the Company, along with other pharmaceutical manufacturers, received a notice from the FTC that it was conducting an investigation into pricing practices. The Company has cooperated fully with these investigations, and believes that it is currently operating in all material respects in accordance with applicable standards. Accordingly, although the Company cannot predict the outcome of the investigations, it does not believe that either investigation will have a material adverse effect on the financial position, liquidity or results of operations of the Company. There are various other legal proceedings, principally product liability and intellectual property suits involving the Company, which are pending. While it is not feasible to predict the outcome of these proceedings, in the opinion of the Company, all such proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability which would have a material adverse effect on the financial position, liquidity or results of operations of the Company. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not applicable. _________________ EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 1, 1997) RAYMOND V. GILMARTIN -- Age 55 November, 1994 -- Chairman of the Board, President and Chief Executive Officer June, 1994 -- President and Chief Executive Officer Prior to June, 1994, Mr. Gilmartin was President and Chief Executive Officer (1989 to 1992) and Chairman, President and Chief Executive Officer (1992 to 1994) of Becton Dickinson and Company (medical supplies and devices and diagnostic systems). DAVID W. ANSTICE -- Age 48 January, 1997 -- President, Human Health-The Americas -- responsible for the Company's prescription drug business in the United States, Canada and Latin America, worldwide coordination of marketing policies and medical and scientific affairs September, 1994 -- President, Human Health-U.S./Canada -- responsible for the Company's prescription drug business in the United States and Canada, worldwide coordination of marketing policies and medical and scientific affairs January, 1994 -- President, Human Health-Europe January, 1993 -- Senior Vice President, Merck Human Health Division (MHHD)- Europe April, 1991 -- Senior Vice President, MHHD and President, U.S. Human Health PAUL R. BELL -- Age 51 Effective April, 1997 -- President, Human Health-Asia Pacific -- responsible for the Company's prescription drug business in the Far East, Australia, New Zealand and Japan March, 1994 -- Vice President and Managing Director, Merck Sharp & Dohme (Australia) Pty. Limited (MSD Australia), a wholly-owned subsidiary of the Company September, 1988 -- Managing Director, MSD Australia CELIA A. COLBERT -- Age 40 January, 1997 -- Vice President, Secretary and Assistant General Counsel November, 1993 -- Secretary and Assistant General Counsel September, 1993 -- Secretary February, 1993 -- Secretary, New Products Committee October, 1992 -- Counsel, Corporate Staff May, 1991 -- Associate Counsel, Corporate Staff CAROLINE DORSA -- Age 37 January, 1997 -- Vice President and Treasurer January, 1994 -- Treasurer July, 1993 -- Executive Director, Customer Marketing, U. S. Human Health (USHH) June, 1992 -- Executive Director, Pricing and Strategic Planning, USHH April, 1990 -- Executive Director, Financial Evaluation and Analysis 12 R. GORDON DOUGLAS JR. -- Age 62 January, 1994 -- President, Merck Vaccines April, 1991 -- President, Merck Vaccine Division KENNETH C. FRAZIER -- Age 42 January, 1997 -- Vice President, Public Affairs and Assistant General Counsel -- responsible for public affairs, corporate legal activities and The Merck Company Foundation April, 1994 -- Vice President, Public Affairs May, 1992 -- Vice President, General Counsel and Secretary, Astra/Merck Group Prior to May, 1992, Mr. Frazier was a partner at the law firm Drinker, Biddle & Reath for more than five years. BERNARD J. KELLEY -- Age 55 December, 1993 -- President, Merck Manufacturing Division (MMD) August, 1993 -- Senior Vice President, Operations, MMD September, 1991 -- Senior Vice President, Administration, Planning and Quality, MMD JUDY C. LEWENT -- Age 48 January, 1997 -- Senior Vice President and Chief Financial Officer -- responsible for financial and corporate development functions, internal auditing and the Company's joint venture relationships September, 1994 -- Senior Vice President and Chief Financial Officer -- responsible for financial and public affairs functions, The Merck Company Foundation, internal auditing and the Company's joint venture relationships December, 1993 -- Senior Vice President and Chief Financial Officer -- responsible for financial and public affairs functions and The Merck Company Foundation June, 1993 -- Senior Vice President, Chief Financial Officer and Controller January, 1993 -- Senior Vice President and Chief Financial Officer April, 1990 -- Vice President, Finance and Chief Financial Officer HENRI LIPMANOWICZ -- Age 58 January, 1997 -- President, Human Health-Asia Pacific -- responsible for the Company's prescription drug business in the Far East, Australia, New Zealand and Japan January, 1995 -- President, Human Health-Intercontinental Region and Japan -- responsible for the Company's prescription drug business in the Near East, the Far East, Eastern Europe, Africa, Latin America, Australia, New Zealand and Japan January, 1994 -- President, Human Health-Merck Intercontinental Region (MIR)/Japan June, 1991 -- Senior Vice President, MIR, Merck Human Health Division 13 PER G. H. LOFBERG -- Age 49 December, 1995 -- President, Merck-Medco Managed Care, L.L.C., a wholly-owned subsidiary of the Company January, 1994 -- President, Merck-Medco Managed Care Division April, 1991 -- Senior Executive Vice President, Strategic Planning and Marketing, Medco Containment Services, Inc. MARY M. MCDONALD -- Age 52 January, 1997 -- Senior Vice President and General Counsel -- responsible for legal and public affairs functions and The Merck Company Foundation January, 1993 -- Senior Vice President and General Counsel April, 1991 -- Vice President and General Counsel PETER E. NUGENT -- Age 54 September, 1993 -- Vice President, Controller July, 1989 -- Vice President, Corporate Taxes JOHN M. PRESTON -- Age 50 April, 1993 -- President, Merck AgVet Division July, 1992 -- Executive Vice President, Merck AgVet Division September, 1991 -- Vice President, Business Affairs, MSD AGVET Division EDWARD M. SCOLNICK -- Age 56 September, 1994 -- Executive Vice President, Science and Technology and President, Merck Research Laboratories (MRL) -- responsible for worldwide research function and activities of Merck Manufacturing Division (MMD), computer resources and corporate licensing December, 1993 -- Executive Vice President, Science and Technology and President, MRL -- responsible for worldwide research function and activities of MMD and computer resources January, 1993 -- Executive Vice President and President, MRL -- responsible for worldwide research function and activities of Merck AgVet Division and computer resources April, 1991 -- Senior Vice President and President, MRL -- responsible for worldwide research function and activities of Merck Frosst Canada, Inc. BENNETT M. SHAPIRO -- Age 57 September, 1990 -- Executive Vice President, Worldwide Basic Research, Merck Research Laboratories 14 DEBORAH K. SMITH -- Age 49 June, 1996 -- Senior Vice President, Human Resources Prior to June, 1996, Ms. Smith held numerous senior human resources positions (1972 to 1995) at Xerox Corporation and most recently was Senior Vice President, Human Resources (1995 to 1996) of Bausch & Lomb Incorporated. PER WOLD-OLSEN -- Age 49 January, 1997 -- President, Human Health-Europe, Middle East & Africa -- responsible for the Company's prescription drug business in Europe, the Middle East and Africa September, 1994 -- President, Human Health-Europe -- responsible for the Company's European prescription drug business January, 1994 -- Senior Vice President, Worldwide Human Health Marketing September, 1991 -- Senior Vice President, Human Health Marketing, Merck Human Health Division All officers listed above serve at the pleasure of the Board of Directors. None of these officers, other than Mr. Gilmartin (who has an employment agreement with the Company which is an exhibit to this Form 10-K) was elected pursuant to any arrangement or understanding between the officer and the Board. There are no family relationships among the officers listed above. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required for this item is incorporated by reference to pages 41 and 55 of the Company's 1996 Annual Report to stockholders. ITEM 6. SELECTED FINANCIAL DATA. The information required for this item is incorporated by reference to the data for the last five fiscal years of the Company included under Results for Year and Year-End Position in the Selected Financial Data table included on page 55 of the Company's 1996 Annual Report to stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required for this item is incorporated by reference to pages 32 through 41 of the Company's 1996 Annual Report to stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (a) FINANCIAL STATEMENTS The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996 and the report dated January 28, 1997 of Arthur Andersen LLP, independent public accountants, are incorporated by reference to pages 42 through 53 and page 54 of the Company's 1996 Annual Report to stockholders. (b) SUPPLEMENTARY DATA Selected quarterly financial data for 1996 and 1995 are incorporated by reference to page 41 of the Company's 1996 Annual Report to stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The required information on directors and nominees is incorporated by reference to pages 2 (beginning with the caption "Election of Directors") through 5 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 1997. Information on executive officers is set forth in Part I of this document on pages 12 (beginning with the caption "Executive Officers of the Registrant") through 15. The required information on compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to pages 25 (beginning with the caption "Section 16(a) Beneficial Ownership Reporting Compliance") to 26 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 1997. ITEM 11. EXECUTIVE COMPENSATION. The information required for this item is incorporated by reference to page 7 (beginning with the caption "Compensation of Directors"), and 9 through 18 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required for this item is incorporated by reference to page 8 of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 1997. 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required for this item is incorporated by reference to page 7 (under the caption "Relationships with Outside Firms") of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held April 23, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) DOCUMENTS FILED AS PART OF THIS FORM 10-K 1. FINANCIAL STATEMENTS The following consolidated financial statements and report of independent public accountants are incorporated herein by reference to the Company's 1996 Annual Report to stockholders, as noted on page 16 of this document: Consolidated statement of income for the years ended December 31, 1996, 1995 and 1994 Consolidated statement of retained earnings for the years ended December 31, 1996, 1995 and 1994 Consolidated balance sheet, December 31, 1996 and 1995 Consolidated statement of cash flows for the years ended December 31, 1996, 1995 and 1994 Notes to financial statements Report of independent public accountants 2. FINANCIAL STATEMENT SCHEDULES Schedules are omitted because they are either not required or not applicable. The registrant is primarily an operating company and all of the subsidiaries included in the consolidated financial statements filed are wholly owned except for minority interests in six consolidated subsidiaries. 17 3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING - ------- ----------- ---------------- 3(a) -- Restated Certificate of Incorporation of * Merck & Co., Inc. (May 6, 1992) 3(b) -- By-Laws of Merck & Co., Inc. (as amended ** effective June 9, 1994) 10(a) -- Executive Incentive Plan (as amended *** effective February 27, 1996) 10(b) -- Base Salary Deferral Plan (as adopted on Filed with this document October 22, 1996, effective January 1, 1997) 10(c) -- 1987 Incentive Stock Plan (as amended * effective May 6, 1992) 10(d) -- 1991 Incentive Stock Plan (as amended ** effective February 23, 1994) 10(e) -- 1996 Incentive Stock Plan (as amended *** on October 24, 1995, effective January 1, 1996) 10(f) -- Non-Employee Directors Stock Option Plan * (as adopted on April 28, 1992 and restated May 6, 1992) 10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to (as adopted on April 23, 1996) Form 10-Q Quarterly Report for the period ended June 30, 1996 10(h) -- Supplemental Retirement Plan (as amended ** effective January 1, 1995) 10(i) -- Retirement Plan for the Directors of Incorporated by reference to Merck & Co., Inc. (amended and Form 10-Q Quarterly Report restated June 21, 1996) for the period ended June 30, 1996 10(j) -- Plan for Deferred Payment of Directors' Incorporated by reference to Compensation (amended and Form 10-Q Quarterly Report restated June 21, 1996) for the period ended June 30, 1996 10(k) -- Medco Class A 1983 Non-Qualified Stock **** Option Plan 10(l) -- Medco Class A Non-Qualified Stock Option *** Agreement dated July 1, 1991 between Merck-Medco and Per G.H. Lofberg (together with a list showing the number of options held) 10(m) -- Form of Stock Option Agreement **** dated October 14, 1992 between Merck-Medco and Per G.H. Lofberg (together with a list showing the number of options held) 10(n) -- Employment Agreement between Per G.H. Incorporated by reference to Lofberg and Merck-Medco dated April 1, Form 10-K Annual Report of 1993 Medco Containment Services, Inc. for the fiscal year ended June 30, 1993
18
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING - ------- ----------- ---------------- 10(o) -- Amendment dated July 27, 1993 to *** Employment Agreement between Per G.H. Lofberg and Merck-Medco dated April 1, 1993 10(p) -- Letter Agreement dated May 24, 1996 with Incorporated by reference to Form respect to the Employment Agreement 10-Q Quarterly Report for the between Per G.H. Lofberg and Merck-Medco period ended June 30, 1996 dated April 1, 1993 and amended July 27, 1993 10(q) -- Employment Agreement between Raymond V. Incorporated by reference to Form Gilmartin and the Company dated June 9, 10-Q Quarterly Report for the 1994 period ended June 30, 1994 11 -- Computation of Earnings per Common Share Filed with this document 12 -- Computation of Ratios of Earnings to Fixed Filed with this document Charges 13 -- 1996 Annual Report to stockholders (only Filed with this document those portions incorporated by reference in this document are deemed "filed") 21 -- List of subsidiaries Filed with this document 24 -- Power of Attorney and Certified Resolution Filed with this document of Board of Directors 27 -- Financial Data Schedule Filed with this document
* Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1992 ** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1994 *** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1995 **** Incorporated by reference to Post Effective Amendment No. 1 to Registration Statement on Form S-8 to Form S-4 Registration Statement (No. 33-50667) None of the instruments defining the rights of holders of long-term debt of the Company and its subsidiaries (Exhibit Number 4) are being filed since the total amount of securities authorized under any of such instruments taken individually does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such instruments to the Commission upon request. Copies of the exhibits may be obtained by stockholders upon written request directed to the Stockholder Services Department, Merck & Co., Inc., P.O. Box 100-WS 3AB-40, Whitehouse Station, New Jersey 08889-0100 accompanied by check in the amount of $5.00 payable to Merck & Co., Inc. to cover processing and mailing costs. (b) REPORTS ON FORM 8-K During the three-month period ended December 31, 1996, one Current Report was filed on Form 8-K under Item 5 --Other Events regarding the Company's announcement of its plans to combine its animal health and poultry genetics business with those of Rhone-Poulenc to form a 50-50 joint venture, to be called Merial. This report was dated December 19, 1996 and filed December 23, 1996. 19 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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. Dated: March 17, 1997 By RAYMOND V. GILMARTIN (Chairman of the Board, President and Chief Executive Officer) By /s/ CELIA A. COLBERT Celia A. Colbert (Attorney-in-Fact) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE ---------- ----- ---- RAYMOND V. GILMARTIN Chairman of the Board, March 17, 1997 President and Chief Executive Officer; Principal Executive Officer; Director JUDY C. LEWENT Senior Vice President and Chief March 17, 1997 Financial Officer; Principal Financial Officer PETER E. NUGENT Vice President, Controller; March 17, 1997 Principal Accounting Officer H. BREWSTER ATWATER, JR. Director March 17, 1997 DEREK BIRKIN Director March 17, 1997 LAWRENCE A. BOSSIDY Director March 17, 1997 WILLIAM G. BOWEN Director March 17, 1997 JOHNNETTA B. COLE Director March 17, 1997 LLOYD C. ELAM Director March 17, 1997 CHARLES E. EXLEY, JR. Director March 17, 1997 WILLIAM N. KELLEY Director March 17, 1997 EDWARD M. SCOLNICK Director March 17, 1997 SAMUEL O. THIER Director March 17, 1997
CELIA A. COLBERT, BY SIGNING HER NAME HERETO, DOES HEREBY SIGN THIS DOCUMENT PURSUANT TO POWERS OF ATTORNEY DULY EXECUTED BY THE PERSONS NAMED, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS AN EXHIBIT TO THIS DOCUMENT, ON BEHALF OF SUCH PERSONS, ALL IN THE CAPACITIES AND ON THE DATE STATED, SUCH PERSONS INCLUDING A MAJORITY OF THE DIRECTORS OF THE COMPANY. By /s/ CELIA A. COLBERT Celia A. Colbert (Attorney-in-Fact) 20 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (Nos. 33-21087, 33-21088, 33-36101, 33-40177, 33-51235, 33-53463, 33-64273 and 33-64665), on Form S-4 (No. 33-50667) and on Form S-3 (Nos. 33-39349, 33-60322, 33-51785, 33-57421 and 333- 17045). It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP New York, New York March 17, 1997 21 EXHIBIT INDEX -------------
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING - ------- ----------- ---------------- 3(a) -- Restated Certificate of Incorporation of * Merck & Co., Inc. (May 6, 1992) 3(b) -- By-Laws of Merck & Co., Inc. (as amended ** effective June 9, 1994) 10(a) -- Executive Incentive Plan (as amended *** effective February 27, 1996) 10(b) -- Base Salary Deferral Plan (as adopted on Filed with this document October 22, 1996, effective January 1, 1997) 10(c) -- 1987 Incentive Stock Plan (as amended * effective May 6, 1992) 10(d) -- 1991 Incentive Stock Plan (as amended ** effective February 23, 1994) 10(e) -- 1996 Incentive Stock Plan (as amended *** on October 24, 1995, effective January 1, 1996) 10(f) -- Non-Employee Directors Stock Option Plan * (as adopted on April 28, 1992 and restated May 6, 1992) 10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to (as adopted on April 23, 1996) Form 10-Q Quarterly Report for the period ended June 30, 1996 10(h) -- Supplemental Retirement Plan (as amended ** effective January 1, 1995) 10(i) -- Retirement Plan for the Directors of Incorporated by reference to Merck & Co., Inc. (amended and Form 10-Q Quarterly Report restated June 21, 1996) for the period ended June 30, 1996 10(j) -- Plan for Deferred Payment of Directors' Incorporated by reference to Compensation (amended and Form 10-Q Quarterly Report restated June 21, 1996) for the period ended June 30, 1996 10(k) -- Medco Class A 1983 Non-Qualified Stock **** Option Plan 10(l) -- Medco Class A Non-Qualified Stock Option *** Agreement dated July 1, 1991 between Merck-Medco and Per G.H. Lofberg (together with a list showing the number of options held) 10(m) -- Form of Stock Option Agreement **** dated October 14, 1992 between Merck-Medco and Per G.H. Lofberg (together with a list showing the number of options held) 10(n) -- Employment Agreement between Per G.H. Incorporated by reference to Lofberg and Merck-Medco dated April 1, Form 10-K Annual Report of 1993 Medco Containment Services, Inc. for the fiscal year ended June 30, 1993
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- 10(o) -- Amendment dated July 27, 1993 to *** Employment Agreement between Per G.H. Lofberg and Merck-Medco dated April 1, 1993 10(p) -- Letter Agreement dated May 24, 1996 with Incorporated by reference to Form respect to the Employment Agreement 10-Q Quarterly Report for the between Per G.H. Lofberg and Merck-Medco period ended June 30, 1996 dated April 1, 1993 and amended July 27, 1993 10(q) -- Employment Agreement between Raymond V. Incorporated by reference to Form Gilmartin and the Company dated June 9, 10-Q Quarterly Report for the 1994 period ended June 30, 1994 11 -- Computation of Earnings per Common Share Filed with this document 12 -- Computation of Ratios of Earnings to Fixed Filed with this document Charges 13 -- 1996 Annual Report to stockholders (only Filed with this document those portions incorporated by reference in this document are deemed "filed") 21 -- List of subsidiaries Filed with this document 24 -- Power of Attorney and Certified Resolution Filed with this document of Board of Directors 27 -- Financial Data Schedule Filed with this document
- ------------------ * Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1992 ** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1994 *** Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1995 **** Incorporated by reference to Post Effective Amendment No. 1 to Registration Statement on Form S-8 to Form S-4 Registration Statement (No. 33-50667)
EX-10.(B) 2 BASE SALARY DEFERRAL PLAN ================================================================================ EXHIBIT 10(b) MERCK & CO., INC. BASE SALARY DEFERRAL PLAN (AS ADOPTED OCTOBER 22, 1996; EFFECTIVE JANUARY 1, 1997) ================================================================================ MERCK & CO., INC. BASE SALARY DEFERRAL PLAN 1. ELIGIBILITY The employees eligible to defer base salary under the Merck & Co., Inc. Base Salary Deferral Plan (the "Plan") are those employees of Merck & Co., Inc., and its subsidiaries (the "Company") whose positions are in Grade 1 and/or are subject to Section 16 of the Securities Exchange Act of 1934. 2. PARTICIPATION An eligible employee may become a participant in the Plan (a "Participant") by filing a timely written deferral election with the Company. Any deferrals shall be made under and in conformance with the Merck & Co., Inc. Deferral Program which is incorporated herein. 3. DEFERRAL ELECTION (a) ANNUAL BASE SALARY A Participant may elect to defer an aggregate amount of annual base salary determined as of January 1 of the calendar year in which such deferral will occur, exclusive of any bonus or any other compensation or allowance paid or payable by the Company or its affiliates (the "Annual Base Salary"). The maximum amount which a Participant may defer in any calendar year under this Plan shall be the lesser of (1) fifty percent (50%) of the Participant's Annual Base Salary or (2) the Participant's Annual Base Salary in excess of the amount determined under Section 401(a)(17) of the Internal Revenue Code. The minimum amount a Participant may elect to defer is five percent (5%) of Annual Base Salary. (b) EFFECTIVE DATE OF ELECTION A Participant's election to defer a portion of Annual Base Salary shall be made pursuant to procedures established by the Company and shall be made prior to the commencement of any pay period to which such election applies. A Participant's election of investment measures and distribution schedule shall apply to all base salary deferrals for the applicable calendar year and shall be irrevocable during that calendar year. The election to defer a portion of Annual Base Salary is revocable; however, any modification of a Participant's election to defer a portion of Annual Base Salary shall be effective only with respect to pay periods which begin after the date such direction is received by the Company or payment dates which occur later in time. 4. ADMINISTRATION The Plan shall be administered by the Compensation and Benefits Committee of the Board of Directors of the Company (the "Committee"). The Committee may establish such rules and regulations as it deems necessary for the proper administration of the Plan and make such determinations and take such action in connection with the Plan as it deems necessary. 5. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN IN WHOLE OR IN PART The Committee may discontinue the Plan at any time and may from time to time amend or revise the terms of the Plan provided that such discontinuance or amendment shall not materially adversely affect any rights with respect to any pay period which has already commenced. 6. MISCELLANEOUS Neither the action of the Company in establishing the Plan nor any action taken by it or by the Committee under the provisions hereof, nor any provision of the Plan, shall be construed as giving to any employee the right to be retained in the employ of the Company, its subsidiaries or affiliates. -2- EX-11 3 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 MERCK & CO., INC. AND SUBSIDIARIES Computation of Earnings Per Common Share ---------------------------------------- (In millions except per share amounts)
1996 1995 1994 -------- -------- -------- Net Income and Adjusted Earnings: - ---------------------------------- Net Income.............................................. $3,881.3 $3,335.2 $2,997.0 Effect on Earnings of Compensation Expense Relating to Stock Option and Incentive Plans...................... 12.3 17.9 5.2 Effect on Earnings of Interest on Debentures............ - - .2 -------- -------- -------- Adjusted Earnings for Fully Diluted Earnings Per Share.. $3,893.6 $3,353.1 $3,002.4 ======== ======== ======== Weighted Average Shares and Share Equivalents Outstanding: - ---------------------------------------------------------- Weighted Average Shares Outstanding (As Reported).......... 1,213.6 1,236.1 1,257.2 Common Share Equivalents Issuable Under Stock Option and Incentive Plans.......................................... 31.3 33.0 18.3 Common Share Equivalents Issuable on Assumed Conversion of Debentures............................................ .3 .4 .7 ------- ------- ------- Weighted Average Shares and Share Equivalents Outstanding.. 1,245.2 1,269.5 1,276.2 ======= ======= ======= Earnings Per Share (As Reported)........................... $3.20 $2.70 $2.38 ===== ===== ===== Fully Diluted Earnings Per Share (a)....................... $3.13 $2.64 $2.35 ===== ===== =====
(a) This calculation is submitted in accordance with the regulations of the Securities and Exchange Commission although not required by APB Opinion No. 15 because it results in dilution of less than 3%.
EX-12 4 COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGE EXHIBIT 12 MERCK & CO., INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges -------------------------------------------------- (In millions except ratio data)
Years Ended December 31 ----------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ------ ------- -------- -------- ------- ---------- Income before Taxes and Cumulative Effect of Accounting Charges $5,540.8 $4,797.2 $4,415.2 $3,102.7 $3,563.6 $3,166.7 Add: One-third of rents 41.0 28.1 36.0 35.0 34.0 31.1 Interest expense, net 103.2 60.3 96.0 48.0 23.6 26.0 Preferred stock dividends 70.0 2.1 - - - - -------- -------- -------- -------- -------- -------- Earnings $5,755.0 $4,887.7 $4,547.2 $3,185.7 $3,621.2 $3,223.8 ======== ======== ======== ======== ======== ======== One-third of rents $ 41.0 $ 28.1 $ 36.0 $ 35.0 $ 34.0 $ 31.1 Interest expense 138.6 98.7 124.4 84.7 72.7 68.7 Preferred stock dividends 70.0 2.1 - - - - -------- -------- -------- -------- -------- -------- Fixed Charges $ 249.6 $ 128.9 $ 160.4 $ 119.7 $ 106.7 $ 99.8 ======== ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 23 38 28 27 34 32 == == == == == ==
For purposes of computing these ratios, "earnings" consist of income before income taxes, cumulative effect of accounting changes, 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-13 5 FINANCIAL REVIEW - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- DESCRIPTION OF MERCK'S BUSINESS Merck is a leading research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products and services. SALES - -------------------------------------------------------------------------------- ($ in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Elevated cholesterol....................... $ 4,055.9 $ 3,211.1 $ 2,599.0 Hypertension/heart failure................. 3,512.4 3,021.3 2,752.6 Anti-ulcerants............................. 1,143.6 1,019.8 1,565.7 Antibiotics................................ 822.3 848.3 827.4 Ophthalmologicals.......................... 693.1 570.6 482.3 Vaccines/biologicals....................... 586.8 529.9 485.3 Benign prostatic hyperplasia............... 450.1 405.8 322.7 Osteoporosis............................... 281.8 45.2 4.6 Other Merck human health................... 71.3 221.3 376.7 Other human health......................... 7,167.3 5,726.7 4,103.9 Animal health/crop protection.............. 1,044.1 1,041.9 1,027.4 Specialty chemical......................... -- 39.2 422.2 - -------------------------------------------------------------------------------- $19,828.7 $16,681.1 $14,969.8 ================================================================================ Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Among these are elevated cholesterol products, which include Zocor and Mevacor; hypertension/heart failure products which include Vasotec, the largest-selling product among this group, Prinivil and Vaseretic, as well as Cozaar and Hyzaar, both of which were launched in 1995; anti-ulcerants, of which Pepcid is the largest-selling, succeeding Prilosec, the largest-selling prior to its 1994 transfer to the Astra Merck joint venture; antibiotics, of which Primaxin and Noroxin are the largest-selling; ophthalmologicals, of which Timoptic, Timoptic-XE and Trusopt are the largest-selling; vaccines/biologicals, of which M-M-R II, a pediatric vaccine for measles, mumps and rubella, Recombivax HB (hepatitis B vaccine recombinant) and Varivax, a live virus vaccine for the prevention of chickenpox, are the largest-selling; benign prostatic hyperplasia, which includes Proscar, a treatment for symptomatic benign prostate enlargement; osteoporosis, which includes Fosamax, for treatment in postmenopausal women, launched in the United States in October 1995; and other Merck human health products, which include Crixivan, an HIV protease inhibitor, cleared for marketing in the United States by the U.S. Food and Drug Administration (F.D.A.) in March 1996, anti-inflammatory/ analgesics, psychotherapeutics and a muscle relaxant. Also included in this category are rebates and discounts on Merck pharmaceutical products. Other human health primarily includes Merck-Medco Managed Care (Medco) sales of non-Merck products and Medco human health services, principally managed prescription drug programs. Animal health/crop protection products include medicinals used to control and alleviate disease in livestock, small animals and poultry. These products are primarily antiparasitics, of which Ivomec for the control of internal and external parasites in livestock, and Heartgard-30 for the prevention of canine heartworm disease, are the largest-selling. This category also includes crop protection products, coccidiostats for the treatment of poultry diseases, and poultry breeding stock. In December 1996, Merck and Rhone-Poulenc announced plans to combine their respective animal health businesses, discussed in greater detail under Strategic Alliances. The Company also announced in December that it plans to divest its crop protection business. As and when these transactions are completed, Merck will cease to report animal health/crop protection sales. Specialty chemical products are used in health care, food processing, oil exploration, paper, textiles and personal care. All specialty chemical businesses were divested by the first quarter of 1995. Merck sells its human health products to drug wholesalers and retailers, hospitals, clinics, government agencies and managed health-care providers such as health maintenance organizations and other institutions. The Company's professional representatives communicate the effectiveness, safety and value of our products to health-care professionals in private practice, group practices and managed-care organizations. Animal health/crop protection products are sold to veterinarians, distributors, wholesalers, retailers, feed manufacturers, veterinary suppliers and laboratories. COMPETITION AND THE HEALTH-CARE ENVIRONMENT The markets in which the Company's business is conducted are highly competitive and, in many cases, highly regulated. Global efforts toward health-care cost containment continue to exert pressure on product pricing. In the United States, government efforts to slow the increase of health-care costs and the demand for price discounts from managed-care groups have limited the Company's ability to mitigate the effect of inflation on costs and expenses through pricing. Outside of the United States, government mandated cost containment programs have required the Company to similarly limit selling prices. Additionally, government actions have significantly reduced the sales growth of certain products by decreasing the patient reimbursement cost of the drug, restricting the volume of drugs that physicians can prescribe, and increasing the use of generic products. It is anticipated that the worldwide trend for cost containment and competitive pricing will continue for the balance of the 1990's and result in continued pricing pressures. 32 In the United States, legislative bodies are working to expand health-care access and reduce the associated costs. The debate on reforms to the health-care system will be protracted. Although the Company cannot fully predict the outcome of legislation to accomplish the goals of reform, it is well positioned to respond to evolving market forces resulting from legislative changes to the system. The Company believes that its current policies and strategies will enable it to maintain a strong position in this changing economic environment. BUSINESS STRATEGIES Consistent with our strategy to grow through volume, the Company is firmly committed to a policy of constraining price increases, given stable market conditions and government policies that foster innovation. Since 1990, this policy has limited the net weighted average price changes for all human health products to the projected general rate of inflation as measured by the U.S. Consumer Price Index (CPI), and, since 1993, has further limited price increases on individual products to the projected CPI plus 1% on an annual basis. Since its inception, this policy has yielded a cumulative net price increase that is significantly below the cumulative increase in the general rate of U.S. inflation. The Company is discovering new innovative products and developing new indications for existing products - the result of its continuing commitment to research. The Company is also developing innovative sales, marketing and education techniques; establishing joint ventures, licensing agreements and health-care partnerships with large managed-care organizations and other payors, and demonstrating to payors and providers the cost effectiveness of Merck products. Additionally, achievement of productivity gains has become a permanent strategy. The Company expects that these gains will continue to offset inflation at the manufacturing level. Actions undertaken include plant optimization, implementing lowest cost processes, improving technology transfer between research and manufacturing, re-engineering of core and administrative processes and delayering the organization. To enhance its competitive position in the fast growing area of managed care, Merck acquired Medco Containment Services, Inc. in 1993. Medco provides pharmaceutical benefits management services in the United States to control prescription drug benefit costs. Medco manages prescription drug programs through its mail order and retail pharmacy networks and offers a series of health management programs that improve drug therapy, promote better health outcomes and lower the long-term cost of care associated with certain chronic diseases. Medco sells its pharmaceutical benefits management services to corporations, labor unions, insurance companies, Blue Cross and Blue Shield organizations, Federal and state employee plans, health maintenance and other similar organizations. STRATEGIC ALLIANCES To expand its research base and realize synergies from combining capabilities, opportunities and assets, the Company has formed a number of joint ventures. In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra's products under a royalty-bearing license. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc., in which Merck and Astra each own a 50% share. The joint venture, formed in November 1994, develops and markets Astra's new prescription medicines in the United States. Astra Merck sales are not reported in the Company's consolidated sales. Merck sales of Astra products for 1994 prior to November were $733.2 million. Joint venture sales were $1.8 billion for 1996 and $1.3 billion for 1995, consisting primarily of Prilosec, the first of a class of medications known as proton pump inhibitors which slows the production of acid from the cells of the stomach lining. In 1996, the joint venture received clearance from the F.D.A. to market Prilosec in combination with the antibiotic Biaxin(R) (clarithromycin). The combination therapy will be indicated for the treatment of patients with Helicobacter pylori infection and active duodenal ulcers to ------------------- eradicate H. pylori, the bacteria now believed to cause approximately 90% of --------- duodenal ulcers. Astra Merck has also received F.D.A. clearance to market Prilosec for the short-term treatment of active, benign gastric ulcers and, in December 1996, approval to market Lexxel, a combination product for the treatment of hypertension. In 1989, Merck formed a joint venture with Johnson & Johnson to develop and market a broad range of non-prescription medicines for U.S. consumers. This 50% owned joint venture was expanded into Europe in 1993, and into Canada in 1996. Sales of product marketed by the joint venture were $530.2 million for 1996 and $403.5 million for 1995, consisting primarily of gastrointestinal products including Pepcid AC Acid Controller, a non-prescription formulation of Pepcid, Merck's H2-receptor antagonist, and Mylanta. Pepcid AC continues to lead the high-growth U.S. acid relief market. In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an independent, research-driven, worldwide pharmaceutical joint venture, equally owned by each party. DuPont contributed its entire pharmaceutical and radiopharmaceutical imaging agents businesses and is providing administrative services. Merck contributed cash and European marketing rights to several of its prescription medicines and is providing research and development funding and expertise and international industry expertise. Joint venture sales were $1.3 billion for 1996 and $1.2 billion for 1995, consisting primarily of cardiovascular, radiopharmaceutical and central nervous system products. 33 In 1994, Merck and Pasteur Merieux Serums et Vaccins (Pasteur) established a 50% owned joint venture to market vaccines and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $663.0 million for 1996 and $598.6 million for 1995. In December 1996, Merck and Rhone-Poulenc announced plans to combine their respective animal health businesses to form an equally owned joint venture to be called Merial. The joint venture, which is subject to approval by European, French and U.S. authorities, is expected to be fully operational by the second quarter of 1997. Sales of the Company's animal health products, which will no longer be reported as part of the Company's consolidated sales once the venture is operational, were $843.2 million in 1996. This transaction is not expected to have a significant effect on the Company's financial position, liquidity or results of operations. FOREIGN OPERATIONS The Company's operations outside the United States are conducted primarily through subsidiaries. Sales by subsidiaries outside the United States were 30% of sales in 1996 and 32% of sales in 1995 and 1994. [CHART] DISTRIBUTION OF 1996 FOREIGN SALES ---------------------------------- Splits ------ Europe 55% Asia/Pacific 30% Other Foreign 15% ------ Total 100% The Company's worldwide business is subject to risks of currency fluctuations and governmental actions. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions. The ongoing integration of the European market is affecting businesses operating within the European Union (EU), particularly companies such as Merck that maintain a strong research and manufacturing presence within Europe and marketing and sales organizations throughout. Merck is continually seeking to improve the efficiency and productivity of its EU operations. Over the years, the Company has divested and restructured to reduce its operational exposure in countries where economic conditions or government policies make it difficult to earn fair returns. At the same time, Merck is actively pursuing opportunities in countries located in Latin America, Eastern Europe, Asia Pacific and other countries where changes in government and in fiscal and regulatory policies are making it possible for Merck to earn fair, economic returns. While none of these actions individually has significantly affected operations, the overall impact has been favorable. OPERATING RESULTS Total sales for 1996 increased 19% from 1995. The effect of a strengthening U.S. dollar against foreign currencies decreased 1996 sales growth by one percentage point. Sales for 1996 were affected by the divestitures of Medco Behavioral Care (MBC) in October 1995 and Kelco in February 1995. Adjusting for these effects, sales grew 21% in 1996 in total and on a volume basis. Total sales for 1995 increased 11% from 1994. Foreign exchange increased 1995 sales growth by two percentage points. Sales for 1995 were affected by the formation of a joint venture with Astra and the divestiture of Synetic (a Medco subsidiary) in 1994, as well as the divestitures of Calgon Vestal Laboratories, Kelco and MBC in 1995. Adjusting for these effects, 1995 sales grew 21%, with unit volume up 20%. [GRAPHIC] COMPONENTS OF HUMAN/ANIMAL SALES GROWTH --------------------------------------- TOTAL SALES SALES VOLUME NET PRICING FOREIGN GROWTH GROWTH ACTIONS EXCHANGE RATES ----------- ------------ ----------- -------------- 1992 13.1 % 11.1 % 1.1 % 0.9 % 1993 6.8 8.6 0.1 -1.9 1994 8.7 8.5 -0.6 0.8 1995 11.8 10.1 -0.6 2.3 1996 16.0 17.5 0.3 -1.8 This chart illustrates the effects of price, volume and exchange on sales of Merck human and animal health products. Growth for 1995 and 1994 has been adjusted for the effect of the Astra Merck joint venture formation. The human and animal health business has grown predominantly through sales volume over the last five years. Price had a slightly favorable effect on sales growth in 1996, a variable decline from 1.1% in 1992, while the effect of exchange has varied over the same period. 34 In 1996, sales of Merck human and animal health products grew 16%. Foreign exchange rates had a two percentage point unfavorable effect on sales growth, while price changes had essentially no effect. In measuring these effects, changes in the value of foreign currencies are calculated net of price increases in hyperinflationary countries, principally in Latin America. Domestic sales growth was 20%, while foreign sales grew 12% including a four percentage point unfavorable effect from exchange. The unit volume growth from the sales of Merck's human and animal health products was paced by Zocor, Vasotec, Vaseretic, Prinivil, Pepcid and Proscar, the 1995 introductions of Cozaar, Hyzaar, Fosamax and Trusopt in the United States and many major European markets, the 1995 launch of Varivax in the United States, and the 1996 introductions of Crixivan and Vaqta. Together, Merck's cholesterol-lowering agents, Zocor and Mevacor, hold about 40% of the worldwide cholesterol-lowering market, and combined sales have shown significant growth in 1996. During 1996, Zocor established a new Merck product sales record and established its position as the leading branded product in the worldwide cholesterol-lowering market, fueled by the results of the landmark Scandinavian Simvastatin Survival Study (4S) and additional key studies on the benefits of using this class of products to lower cholesterol in high risk patients. The 4S study proved that Zocor saves lives and prevents heart attacks and strokes in people with heart disease and high cholesterol. Other important benefits arising from the study include fewer hospitalizations and surgical procedures for these conditions. Zocor remains the only medication with an indication to reduce all-cause mortality in patients with elevated cholesterol and coronary heart disease. There is strong potential for the continued growth of Zocor since fewer than one third of patients in the United States who have coronary disease are currently receiving cholesterol-lowering therapy. Mevacor is the first cholesterol-lowering drug shown to reduce both plaque of the carotid arteries and heart attacks in patients with no history of coronary artery disease. The Asymptomatic Carotid Artery Progression Study (ACAPS) found that patients taking Mevacor experienced significantly fewer major cardiac events than patients treated with a placebo. The study's results were added to the clinical pharmacology section of the labeling for Mevacor in the United States and Canada. Vasotec, Merck's angiotensin converting enzyme (ACE) inhibitor indicated for treating high blood pressure, heart failure and asymptomatic left ventricular dysfunction, recorded solid growth. It is the leading branded ACE inhibitor product in the worldwide cardiovascular market and is the only ACE inhibitor indicated for the treatment of these three conditions. Vaseretic, a combination of Vasotec and hydrochlorothiazide, prescribed for the treatment of high blood pressure, continued solid growth. Prinivil, which also treats high blood pressure and acts as an adjunctive therapy for treatment of heart failure, recorded strong growth as well. Pepcid, an H2-receptor antagonist for treatment of duodenal ulcers and the short-term treatment of gastric ulcers and gastroesophageal reflux disease (GERD), continued its solid performance. In the fourth quarter of 1996, Pepcid became the second most prescribed H2-receptor antagonist in the United States, despite competition from generic products in its class and the introduction of lower dose over-the-counter (OTC) formulations of the same class of drugs. Proscar is the only medical treatment available that effectively and safely over the long term improves urinary symptoms by acting to shrink the enlarged prostate. The volume growth of Proscar in 1996 is attributable to increasing acceptance by urologists and the results from six major clinical studies involving 2,600 men which showed that Proscar provides effective long-term disease management of symptomatic benign prostate enlargement, a disease that affects 50% of men over the age of 50. New studies suggest that Proscar can halt and even reverse the progression of the disease, especially in markedly enlarged prostates. Cozaar and Hyzaar (a combination of Cozaar and the diuretic hydrochlorothiazide), Merck's newest antihypertensive drugs, were the first in a new class of drugs that block a potent hormone called angiotensin II, resulting in gradual, smooth, 24-hour blood pressure reduction. These products, which were introduced in the United States in May 1995 are now marketed in over 40 countries. Physicians have adopted Iosartan, the active ingredient of Cozaar and Hyzaar, faster than any new antihypertensive product launched in this decade. Both products are highly effective and show exceptional tolerability. Fosamax, Merck's non-hormonal breakthrough medicine for the treatment of osteoporosis in postmenopausal women, has been introduced in 47 countries, including the United States where it became available in October 1995. More than 1.3 million patients worldwide are now being treated with Fosamax and prescription trends are strong. Merck has filed a supplement with the F.D.A. for a new indication for Fosamax - the prevention of osteoporosis in postmenopausal women. The application is based on major studies that show Fosamax can prevent osteoporotic fractures and bone loss that leads to the disease. In one study, Fosamax reduced by about one half the risk of hip and vertebral fractures and reduced by 20% hospitalizations in postmenopausal women with osteoporosis who had previous vertebral fractures. In February 1997, an F.D.A. Advisory Committee unanimously recommended that the F.D.A. clear for marketing Fosamax for the prevention of osteoporosis. (The F.D.A. is not bound by the decision of its advisory committee.) In the United States, the annual cost of hip fractures is estimated at $10.0 billion. Data presented in September 1996 confirmed that Fosamax prevents bone loss and restores bone mass in postmenopausal women - with a tolerability profile similar to that of placebo - which shows that Fosamax is a promising alternative to hormone replacement therapy for preventing osteoporosis. Merck continues to educate women about the consequence of osteoporosis and the benefits of treatment with Fosamax through major consumer campaigns. 35 Sales of Trusopt, the first carbonic anhydrase inhibitor made in a topical (eyedrop) formulation, have proceeded at a strong pace since it was first introduced in the United States in May 1995. Since its launch, Trusopt has become the most widely prescribed anti-glaucoma medicine in the United States and in several countries in Europe. The product is indicated for the treatment of elevated intraocular pressure in patients with ocular hypertension or open-angle glaucoma. Trusopt has been proven effective in the consistent lowering of intraocular pressure in most patients and may be used both as monotherapy and adjunctive therapy. Cleared for marketing in March 1995, Varivax, a live-virus vaccine for protection against chickenpox in healthy individuals (12 months of age and older) who have not had the disease, also contributed to the volume growth in 1996. In 1996, Merck reached an agreement with the U.S. Centers for Disease Control and Prevention (C.D.C.) to supply Varivax for use in children served by the Federally funded Vaccines for Children program. About 60% of children in the United States are vaccinated through Federal and state-funded programs. The American Academy of Pediatrics (A.A.P.) and the Advisory Committee on Immunization Practices to the C.D.C. in 1995 recommended the universal use of Varivax in early childhood, and for susceptible older children and adolescents. The A.A.P. also recommended Varivax become a standard part of their recommended childhood immunization schedule. At the end of 1996, more than 4.5 million doses of Varivax were distributed in the United States, making it the most rapidly accepted vaccine since Merck introduced the measles vaccine in 1963. After unusually fast regulatory reviews, Crixivan, Merck's new protease inhibitor for the treatment of HIV infection in adults, was cleared for marketing in 1996 by the F.D.A. in March, by the Canadian authorities in September and by the European Commission for all 15 countries in the European Union in October. In addition, Crixivan is available in more than 20 other countries. Crixivan is a potent inhibitor of the HIV protease enzyme that is critical to the replication of the virus that causes AIDS. It can be taken in combination with other anti-HIV therapies or alone by adults with HIV infection when single therapy is warranted. Data from three studies released in January 1997 demonstrate remarkable results when Crixivan is used in combination with two other anti-HIV drugs - both reverse transcriptase inhibitors. In an update of an earlier study, researchers reported that the triple-combination therapy sustained viral suppression up to 68 weeks in 86% of patients (18 of 21) whose virus in the bloodstream had been lowered below the limit of detection in the assay used. In another study, researchers reported, for the first time, significant results using triple-combination therapy in patients with very advanced AIDS: about 65% (55 of 85) had HIV in the bloodstream reduced to undetectable levels, based upon the limits of the assay, after 24 weeks. In a third study of people newly infected with HIV, researchers found that all patients (11 of 11) had undetectable virus levels after four to nine months of triple therapy. In April 1996, the F.D.A. licensed Merck to market Vaqta, a new vaccine for the prevention of hepatitis A in persons two years of age and older. Hepatitis A is a highly contagious virus that is spread through contaminated food or water and attacks the liver and can cause victims to be ill for several weeks. Because there is no treatment for hepatitis A and the medical and economic consequences of the disease are substantial, immunization of high risk individuals is recommended by the C.D.C. Vaqta has been launched in the United States, Germany and Canada, with other introductions expected to follow. Sales of other human health products and services contributed significantly to 1996 sales growth. Other human health principally includes sales of non-Merck products by Medco, which currently manages pharmaceutical benefits for over 49 million plan participants, up from 47 million at the end of 1995. As a result, the number of prescriptions managed by Medco grew to over 235 million in 1996, up from 171 million prescriptions in 1995. This growth was based on winning new accounts and expanding services to existing customers, which strengthened the Company's leadership position. Sales of ivermectin, a broad-spectrum antiparasitic, were down in 1996 due to increased competition and a weak cattle market. A group of longer-established products, including Noroxin, Mefoxin, Moduretic and Aldomet, while still contributing to 1996 revenues, also continued to decline in unit volume due to generic and therapeutic competition. In 1995, sales of Merck human and animal health products grew 5%. Favorable foreign exchange rates increased this sales growth by two percentage points, and price changes had a one point unfavorable effect. Adjusting for the effect of the Astra Merck joint venture formation, sales grew 12% in total and 10% on a volume basis in 1995. Domestic sales growth was 10% adjusted for the aforementioned effect. Foreign sales grew 14%, including a five percentage point increase from the effect of exchange. The unit volume growth from the sales of Merck's human and animal health products was paced by Vasotec, Vaseretic, Prinivil, Zocor, Pepcid, Primaxin and Proscar. The introduction of Varivax, Cozaar, Hyzaar, Fosamax and Trusopt also added to the sales growth. 36 The decline in specialty chemical sales reflects the sales of Calgon Vestal Laboratories and Kelco in the first quarter of 1995. COSTS, EXPENSES AND OTHER - ------------------------------------------------------------------------------- ($ in millions) 1996 CHANGE 1995 Change 1994 - ------------------------------------------------------------------------------- Materials and production............. $ 9,319.2 +25% $ 7,456.3 +25% $ 5,962.7 Marketing and administrative......... 3,841.3 +16% 3,297.8 + 4% 3,177.5 Research and development............ 1,487.3 +12% 1,331.4 + 8% 1,230.6 Equity income from affiliates........ (600.7) +73% (346.3) * (56.6) Gains on sales of specialty chemical businesses............. - * (682.9) * - Gain on joint venture formation.............. - * - * (492.0) Provision for joint venture obligation............. - * - * 499.6 Other (income) expense, net........... 240.8 -71% 827.6 * 232.8 - ------------------------------------------------------------------------------- $ 14,287.9 +20% $ 11,883.9 +13% $ 10,554.6 =============================================================================== * Over 100% or nonrecurring In 1996, materials and production costs increased 25%. Adjusting for the effects of the 1995 sales of MBC and Kelco, materials and production costs increased 29%, compared to a 21% sales growth rate on the same basis. Adjusting for the aforementioned effects, and excluding exchange and inflation, these costs increased 23%, compared to a 21% unit sales volume gain in 1996. The higher growth rate in these costs over the sales volume growth is primarily attributable to growth in Medco's historically lower-margin business. The increase driven by Medco is partially offset by cost controls and productivity improvements from the Company's goal to reduce manufacturing costs. In 1995, materials and production costs increased 25%. Adjusting for the effects of the 1994 Astra Merck joint venture formation and sale of Synetic, as well as the 1995 sales of Calgon Vestal Laboratories, Kelco and MBC, materials and production costs increased 34%, compared to a 21% sales growth rate on the same basis. Adjusting for the aforementioned effects, and excluding exchange and inflation, these costs increased 29%, compared to a 20% unit sales volume gain in 1995. Marketing and administrative expenses increased 16% in 1996. Adjusting for the effects of the 1995 sales of MBC and Kelco, marketing and administrative expenses increased 18%. Adjusting for the aforementioned effects, and excluding exchange and inflation, these expenses increased 16%. The increase in marketing and administrative expenses in 1996 primarily reflects the continued commitment of resources to support the 1995 and 1996 product launches, spending to support disease management programs and investments in information technology which will enhance Merck-Medco's strong capabilities in improving and managing prescription drugs. Marketing and administrative expenses increased 4% in 1995. Adjusting for the effects of the 1994 Astra Merck joint venture formation and the sale of Synetic, as well as the 1995 sales of Calgon Vestal Laboratories, Kelco and MBC, marketing and administrative expenses increased 12%. Adjusting for the aforementioned effects, and excluding exchange and inflation, these expenses increased 6%, primarily due to the commitment of resources to support the launches of new products in 1995. Marketing and administrative expenses as a percentage of sales were 19% in 1996, 20% in 1995 and 21% in 1994. The improvement in these ratios reflects the lower marketing and administrative costs relative to sales of Medco, continuing cost controls, productivity improvements and the beneficial effects from restructuring programs. Research and development expenses increased 12% in 1996. Excluding the effects of exchange and inflation, these expenses increased 9%. Research and development expenses increased 8% in 1995. Excluding the effects of exchange and inflation, these expenses increased 3%. Not included in consolidated research and development expenses are costs incurred by the Company's joint ventures, which totaled $440.7 million in 1996 and $376.9 million in 1995. 37 Research and development in the pharmaceutical industry is inherently a long-term process. The data below show an unbroken trend of year-to-year increases in research and development spending. For the period 1987 to 1996, the compounded annual growth rate in research and development was 12%. [GRAPHIC] R&D EXPENDITURES ---------------- ($ in millions) Year Total R&D Expenditures ---- ---------------------- 1987 566 1988 669 1989 751 1990 854 1991 988 1992 1,112 1993 1,173 1994 1,231 1995 1,331 1996 1,487 This chart excludes research and development costs incurred by the Company's joint ventures, which were $440.7 million in 1996. Equity income from affiliates reflects an improving trend resulting primarily from the favorable performance of our joint ventures with Astra and DuPont. In the first quarter of 1995, the Company recorded gains of $682.9 million on the sales of Calgon Vestal Laboratories and Kelco. (See Note 3 to the financial statements for further information.) These gains were substantially offset by $675.5 million of nonrecurring charges included in Other (income) expense, net. These charges consist of $278.5 million for losses on sales of assets, $175.0 million for restructuring actions, $161.2 million for endowment of The Merck Company Foundation and $60.8 million for settlement of claims. The restructuring actions involve manufacturing facility consolidation, rationalization and work-force reduction in Europe and the United States. In 1994, the Company recorded a gain of $492.0 million on the sale to Astra of an interest in a joint venture and a provision of $499.6 million in recognition of an obligation to the DuPont Merck joint venture. (See Note 4 to the financial statements for further information.) In 1996, other expense, net, decreased primarily due to $675.5 million of nonrecurring charges recorded in 1995 which substantially offset the gains on the sales of Calgon Vestal Laboratories and Kelco. Also contributing to the year-to-year improvement were higher interest income and favorable exchange resulting from the translation of the Company's balance sheet. This effect was partially offset by higher interest expense and higher income allocable to minority interests. In 1995, other expense, net, increased primarily as a result of the aforementioned $675.5 million of nonrecurring charges. This effect was partially offset by higher interest income, lower interest expense and favorable exchange resulting from the translation of the Company's balance sheet. (See Note 15 to the financial statements for further information.) EARNINGS - -------------------------------------------------------------------------------- ($ in millions except per share amounts) 1996 CHANGE 1995 Change 1994 - -------------------------------------------------------------------------------- Net income ............ $3,881.3 +16% $3,335.2 +11% $2,997.0 As a % of sales ..... 19.6% 20.0% 20.0% As a % of average total assets ...... 16.1% 14.6% 14.3% Earnings per common share ........ $3.20 +19% $2.70 +13% $2.38 ================================================================================ Net income was up 16% in 1996 and 11% in 1995. Net income as a percentage of sales was 19.6% in 1996, compared to 20.0% in 1995 and 1994. The decline in the ratio for 1996 is principally due to the higher growth rate in Medco's historically lower-margin business and the commitment of resources to the Company's new product launches offset in part by the growth and favorable mix in Merck's human and animal health business and productivity improvements. Foreign currency exchange had essentially no impact in 1996 as compared to a favorable impact in 1995. The Company's effective income tax rate in 1996 was 30.0%, compared with 30.5% in 1995. The lower effective tax rate in 1996 primarily relates to joint ventures, which also affected pretax income growth. Specifically, pretax income growth was reduced by the Company's share of the increase in taxes related to the Astra Merck joint venture and the European vaccine joint venture with Pasteur. Prior to the formation of these joint ventures in 1994, taxes related to these businesses were included in the Company's tax provision. Thus, the impact on pretax growth is offset by a corresponding reduction in the Company's tax rate, resulting in no effect on net income growth. Net income as a percentage of average total assets was 16.1% in 1996, 14.6% in 1995 and 14.3% in 1994, with the improvements attributed to the continued growth in operations and the Company's asset management efforts. Earnings per share grew 19% in 1996, compared to 13% in 1995. In 1996 and 1995, earnings per share increased at a faster rate than net income as a result of treasury stock purchases. 38 DISTRIBUTION OF 1996 SALES AND EQUITY INCOME [CHART] Splits ------ Raw Materials and Production Cost 46% Operating Expense 27% Taxes and Net Interest 8% Dividends 9% Retained Earnings 10% --- Total 100% ---- ENVIRONMENTAL AND OTHER MATTERS The Company believes that it is in compliance in all material respects with applicable environmental laws and regulations. The Company has maintained a leadership role in supporting environmental initiatives and fostering pollution prevention by actions including the elimination of, or the application of best available technology to reduce air emissions of known or suspect carcinogens at its facilities worldwide. Projects which were in place at the end of 1995 have reduced environmental releases and transfers of toxic chemicals, based on Environmental Protection Agency (E.P.A.) reporting standards, by 90% from 1987 levels. In 1996, the Company incurred capital expenditures of approximately $29.2 million for environmental protection facilities. Capital expenditures for this purpose are forecasted to exceed $350.0 million for the years 1997 through 2001. In addition, the Company's operating and maintenance expenditures for pollution control were approximately $78.4 million in 1996. Expenditures for this purpose for the years 1997 through 2001 are forecasted to exceed $492.0 million. The Company is a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, as well as under other Federal and state statutes. While it is not feasible to predict or determine the 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, liquidity or capital resources. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for environmental purposes were $18.9 million in 1996, and are estimated at $136.0 million for the years 1997 through 2001. These amounts do not consider potential insurance recoveries. The Company has taken an active role in identifying and providing for these costs; and, therefore, management does not believe that these expenditures should result in a materially adverse effect on the Company's financial position, results of operations, liquidity or capital resources. In November 1994, the Company, along with other pharmaceutical manufacturers and pharmaceutical benefits managers (PBMs), received a notice from the Federal Trade Commission (F.T.C.) that it intended to investigate agreements, alliances, activities and acquisitions involving pharmaceutical manufacturers and PBMs. In March 1996, the Company, along with other pharmaceutical manufacturers, received a notice from the F.T.C. that it was conducting an investigation into pricing practices. The Company has cooperated fully with the F.T.C. in each of these investigations, and believes that it is currently operating in all material respects in accordance with applicable standards. While it is not feasible to predict or determine the outcome of either of these investigations, management does not believe that they should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. CAPITAL EXPENDITURES Capital expenditures were $1.2 billion in 1996 and $1.0 billion in 1995. Expenditures in the United States were $937.8 million in 1996 and $793.5 million in 1995. Expenditures during 1996 included $630.4 million for production facilities, $160.7 million for research and development facilities, $29.2 million for environmental projects and $376.4 million for administrative, safety and general site projects. Not included above are capital expenditures incurred by the Company's joint ventures, which totaled $111.7 million in 1996, including $36.5 million for research and development facilities. Capital expenditures approved but not yet spent at December 31, 1996 were $879.6 million. Capital expenditures for 1997 are estimated to be $1.8 billion. Depreciation was $521.7 million in 1996 and $463.3 million in 1995, of which $369.0 million and $332.8 million, respectively, applied to locations in the United States. [GRAPHIC] CAPITAL EXPENDITURES -------------------- ($ in millions) Year Total Capital Expenditures ---- -------------------------- 1987 254 1988 373 1989 433 1990 671 1991 1,042 1992 1,067 1993 1,013 1994 1,009 1995 1,005 1996 1,197 This chart excludes capital expenditures incurred by the Company's joint ventures, which were $111.7 million in 1996. 39 ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations continues to be the Company's primary source of funds to finance operating needs and capital expenditures. In 1996, pretax cash flows from operations were $6.5 billion, reflecting the continued growth of the Company's earnings. Pretax cash flows from operations for 1995 were essentially equivalent to 1994 and reflect the impact of the endowment of The Merck Company Foundation, increased pension funding and timing of receipts and disbursements. In 1996, cash from operations was used to fund capital expenditures of $1.2 billion, to pay Company dividends of $1.7 billion and to partially fund the purchase of treasury shares. At December 31, 1996, the total of worldwide cash and investments was $4.7 billion, including $2.2 billion in cash, cash equivalents and short-term investments and $2.5 billion of long-term investments. The above totals include $1.2 billion in cash and investments held by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership interest. SELECTED DATA - ------------------------------------------------------------------------------- ($ in millions) 1996 1995 1994 - ------------------------------------------------------------------------------- Working capital .................. $2,897.4 $3,870.2 $2,291.4 Total debt to total liabilities and equity ......... 7.3% 7.5% 5.9% Cash provided by operations to total debt .................. 3.1:1 1.6:1 3.2:1 =============================================================================== Working capital levels are more than adequate to meet the operating requirements of the Company. The increase in working capital in 1995 reflects proceeds from the sales of the Company's specialty chemical businesses and the issuance of $1.0 billion par value of variable rate nonconvertible Preferred Equity Certificates. These proceeds were used to fund a portion of the Company's stock repurchase program and for other general corporate purposes. From 1994 to 1996, debt levels were affected by purchases of treasury shares and other operating requirements, resulting in periodic reductions in working capital and increases in the ratio of total debt to total liabilities and equity. The favorable ratio of cash provided by operations to total debt is an indication of the ability of the Company to cover its debt obligations. From 1994 to 1996, the Company purchased $4.8 billion of treasury shares under three programs authorized by the Board of Directors in 1993, 1994 and 1995. The 1993 program was completed in 1994, and the 1994 program was completed in 1996. In February 1997, the Board of Directors approved purchases of up to an additional $5.0 billion of Merck shares. Through December 31, 1996, $2.1 billion of shares had been purchased under the 1995 program. For the period 1987 to 1996, the Company has purchased 213.8 million shares at a total cost of $8.1 billion. In 1993, Merck filed a shelf registration with the Securities and Exchange Commission under which the Company could issue up to $1.0 billion of debt securities. Proceeds from the sale of these securities are to be used for general corporate purposes. The remaining capacity under the shelf is $670.0 million. The Company's strong financial position, as evidenced by its triple-A credit ratings from Moody's and Standard & Poor's on outstanding debt issues, provides a high degree of flexibility in obtaining funds on competitive terms. The ability to finance ongoing operations primarily from internally generated funds is desirable because of the high risks inherent in research and development required to develop and market innovative new products and the highly competitive nature of the pharmaceutical industry. A significant portion of the Company's cash flows are denominated in foreign currencies. The Company relies on sustained cash flows generated from foreign sources to support its long-term commitment to U.S. dollar-based research and development. To the extent the dollar value of cash flows is diminished as a result of a strengthening dollar, the Company's ability to fund research and other dollar-based strategic initiatives at a consistent level may be impaired. To protect against the reduction in value of foreign currency cash flows, the Company has instituted balance sheet and revenue hedging programs to partially hedge this risk. The objective of the balance sheet hedging program is to protect the U.S. dollar value of foreign currency denominated net monetary assets from the effects of volatility in foreign exchange that might occur prior to their conversion to U.S. dollars. To achieve this objective, the Company will hedge foreign currency risk on monetary assets and liabilities where hedging is cost beneficial. The Company seeks to fully hedge exposure denominated in developed country currencies, such as those of Japan, Germany, France and Canada, and will either partially hedge or not hedge at all, exposure in other currencies, particularly exposure in hyperinflationary countries where hedging instruments may not be available at any cost. The Company will minimize the effect of exchange on unhedged exposure, principally by managing operating activities and net asset positions at the local level. The Company manages its net asset exposure principally with forward exchange contracts. These contracts enable the Company to buy and sell foreign currencies in the future at fixed exchange rates. On net monetary assets hedged, forward contracts offset the consequences of changes in foreign exchange on the amount of U.S. dollar cash flows derived from the net assets. Contracts used to hedge net monetary asset exposure have average maturities at inception of less than one year. The cash flows generated from these forward contracts are reported as arising from operating activities in the Consolidated Statement of Cash Flows. The balance sheet hedging program has significantly reduced the volatility of U.S. dollar cash flows derived from foreign currency denominated net monetary assets. 40 The objective of the revenue hedging program is to reduce the potential for longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar value of future cash flows derived from foreign currency denominated sales. To achieve this objective, the Company will partially hedge forecasted sales that are expected to occur over its planning cycle, typically no more than three years into the future. The Company will layer in hedges over time, increasing the portion of sales hedged as it gets closer to the expected date of the transaction. The portion of 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 forecasted transaction exposure principally with purchased local currency put options. On the forecasted transactions hedged, these option contracts effectively reduce the potential for a strengthening U.S. dollar to decrease the future U.S. dollar cash flows derived from foreign currency denominated sales. Purchased local currency put options provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a pre-determined price. If the value of the U.S. dollar weakens relative to other major currencies when the options mature, the options would expire unexercised, enabling the Company to benefit from favorable movements in exchange, except to the extent of premiums paid for the contracts. Over the last three years the program has had a minimal cumulative effect on cash flows. However, the program has prevented a loss in value of cash flows during interim periods of relative strength in the U.S. dollar for the portion of revenues hedged. The cash flows associated with these contracts are reported as arising from operating activities in the Consolidated Statement of Cash Flows. In addition to the balance sheet and revenue hedging programs, the Company hedges interest rates on certain fixed and variable rate borrowing and investing transactions. Interest rates are hedged with swap contracts that exchange the cash flows from interest rates on the underlying financial instruments for those derived from interest rates inherent in the contracts. For foreign currency denominated borrowing and investing transactions, cross-currency interest rate swap contracts are used, which, in addition to exchanging cash flows derived from rates, exchange currencies at both inception and termination of the contracts. On investing transactions, swap contracts allow the Company to receive variable rate returns and limit foreign exchange risk, while, on borrowing transactions, these contracts allow the Company to borrow at more favorable rates than otherwise attainable through direct issuance of variable rate U.S. dollar debt. The cash flows associated with these contracts are reported as arising from operating activities in the Consolidated Statement of Cash Flows. CONDENSED INTERIM FINANCIAL DATA - ------------------------------------------------------------------------------ ($ in millions except per share amounts) 4th Q 3rd Q 2nd Q 1st Q - ------------------------------------------------------------------------------ 1996 - ------------------------------------------------------------------------------ Sales ................... $ 5,406.1 $4,983.4 $4,908.8 $4,530.4 Materials and production costs ...... 2,473.9 2,328.4 2,283.8 2,233.1 Marketing/administrative expenses .............. 1,139.0 941.8 946.2 814.3 Research/development expenses .............. 423.3 366.8 347.7 349.5 Equity income from affiliates .............. (160.7) (146.2) (128.4) (165.4) Other expense, net ...... 60.6 55.2 65.1 59.9 Income before taxes ..... 1,470.0 1,437.4 1,394.4 1,239.0 Net income .............. 1,043.5 1,001.9 972.1 863.8 Earnings per common share $.87 $.83 $.80 $.70 - ------------------------------------------------------------------------------ 1995 - ------------------------------------------------------------------------------ Sales ................... $4,556.9 $4,171.1 $4,135.7 $3,817.3 Materials and production costs ...... 2,125.9 1,858.2 1,746.0 1,726.2 Marketing/administrative expenses .............. 910.9 767.2 849.6 770.0 Research/development expenses .............. 381.1 332.5 329.7 288.2 Equity income from affiliates .............. (107.5) (75.3) (71.5) (92.0) Other expense, net ...... 33.6 41.5 40.4 29.1 Income before taxes ..... 1,212.9 1,247.0 1,241.5 1,095.8 Net income .............. 857.8 861.9 858.1 757.4 Earnings per common share $.70 $.70 $.69 $.61 ============================================================================== In the chart above, sales for 1995 and 1996 were affected by the first quarter 1995 sale of Kelco and the fourth quarter 1995 sale of MBC. DIVIDENDS PAID PER COMMON SHARE - ------------------------------------------------------------------------------- Year 4th Q 3rd Q 2nd Q 1st Q - ------------------------------------------------------------------------------- 1996 ......................... $1.42 $.40 $.34 $.34 $.34 1995 ......................... 1.24 .34 .30 .30 .30 =============================================================================== COMMON STOCK MARKET PRICES - ------------------------------------------------------------------------------- 1996 4th Q 3rd Q 2nd Q 1st Q - ------------------------------------------------------------------------------- High ................... $84 1/4 $70 7/8 $66 1/8 $71 3/8 Low .................... 69 1/8 58 1/4 56 1/2 60 1/2 - ------------------------------------------------------------------------------- 1995 - ------------------------------------------------------------------------------- High ................... $67 1/4 $57 7/8 $51 1/4 $45 1/8 Low .................... 55 5/8 47 1/4 41 1/4 36 3/8 =============================================================================== The principal market for trading of the common stock is the New York Stock Exchange under the symbol MRK. 41 Merck & Co., Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME - -------------------------------------------------------------------------------- Years Ended December 31 ($ in millions except per share amounts) 1996 1995 1994 - ----------------------------------------------------------------------------- Sales ................................ $19,828.7 $16,681.1 $14,969.8 - ----------------------------------------------------------------------------- Costs, Expenses and Other Materials and production ............. 9,319.2 7,456.3 5,962.7 Marketing and administrative ......... 3,841.3 3,297.8 3,177.5 Research and development ............. 1,487.3 1,331.4 1,230.6 Equity income from affiliates ........ (600.7) (346.3) (56.6) Gains on sales of specialty chemical businesses ............... - (682.9) - Gain on joint venture formation ...... - - (492.0) Provision for joint venture obligation - - 499.6 Other (income) expense, net .......... 240.8 827.6 232.8 - ----------------------------------------------------------------------------- 14,287.9 11,883.9 10,554.6 - ----------------------------------------------------------------------------- Income Before Taxes .................. 5,540.8 4,797.2 4,415.2 Taxes on Income ...................... 1,659.5 1,462.0 1,418.2 - ----------------------------------------------------------------------------- Net Income ........................... $ 3,881.3 $ 3,335.2 $ 2,997.0 ============================================================================= Earnings Per Common Share ............ $3.20 $2.70 $2.38 ============================================================================= Merck & Co., Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF RETAINED EARNINGS - -------------------------------------------------------------------------------- Years Ended December 31 ($ in millions) 1996 1995 1994 - ------------------------------------------------------------------------------- Balance, January 1 .................. $12,740.6 $10,942.0 $9,393.2 - ------------------------------------------------------------------------------- Net Income .......................... 3,881.3 3,335.2 2,997.0 Common Stock Dividends Declared ..... (1,793.4) (1,578.0) (1,463.1) Net Unrealized (Loss) Gain on Investments ............... (10.8) 41.4 14.9 - ------------------------------------------------------------------------------- Balance, December 31 ................ $14,817.7 $12,740.6 $10,942.0 =============================================================================== 42 The accompanying notes are an integral part of these financial statements. Merck & Co., Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET - -------------------------------------------------------------------------------- December 31 ($ in millions) 1996 1995 - -------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------- Current Assets Cash and cash equivalents ...................... $ 1,352.4 $ 1,847.4 Short-term investments ......................... 829.2 1,502.4 Accounts receivable ............................ 2,655.9 2,495.7 Inventories .................................... 2,148.8 1,872.5 Prepaid expenses and taxes ..................... 740.3 899.5 - -------------------------------------------------------------------------------- Total current assets ........................... 7,726.6 8,617.5 - -------------------------------------------------------------------------------- Investments .................................... 2,499.4 1,969.6 - -------------------------------------------------------------------------------- Property, Plant and Equipment (at cost) Land ........................................... 206.9 206.3 Buildings ...................................... 2,949.8 2,783.2 Machinery, equipment and office furnishings .... 4,765.0 4,055.9 Construction in progress ....................... 804.7 663.6 - -------------------------------------------------------------------------------- 8,726.4 7,709.0 Less allowance for depreciation ................ 2,799.7 2,439.9 - -------------------------------------------------------------------------------- 5,926.7 5,269.1 - -------------------------------------------------------------------------------- Goodwill and Other Intangibles (net of accumulated amortization of $606.5 million in 1996 and $411.5 million in 1995) ..................... 6,736.6 6,826.3 - -------------------------------------------------------------------------------- Other Assets ................................... 1,403.8 1,149.3 - -------------------------------------------------------------------------------- $24,293.1 $23,831.8 ================================================================================ Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------- Current Liabilities Accounts payable and accrued liabilities ....... $ 2,937.8 $ 3,105.2 Loans payable and current portion of long-term debt ............................... 606.1 423.1 Income taxes payable ........................... 802.6 800.8 Dividends payable .............................. 482.7 418.2 - -------------------------------------------------------------------------------- Total current liabilities ...................... 4,829.2 4,747.3 - -------------------------------------------------------------------------------- Long-Term Debt ................................. 1,155.9 1,372.8 - -------------------------------------------------------------------------------- Deferred Income Taxes and Noncurrent Liabilities 4,027.3 3,689.7 - -------------------------------------------------------------------------------- Minority Interests ............................. 2,310.2 2,286.3 - -------------------------------------------------------------------------------- Stockholders' Equity Common stock Authorized - 2,700,000,000 shares Issued - 1,483,619,311 shares - 1996 - 1,483,463,327 shares -1995 .......... 4,967.5 4,742.5 Retained earnings .............................. 14,817.7 12,740.6 - -------------------------------------------------------------------------------- 19,785.2 17,483.1 Less treasury stock, at cost 277,016,963 shares - 1996 254,614,794 shares - 1995 .................... 7,814.7 5,747.4 - -------------------------------------------------------------------------------- Total stockholders' equity ..................... 11,970.5 11,735.7 - -------------------------------------------------------------------------------- $24,293.1 $23,831.8 ================================================================================ The accompanying notes are an integral part of this financial statement. 43 Merck & Co., Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
Years Ended December 31 ($ in millions) 1996 1995 1994 - ---------------------------------------------------------------------------------------- Cash Flows from Operating Activities Income before taxes ............................... $5,540.8 $4,797.2 $4,415.2 Adjustments to reconcile income before taxes to cash provided from operations before taxes: Gains on sales of specialty chemical businesses - (682.9) - Gain on joint venture formation ............... - - (492.0) Provision for joint venture obligation ........ - - 499.6 Depreciation and amortization ................. 730.9 667.2 681.6 Other ......................................... 175.1 630.1 (10.7) Net changes in assets and liabilities: Accounts receivable ......................... (224.7) (244.1) (265.0) Inventories ................................. (267.6) (271.8) (26.2) Accounts payable and accrued liabilities ............................... 414.2 383.1 290.6 Noncurrent liabilities ...................... 143.0 (262.0) (123.5) Other ....................................... 10.4 (43.0) 28.1 - ---------------------------------------------------------------------------------------- Cash Provided by Operating Activities Before Taxes .................................... 6,522.1 4,973.8 4,997.7 Income Taxes Paid ................................. (1,094.4) (2,029.6) (857.8) - ---------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities ......... 5,427.7 2,944.2 4,139.9 - ---------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures .............................. (1,196.7) (1,005.5) (1,009.3) Purchase of securities, subsidiaries and other investments ........................... (15,719.1) (13,772.3) (14,814.5) Proceeds from joint venture formation, net of cash transferred ......................... - - 759.3 Proceeds from sale of securities, subsidiaries and other investments .............. 15,079.2 12,430.1 15,082.3 Proceeds from sales of specialty chemical businesses, net of cash transferred ............. - 1,321.1 - Other ............................................. (142.7) (295.7) (50.2) - ---------------------------------------------------------------------------------------- Net Cash Used by Investing Activities ............. (1,979.3) (1,322.3) (32.4) - ---------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net change in short-term borrowings ............... (7.1) 40.5 (1,580.2) Proceeds from issuance of debt .................... 327.5 549.5 336.6 Payments on debt .................................. (341.7) (108.2) (152.4) Proceeds from issuance of preferred stock of subsidiaries ........................... - 1,019.6 - Purchase of treasury stock ........................ (2,493.3) (1,570.9) (704.5) Dividends paid to stockholders .................... (1,728.9) (1,539.8) (1,434.1) Proceeds from exercise of stock options ........... 442.2 264.0 138.6 Other ............................................. (36.0) (56.1) (6.2) - ---------------------------------------------------------------------------------------- Net Cash Used by Financing Activities ............. (3,837.3) (1,401.4) (3,402.2) - ---------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents ....................... (106.1) 22.9 69.3 - ---------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents ............................ (495.0) 243.4 774.6 Cash and Cash Equivalents at Beginning of Year .... 1,847.4 1,604.0 829.4 - ---------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year .......... $ 1,352.4 $ 1,847.4 $ 1,604.0 ========================================================================================
44 The accompanying notes are an integral part of this financial statement. Merck & Co., Inc. and Subsidiaries ($ in millions except per share amounts) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS Merck is a leading research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products and services. Human health products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Human health services include primarily managed prescription drug programs. Animal health/crop protection products include animal medicinals, used to control and alleviate disease in livestock, small animals and poultry, and agricultural insecticides. Merck sells its human health products and services to drug wholesalers and retailers, hospitals, clinics, government agencies, corporations, labor unions, retirement systems, insurance carriers, managed health-care providers such as health maintenance organizations and other institutions. Animal health/crop protection products are sold to veterinarians, distributors, wholesalers, retailers, feed manufacturers, veterinary suppliers and laboratories. 2. SUMMARY OF ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of the Company and all of its subsidiaries. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders' interest is shown as Minority interests in the consolidated financial statements. The Company follows the equity method for 20% or more owned affiliates. Foreign Currency Translation - The U.S. dollar is the functional currency for the Company's foreign subsidiaries. Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months. Inventories - The majority of domestic inventories are valued at the lower of last-in, first-out (LIFO) cost or market. Remaining inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Depreciation - Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated methods are used. Earnings Per Share - Earnings per common share are based on the weighted average number of shares outstanding. These weighted averages were 1,213.6 million, 1,236.1 million and 1,257.2 million in 1996, 1995 and 1994, respectively. Common stock equivalents do not have a significant dilutive effect. Goodwill and Other Intangibles - Goodwill of $3.8 billion in 1996 and 1995 (net of accumulated amortization) represents the excess of acquisition costs over the fair value of net assets of businesses purchased and is amortized on a straight- line basis over periods up to 40 years. Other acquired intangibles principally include customer relationships of $2.9 billion in 1996 and $3.0 billion in 1995 (net of accumulated amortization) that arose in connection with the acquisition of Medco Containment Services, Inc. Other acquired intangibles are recorded at cost and are amortized on a straight-line basis over their estimated useful lives ranging from predominantly 28 to 40 years. The Company continually reviews goodwill and other intangibles to assess recoverability from future operations using undiscounted cash flows. Impairments would be recognized in operating results if a permanent diminution in value occurred. Stock-Based Compensation - Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes, pro forma net income and earnings per share are provided as if the fair value method had been applied. Use of Estimates - The financial statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management's best estimates and judgments. Reclassifications - Certain reclassifications have been made to prior year amounts to conform with current year presentation. 3. DIVESTITURES The Company completed the sale of its specialty chemical businesses in 1995. In January, the Company sold its Calgon Vestal Laboratories business for $261.5 million to Bristol-Myers Squibb. In February, the Company sold its Kelco business to Monsanto for $1.075 billion. These divestitures resulted in pretax gains of $682.9 million recorded in the first quarter. These specialty chemical businesses were not significant to the Company's financial position or results of operations. These gains were substantially offset by $675.5 million of nonrecurring charges included in Other (income) expense, net. (See Note 15.) 45 4. STRATEGIC ALLIANCES In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra's products under a royalty-bearing license. In 1993, the Company's total sales of Astra products reached a level that triggered the first step in the establishment of a separate entity for operations related to Astra products. In November 1994, Astra paid Merck $820.0 million for an interest in a joint venture business carried on by Astra Merck Inc., in which Merck and Astra each own a 50% share. The Company recorded a $492.0 million gain from this transaction. This joint venture develops and markets Astra's new prescription medicines in the United States. The formation of the joint venture has not had a material impact on comparability of net income. Astra Merck product sales are not reported in the Company's consolidated sales. Sales for 1994 prior to November were $733.2 million. Joint venture sales were $1.8 billion for 1996 and $1.3 billion for 1995, consisting primarily of Prilosec, the first of a class of medications known as proton pump inhibitors which slows the production of acid from the cells of the stomach lining. In 1989, Merck formed a joint venture with Johnson & Johnson to develop and market a broad range of non-prescription medicines for U.S. consumers. This 50% owned venture was expanded into Europe in 1993, and into Canada in 1996. Sales of product marketed by the joint venture were $530.2 million for 1996 and $403.5 million for 1995, consisting primarily of gastrointestinal products including Pepcid AC Acid Controller, a non-prescription formulation of Pepcid, Merck's H2-receptor antagonist, and Mylanta. In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an independent, research-driven, worldwide pharmaceutical joint venture, equally owned by each party. DuPont contributed its entire pharmaceutical and radiopharmaceutical imaging agents businesses and is providing administrative services. The Company contributed cash and European marketing rights to several of its prescription medicines and is providing research and development funding and expertise and international industry expertise. Joint venture sales were $1.3 billion for 1996 and $1.2 billion for 1995, consisting primarily of cardiovascular, radiopharmaceutical and central nervous system products. In December 1994, the Company agreed to arrangements that, among other things, eliminated the Company's right to offset the consequences of disproportionate allocations of the DuPont Merck joint venture income and expense against the Company's right to receive a disproportionate share of income arising from a 1989 long-term research and marketing agreement with DuPont. Accordingly, the Company recorded a $499.6 million provision for an obligation to the joint venture. This obligation is a function of the favorable performance of assets contributed by DuPont to the joint venture through December 31, 1994, and certain Merck contractual commitments. This obligation was discharged in 1996. In 1994, Merck and Pasteur Merieux Serums et Vaccins (Pasteur) established an equally owned joint venture to market vaccines and to collaborate in the development of combination vaccines for distribution in Europe. This joint venture is not expected to have a significant impact on comparability of net income in the near term. Joint venture vaccine sales were $663.0 million for 1996 and $598.6 million for 1995. Summarized below are net sales by therapeutic class for these joint ventures for the years ended December 31, 1996 and 1995: 1996 1995 - -------------------------------------------------------------------------------- Gastrointestinals Ethical ................................ $1,712.1 $1,223.4 OTC .................................... 420.5 307.2 - -------------------------------------------------------------------------------- 2,132.6 1,530.6 - -------------------------------------------------------------------------------- Vaccines ................................. 663.0 598.6 Cardiovasculars .......................... 623.9 521.9 Radiopharmaceuticals ..................... 325.4 304.0 Central nervous system ................... 267.7 247.5 Other .................................... 276.9 289.2 - -------------------------------------------------------------------------------- $4,289.5 $3,491.8 ================================================================================ 5. AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD Investments in affiliates accounted for using the equity method are included in Other assets and were $779.7 million at December 31, 1996 and $737.8 million at December 31, 1995. Dividends and distributions received from these affiliates were $476.2 million in 1996 and $296.1 million in 1995. These affiliates did not constitute a significant component of the Company's financial position or results of operations prior to 1995. Summarized information for these affiliates is as follows: Years Ended December 31 1996 1995 - -------------------------------------------------------------------------------- Sales ........................................ $4,441.4 $3,632.9 Materials and production costs ............... 959.4 873.4 Other expense, net ........................... 1,725.2 1,493.8 Income before taxes .......................... 1,756.8 1,265.7 ================================================================================ December 31 - -------------------------------------------------------------------------------- Current assets ............................... $1,613.8 $1,326.0 Noncurrent assets ............................ 3,111.3 2,914.3 Current liabilities .......................... 1,048.0 897.5 Noncurrent liabilities ....................... 1,307.6 1,163.6 ================================================================================ 46 6. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES Summarized below are the carrying values and fair values of the Company's financial instruments at December 31, 1996 and 1995. Fair values were estimated based on market prices, where available, or dealer quotes. 1996 1995 ------------------ ------------------ Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------- Cash and cash equivalents .......... $1,352.4 $1,352.4 $1,847.4 $1,847.4 Short-term investments ............. 829.2 828.9 1,502.4 1,502.4 Long-term investments .............. 2,499.4 2,496.4 1,969.6 1,965.6 Purchased currency options ......... 85.1 143.7 122.1 110.8 Forward exchange contracts and currency swaps ................... 134.7 134.7 80.3 80.3 Interest rate swaps ................ 26.3 31.3 14.4 27.2 - -------------------------------------------------------------------------------- Liabilities - -------------------------------------------------------------------------------- Loans payable and current portion of long-term debt ........ $ 606.1 $ 609.7 $ 423.1 $ 425.4 Long-term debt ..................... 1,155.9 1,160.2 1,372.8 1,424.7 Written currency options ........... -- -- .2 .2 Forward exchange contracts and currency swap ................ 9.2 9.2 6.1 6.1 ================================================================================ The Company has established revenue and balance sheet hedging programs to protect against reductions in value and volatility of future foreign currency cash flows caused by changes in foreign exchange rates. The objectives and strategies of these programs are described in the Analysis of Liquidity and Capital Resources section of the Financial Review. The Company hedges forecasted revenues denominated in foreign currencies with purchased currency options. When the dollar strengthens against foreign currencies, the decline in the value of future foreign currency cash flows is partially offset by the recognition of gains in the value of purchased currency options designated as hedges of the period. Conversely, when the dollar weakens, the increase in the value of future foreign currency cash flows is reduced only by the recognition of the premium paid to acquire the options designated as hedges of the period. Market value gains and premiums on these contracts are recognized in Sales when the hedged transaction is recognized. The carrying value of purchased currency options is reported in Prepaid expenses and taxes or Other assets. The Company continuously reviews its portfolio of purchased options and will adjust its portfolio to accommodate changes in exposure to forecasted revenues. The most cost-effective means of decreasing coverage provided by purchased options is to write options with terms identical to purchased options that are no longer necessary. Deferred gains or losses that accumulate on purchased options prior to writing an offsetting position will remain deferred and are recognized when the hedged transaction occurs. Subsequent changes in the market value of the written options and related purchased options are recorded in earnings. Because the changes in market value of the purchased options equally offset the written options, there is no net impact on earnings. The carrying value of written currency options is reported in Accounts payable and accrued liabilities or Deferred income taxes and noncurrent liabilities. Deferred gains and losses on currency options used to hedge forecasted revenues amounted to $64.9 million and $6.3 million at December 31, 1996 and $27.2 million and $38.5 million at December 31, 1995, respectively. The Company also hedges certain exposures to fluctuations in foreign currency exchange rates that occur prior to conversion of foreign currency denominated monetary assets and liabilities into U.S. dollars. Prior to conversion to U.S. dollars, these assets and liabilities are translated at spot rates in effect on the balance sheet date. The effects of changes in spot rates are reported in earnings and included in Other (income) expense, net. The Company hedges its exposure to changes in foreign exchange principally with forward contracts. Because monetary assets and liabilities are marked to spot and recorded in earnings, forward contracts designated as hedges of the monetary assets and liabilities are also marked to spot with the resulting gains and losses similarly recognized in earnings. Gains and losses on forward contracts are included in Other (income) expense, net and offset losses and gains on the net monetary assets and liabilities hedged. The carrying value of forward exchange contracts is reported in Accounts receivable, Other assets, Accounts payable and accrued liabilities or Deferred income taxes and noncurrent liabilities. At December 31, 1996 and 1995, the Company had contracts to exchange foreign currencies, principally the Japanese yen, French franc and Deutschemark, for U.S. dollars in the following notional amounts: 1996 1995 - -------------------------------------------------------------------------------- Purchased currency options ................... $1,952.6 $2,453.4 Written currency options ..................... -- 48.3 Forward sale contracts ....................... 1,660.9 1,469.9 Forward purchase contracts ................... 431.5 422.3 ================================================================================ 47 The Company uses interest rate swap contracts on certain borrowing and investing transactions. Interest rate swap contracts are intended to be an integral part of borrowing and investing transactions and, therefore, are not recognized at fair value. Interest differentials paid or received under these contracts are recognized as adjustments to the effective yield of the underlying financial instruments hedged. Interest rate swap contracts would only be recognized at fair value if the hedged relationship is terminated. Gains or losses accumulated prior to termination of the relationship would be amortized as a yield adjustment over the shorter of the remaining life of the contract or the remaining period to maturity of the underlying instrument hedged. If the contract remained outstanding after termination of the hedged relationship, subsequent changes in market value of the contract would be recognized in earnings. The Company does not use leveraged swaps and, in general, does not use leverage in any of its investment activities that would put principal capital at risk. In 1995, the Company entered into a five-year combined interest rate and currency swap contract with a notional amount of $296.7 million, and in 1996, a two-year currency swap contract with a notional amount of $336.1 million, to convert two different variable rate Dutch guilder investments to variable rate U.S. dollar investments. The market values of these contracts are reported in Other assets with unrealized gains and losses recorded, net of tax, in Stockholders' equity. The Company also had two interest rate swap contracts outstanding with a combined notional amount of $347.9 million to convert fixed rates on debt issues to floating rates slightly below commercial paper rates. The maturities of these contracts coincide with the maturities of the underlying debt instruments hedged. The debt issues include $200.0 million in zero coupon euronotes and 200.0 million in Swiss franc eurobonds. Concurrent with the issuance of the Swiss franc eurobonds, the Company entered into an interest rate and currency swap. The currency swap is accounted for similar to forward exchange contracts. (See Note 8 for further information.) The interest rate and currency swaps on the debt issues described above essentially provide the Company with variable rate, U.S. dollar denominated debt at rates of interest lower than rates the Company could otherwise obtain had it actually issued variable rate U.S. dollar debt. As part of its ongoing control procedures, the Company monitors concentrations of credit risk associated with financial institutions with which it conducts business. Credit risk is minimal as credit exposure limits are established to avoid a concentration with any single financial institution. The Company also monitors the credit worthiness of its customers to which it grants credit terms in the normal course of business. Concentrations of credit risk associated with these trade receivables are considered minimal due to the Company's diverse customer base. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales. At December 31, 1996, available-for-sale investments include debt and equity securities carried at their fair values of $1.4 billion ($551.3 million of which mature within one year) and $1.1 billion, respectively. Gross unrealized gains and losses amounted to $10.1 million and $5.8 million for debt securities and $181.1 million and $53.0 million for equity securities, respectively, which are recorded, net of tax and minority interests, in Retained earnings. Held-to-maturity investments are carried at amortized cost of $828.6 million ($277.9 million of which mature within one year) and have a fair value of $825.3 million. 7. INVENTORIES Inventories at December 31 consisted of: 1996 1995 - -------------------------------------------------------------------------------- Finished goods ................................. $1,237.3 $1,078.3 Raw materials and work in process .............. 841.1 716.2 Supplies ....................................... 70.4 78.0 - -------------------------------------------------------------------------------- Total (approximates current cost) .............. 2,148.8 1,872.5 Reduction to LIFO cost ......................... -- -- - -------------------------------------------------------------------------------- $2,148.8 $1,872.5 ================================================================================ Inventories valued under the LIFO method comprised approximately 43% and 44% of inventories at December 31, 1996 and 1995, respectively. 8. LOANS PAYABLE AND LONG-TERM DEBT Loans payable at December 31, 1996 consisted primarily of the current portion of long-term debt. The remainder was principally borrowings by foreign subsidiaries. The weighted average interest rate for these borrowings was 6.2% and 7.3% at December 31, 1996 and 1995, respectively. Long-term debt at December 31 consisted of: 1996 1995 - -------------------------------------------------------------------------------- 6.8% euronotes due 2005 ............................... $ 498.9 $ 498.8 5.3% euronotes due 1998 ............................... 251.2 251.8 6.3% debentures due 2026 .............................. 246.6 -- Zero coupon euronotes due 1997 ........................ -- 181.3 5.4% Swiss franc eurobonds due 1997 ................... -- 174.0 6.0% medium-term note due 1997 ........................ -- 99.9 Other ................................................. 159.2 167.0 - -------------------------------------------------------------------------------- $1,155.9 $1,372.8 ================================================================================ At December 31, 1996, the Company had an interest rate swap contract to convert the 6.1% fixed rate on the zero coupon euronotes to a variable rate slightly below commercial paper rates. 48 In addition, the Company entered into an interest rate and currency swap concurrent with the issuance of the Swiss franc eurobonds. The contract converts the fixed rate on the eurobonds to a variable rate slightly below commercial paper rates, payable in U.S. dollars, and enables the Company to buy 200.0 million Swiss francs at maturity at a fixed exchange rate. Accordingly, any exchange gain or loss on these bonds will be entirely offset by the change in the carrying value of the contract. Other consists primarily of pollution control, industrial revenue financing and foreign borrowings at varying rates up to 9.0%. The aggregate maturities of long-term debt for each of the next five years are as follows: 1997, $447.9 million; 1998, $262.0 million; 1999, $7.7 million; 2000, $9.6 million, and 2001, $60.6 million. 9. CONTINGENT LIABILITIES The Company is involved in various claims and legal proceedings of a nature considered normal to its business, principally product liability and intellectual property cases. Additionally, 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 January 1996, the Company and several other defendants entered into an agreement, subject to court approval, to settle the Federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims, pursuant to which the Company would pay $51.8 million, payable in four equal annual installments. In April 1996, the court declined to approve the settlement. Subsequently, the Company and several other defendants entered into an amended settlement agreement, which provides for the same monetary payment and addresses the court's concerns as expressed in its April 1996 opinion. In June 1996, the court granted approval of the amended settlement agreement, to which objecting retail class members filed appeals in July 1996. The Company has not engaged in any conspiracy and no admission of wrongdoing has been made or is included in the amended agreement, which was entered into in order to avoid the cost of litigation and the risk of an inaccurate adverse verdict by a jury presented by a case of this size and complexity. 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. The Company is also a party to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, as well as under other Federal and state statutes. While it is not feasible to predict or determine the 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. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. The Company has taken an active role in identifying and providing for these costs; and, therefore, management does not believe that these expenditures should result in a materially adverse effect on the Company's financial position, results of operations, liquidity or capital resources. 10. PREFERRED STOCK OF SUBSIDIARY COMPANY In December 1995, the Company's wholly-owned subsidiary, Merck Sharp & Dohme Overseas Finance, S.A., issued $1.0 billion par value of variable rate nonconvertible Preferred Equity Certificates (PECs). The proceeds were used to fund a portion of the Company's stock repurchase program and for other general corporate purposes. Beginning in January 1997 to the date fixed for redemption in 2094, the PECs are redeemable at the option of the issuer at the par value plus accumulated and unpaid dividends. The PECs are included in Minority interests in the consolidated financial statements. 11. STOCKHOLDERS' EQUITY In 1996 and 1995, common stock increased by $225.0 and $74.7 million, respectively, principally as a result of issuances of treasury stock for exercises of stock options. In 1994, common stock increased by $91.3 million, principally as a result of conversions of subordinated debentures assumed in conjunction with the Medco acquisition into 2.6 million shares of Merck common stock. A summary of treasury stock transactions (shares in thousands) follows:
1996 1995 1994 ---------------------- ------------------------ ----------------------- Shares Cost Shares Cost Shares Cost - ---------------------------------------------------------------------------------------------- Balance, January 1 .... 254,614.8 $5,747.4 235,341.6 $4,470.8 226,676.6 $3,948.0 Purchases ...... 38,384.2 2,493.3 33,377.2 1,570.9 18,975.0 704.5 Issued primarily under stock option plans (15,982.0) (426.0) (14,104.0) (294.3) (10,310.0) (181.7) - ---------------------------------------------------------------------------------------------- Balance, December 31 .. 277,017.0 $7,814.7 254,614.8 $5,747.4 235,341.6 $4,470.8 ==============================================================================================
At December 31, 1996, 1995 and 1994, 10 million shares of preferred stock, without par value, were authorized; none were issued. 49 12. STOCK OPTION AND INCENTIVE PLANS The Company has stock option plans under which employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of the grant. Options generally vest in 5 years and expire in 10 years from the date of grant. The Company also has plans that provide for the granting of performance-based stock awards. A summary of information relative to the Company's stock option plans follows: Number Average(1) of Shares Price - -------------------------------------------------------------------------------- Outstanding at December 31, 1993 .............. 86,413,723 $ 26.93 Granted ....................................... 19,973,017 31.53 Exercised ..................................... (9,878,486) 14.01 Forfeited ..................................... (2,843,918) 34.41 - -------------------------------------------------------------------------------- Outstanding at December 31, 1994 .............. 93,664,336 29.05 Granted ....................................... 14,193,077 43.38 Exercised ..................................... (13,955,704) 18.96 Forfeited ..................................... (2,480,703) 34.89 - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 .............. 91,421,006 32.65 Granted ....................................... 13,018,617 65.28 Exercised ..................................... (15,835,665) 27.92 Forfeited ..................................... (2,494,936) 37.68 Equivalent Options Assumed .................... 100,275 103.25 - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 .............. 86,209,297 $ 38.38 ================================================================================ (1) Weighted average exercise price. The number of shares and average price of options exercisable at December 31, 1996, 1995 and 1994 were 32,387,469 shares at $30.99, 29,272,456 shares at $26.46 and 31,691,680 at $23.39, respectively. At December 31, 1996 and 1995, 70,493,629 shares and 15,842,665 shares, respectively, were available for future grants under the terms of these plans. Effective January 1, 1996, the Company adopted the provisions of Statement No. 123, Accounting for Stock-Based Compensation. As permitted by the Statement, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based awards, which was not significant. Had the fair value method of accounting been applied to the Company's stock option plans, which requires recognition of compensation cost ratably over the vesting period of the underlying equity instruments, Net income would have been reduced by $46.6 million, or $.04 per share in 1996 and $20.0 million, or $.02 per share in 1995. This pro forma impact only takes into account options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 1996 and 1995 was $19.12 and $12.31, respectively. The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average market price at grant date of $65.28 in 1996 and $43.38 in 1995 and the following weighted average assumptions: risk-free interest rate of 5.9% for 1996 and 6.9% for 1995, expected life of 6.7 years for 1996 and 6.5 years for 1995, volatility of 24% for 1996 and 1995, and dividend yield of 2.1% for 1996 and 2.8% for 1995. Summarized information about stock options outstanding and exercisable at December 31, 1996 is as follows: Outstanding Exercisable ---------------------------- ------------------- Exercise Price Number Average Average Number Average Range of Shares Life(1) Price(2) of Shares Price(2) - -------------------------------------------------------------- $2 to 20 6,602,873 4.37 $ 14.28 6,586,684 $ 14.30 $20 to 30 16,126,629 7.87 25.71 10,496,449 25.07 $30 to 40 26,508,457 6.95 33.76 3,689,072 36.32 $40 to 50 21,554,462 6.43 42.98 10,771,645 43.04 $50 to 75 15,340,101 8.43 63.26 767,994 52.69 Over $75 76,775 7.45 110.14 75,625 110.52 - -------------------------------------------------------------- 86,209,297 32,387,469 ============================================================== (1) Weighted average contractual life remaining in years. (2) Weighted average exercise price. The Company has incentive compensation plans that provide cash awards to employees and may provide deferred awards to certain executives and other key employees. For 1996, total awards under the plans were $113.5 million. 13. RETIREMENT PLANS In addition to required governmental retirement plans, the Company and certain of its subsidiaries have retirement plans for eligible employees that provide benefits based upon age, years of service and compensation. Certain plans also consider primary social security payments in calculating benefits. The expenses for these governmental, Company and subsidiary plans were $294.9 million in 1996, $285.6 million in 1995 and $301.3 million in 1994. Expenses for Company and subsidiary plans were $106.6 million in 1996, $109.0 million in 1995 and $140.1 million in 1994, comprised of the following components: 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost-benefits earned during the year ................... $ 104.1 $ 98.7 $ 109.8 Interest cost on projected benefit obligation ....................... 144.2 139.8 134.7 Net amortization and deferral .............. 107.1 185.9 (105.9) Actual return on assets .................... (248.8) (315.4) 1.5 - -------------------------------------------------------------------------------- Net pension cost ........................... $ 106.6 $ 109.0 $ 140.1 ================================================================================ 50 The net pension cost attributable to international plans and included above was $51.8 million in 1996, $47.2 million in 1995 and $42.5 million in 1994. The Company's funding policy for Employee Retirement Income Security Act of 1974 and foreign plans is to contribute amounts to maintain assets in excess of the projected benefit obligations. Company contributions over the next several years are expected to continue to improve the funded status of the worldwide plans. The plans' assets are diversified in stocks, bonds, short-term and other investments. The plans' funded status at December 31 was as follows:
1996 1995 -------------------- ------------------ OVER UNDER Over Under FUNDED FUNDED Funded Funded - --------------------------------------------------------------------------------- Plan assets at market value ........ $1,838.4 $ 215.2 $1,726.2 $ 19.5 - --------------------------------------------------------------------------------- Accumulated benefit obligation Vested ........................... 1,171.0 257.6 1,197.5 62.3 Nonvested ........................ 196.5 54.6 250.5 27.8 - --------------------------------------------------------------------------------- 1,367.5 312.2 1,448.0 90.1 - --------------------------------------------------------------------------------- Plan assets in excess of (less than) accumulated benefit obligation ... 470.9 (97.0) 278.2 (70.6) Projected compensation increases ... 302.8 176.9 466.4 132.6 - --------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation ..... 168.1 (273.9) (188.2) (203.2) Unamortized transitional net (asset) obligation ............... (76.3) 2.9 (97.4) 8.9 Unrecognized net loss .............. 110.0 103.8 380.3 43.6 Unrecognized prior service cost .... 46.4 11.4 48.9 14.3 - --------------------------------------------------------------------------------- Net pension asset (liability) ...... $ 248.2 $ (155.8) $ 143.6 $(136.4) =================================================================================
International plan assets at market value, included in the above table, were $654.2 million in 1996 and $592.9 million in 1995. The accumulated benefit obligation of international plans, included in this table, was $624.5 million in 1996 and $545.8 million in 1995. The discount rate used in determining the projected benefit obligation and costs was 7.5% at December 31, 1996, 7% at December 31, 1995 and 8.5% at December 31, 1994. The rate of future compensation increases used in determining the projected benefit obligation and costs was 4.5% at December 31, 1996 and 1995, and 5% at December 31, 1994. The expected long-term rate of return on plan assets was 10% at December 31, 1996, 1995 and 1994. In the aggregate, average international plan assumptions do not vary significantly from U.S. assumptions. 14. OTHER POSTRETIREMENT BENEFITS The Company provides health-care (in excess of Medicare) and life insurance benefits for eligible active and retired employees, principally in the United States. The Company reserves the right to modify such benefits in the future. The expected costs of providing postretirement health-care and life insurance benefits are accrued over the employee service period. The cost of health-care and life insurance benefits for active employees was $148.9 million in 1996, $125.0 million in 1995 and $130.4 million in 1994. The cost of postretirement benefits other than pensions was $9.4 million in 1996, $7.6 million in 1995 and $42.1 million in 1994, comprised of the following components: 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost - benefits earned during the year ............................. $ 25.2 $ 16.8 $ 31.7 Interest cost on accumulated postretirement benefit obligation ........... 45.7 44.0 58.4 Net amortization and deferral ................. 13.2 54.1 (52.4) Actual return on assets ....................... (74.7) (107.3) 4.4 - -------------------------------------------------------------------------------- Net postretirement benefit cost ............... $ 9.4 $ 7.6 $ 42.1 ================================================================================ Net postretirement benefit cost in 1996 and 1995 includes the effects of 1995 changes in certain cost-sharing provisions and the Company's method of providing certain benefits. The Company contributes to a retiree health-care qualified trust that will be used to pay a portion of its postretirement benefit liability. The plans' assets are diversified in stocks, bonds and short-term and other investments. The plans' funded status at December 31 was as follows: 1996 1995 - -------------------------------------------------------------------------------- Plan assets at market value .............................. $ 541.6 $ 473.8 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees ............................................... 368.2 392.4 Other fully eligible participants ...................... 46.1 45.3 Other active participants .............................. 249.4 231.0 - -------------------------------------------------------------------------------- 663.7 668.7 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets ............................... (122.1) (194.9) Unrecognized net gain .................................... (166.8) (98.4) Unrecognized plan changes ................................ (141.2) (154.2) - -------------------------------------------------------------------------------- Net postretirement benefit liability ..................... $(430.1) $(447.5) ================================================================================ The discount rate used in determining the accumulated postretirement benefit obligation and cost was 7.5% at December 31, 1996, 7% at December 31, 1995 and 8.5% at December 31, 1994. The expected long-term rate of return on plan assets was 10.0% in 1996, 1995 and 1994. The health-care cost trend rate was 51 8.5% at December 31, 1996. The rate will gradually decline to 5.0% over a 7-year period. The effect of increasing the health-care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 1996 by $75.4 million and the total service and interest cost components of the 1996 net postretirement benefit cost by $11.0 million. 15. OTHER (INCOME) EXPENSE, NET 1996 1995 1994 - ------------------------------------------------------------------------------- Interest income ............................ $(205.4) $(191.0) $(153.9) Interest expense ........................... 138.6 98.7 124.4 Exchange (gains) losses .................... (27.8) (7.8) 26.2 Minority interests ......................... 144.2 91.9 93.4 Amortization of goodwill and other intangibles ........................ 196.2 192.0 193.9 Other, net ................................. (5.0) 643.8 (51.2) - ------------------------------------------------------------------------------- $ 240.8 $ 827.6 $ 232.8 =============================================================================== 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 in 1996 primarily reflects dividends on the PECs, which were issued in December 1995. (See Note 10.) In 1995, other, net, includes $675.5 million of nonrecurring charges consisting of $278.5 million for losses on sales of assets, $175.0 million for restructuring actions, $161.2 million for endowment of The Merck Company Foundation and $60.8 million for settlement of claims. The restructuring actions involve manufacturing facility consolidation, rationalization and work-force reduction in Europe and the United States. Interest paid was $117.4 million in 1996, $85.5 million in 1995 and $144.0 million in 1994. 16. TAXES ON INCOME A reconciliation between the Company's effective tax rate and the U.S. statutory rate follows: 1996 Tax Rate ---------------------- AMOUNT 1996 1995 1994 - ------------------------------------------------------------------------------- U.S. statutory rate applied to pretax income ..................... $1,939.3 35.0% 35.0% 35.0% Differential arising from: Foreign operations ................... (180.8) (3.2) (.9) (1.1) Tax exemption for Puerto Rico operations ......................... (107.5) (1.9) (1.8) (3.8) Equity income from affiliates ........ (103.2) (1.9) (1.5) (.2) State taxes .......................... 7.2 .1 1.5 2.2 Other, including minority interests ................. 104.5 1.9 (1.8) -- - ------------------------------------------------------------------------------- $1,659.5 30.0% 30.5% 32.1% =============================================================================== Domestic companies contributed approximately 73% in 1996, 76% in 1995 and 73% in 1994 to consolidated pretax income. Taxes on income consisted of: 1996 1995 1994 - ------------------------------------------------------------------------------- Current provision Federal ..................................... $1,106.2 $1,043.4 $1,003.1 Foreign ..................................... 410.3 455.1 359.0 State ....................................... (14.6) 149.4 152.6 - ------------------------------------------------------------------------------- 1,501.9 1,647.9 1,514.7 - ------------------------------------------------------------------------------- Deferred provision Federal ..................................... 136.9 (64.3) (166.6) Foreign ..................................... (15.4) (95.9) 72.2 State ....................................... 36.1 (25.7) (2.1) - ------------------------------------------------------------------------------- 157.6 (185.9) (96.5) - ------------------------------------------------------------------------------- $1,659.5 $1,462.0 $1,418.2 =============================================================================== Deferred income taxes at December 31 consisted of: 1996 1995 ---------------------- -------------------- ASSETS LIABILITIES Assets Liabilities - -------------------------------------------------------------------------------- Other intangibles ................ $ -- $1,208.5 $ -- $1,243.1 Accelerated depreciation ......... -- 521.2 -- 524.9 Inventory related ................ 511.6 208.2 463.6 180.3 Other postretirement benefits .... 187.7 -- 183.4 -- Equity investments ............... -- 163.0 -- 153.4 Restructuring charge ............. 151.3 -- 155.3 -- Environmental related ............ 84.0 -- 81.7 -- Compensation related ............. 81.8 -- 70.5 -- Equivalent Medco options assumed ................ 62.7 -- 92.4 -- Pension benefits ................. 9.4 97.9 28.3 65.2 Leasing activity ................. -- 27.0 -- 40.7 Provision for joint venture obligation ..................... -- -- 174.4 -- Other ............................ 712.8 462.7 663.5 428.7 - -------------------------------------------------------------------------------- 1,801.3 2,688.5 1,913.1 2,636.3 Valuation allowance .............. (4.5) -- (15.0) -- - -------------------------------------------------------------------------------- $1,796.8 $2,688.5 $1,898.1 $2,636.3 ================================================================================ At December 31, 1996 and 1995, current deferred tax assets of $568.6 million and $722.8 million, respectively, were included in Prepaid expenses and taxes and current deferred tax liabilities of $112.2 million and $98.0 million, respectively, were included in Income taxes payable. In addition, at December 31, 1996 and 1995, noncurrent deferred tax assets of $52.2 million and $26.3 million, respectively, were included in Other assets and noncurrent deferred tax liabilities of $1.4 billion and $1.4 billion, respectively, were included in Deferred income taxes and noncurrent liabilities. Income taxes paid in 1996, 1995 and 1994 were $1.1 billion, $2.0 billion and $857.8 million, respectively. The increase in 1995 52 primarily reflects taxes paid on the 1994 gain resulting from the sale to Astra of an interest in a joint venture, the 1995 gains on sales of subsidiaries and a change in law affecting the calculation of Federal estimated payments. At December 31, 1996, foreign earnings of $5.4 billion and domestic earnings of $880.9 million have been retained indefinitely by subsidiary companies for reinvestment. No provision is made for income taxes that would be payable upon the distribution of such earnings, and it is not practicable to determine the amount of the related unrecognized deferred income tax liability. These earnings include income from manufacturing operations in Ireland, that were tax exempt through 1990 and are taxed at 10% thereafter. In addition, the Company has domestic subsidiaries operating in Puerto Rico under a tax incentive grant that expires in 2008. The Company's Federal income tax returns have been audited through 1989. 17. GEOGRAPHIC SEGMENT REPORTING 1996 1995 1994 - ------------------------------------------------------------------------------- Customer Sales North America .............................. $14,321.7 $11,704.3 $10,561.6 Europe ..................................... 3,322.4 2,894.3 2,552.6 Asia Pacific ............................... 1,767.0 1,753.2 1,586.7 Other Foreign .............................. 417.6 329.3 268.9 Affiliate Sales North America .............................. 1,723.2 1,640.3 1,390.2 Europe ..................................... 909.8 798.8 611.3 Asia Pacific ............................... 50.4 59.1 44.8 Other Foreign .............................. 2.7 1.5 .6 Eliminations ............................... (2,686.1) (2,499.7) (2,046.9) - ------------------------------------------------------------------------------- $19,828.7 $16,681.1 $14,969.8 =============================================================================== Income Before Taxes North America .............................. $3,691.7 $3,442.1 $3,182.7 Europe ..................................... 1,043.0 925.2 1,021.4 Asia Pacific ............................... 352.9 323.4 277.3 Other Foreign .............................. (2.3) (17.4) 1.9 Eliminations ............................... (95.9) (259.4) (102.7) - ------------------------------------------------------------------------------- 4,989.4 4,413.9 4,380.6 Non-operating income ....................... 551.4 383.3 34.6 - ------------------------------------------------------------------------------- $5,540.8 $4,797.2 $4,415.2 =============================================================================== Assets North America .............................. $15,662.0 $14,563.3 $14,538.9 Europe ..................................... 2,322.4 2,202.4 2,158.2 Asia Pacific ............................... 1,499.5 1,542.3 1,310.3 Other Foreign .............................. 306.1 196.9 151.6 Cash and Investments ....................... 4,681.0 5,319.4 3,686.6 Other Corporate Assets ..................... 1,444.3 1,513.3 1,147.9 Eliminations ............................... (1,622.2) (1,505.8) (1,136.9) - ------------------------------------------------------------------------------- $24,293.1 $23,831.8 $21,856.6 =============================================================================== Sales to affiliates by North America include products manufactured in the United States that are shipped to facilities in foreign countries for manufacture into finished products. Sales to affiliates are at negotiated prices based on specific market conditions. Profits are shown within the geographic areas at the time of sale; such profits, however, are included in consolidated income when a sale is made to a customer. Research and development expenses are included in the geographic area in which the expenses were incurred. Investments in affiliates accounted for using the equity method are included in Other Corporate Assets and earnings from these investments are included in Non- operating income. These affiliates primarily operate in North America. The Company's worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions. 53 - -------------------------------------------------------------------------------- MANAGEMENT'S REPORT - -------------------------------------------------------------------------------- Primary responsibility for the integrity and objectivity of the Company's financial statements rests with management. The financial statements report on management's stewardship of Company assets. These statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management's best estimates and judgments. Nonfinancial information included in the Annual Report has also been prepared by management and is consistent with the financial statements. To assure that financial information is reliable and assets are safeguarded, management maintains an effective system of internal controls and procedures, important elements of which include: careful selection, training and development of operating and financial managers; an organization that provides appropriate division of responsibility, and communications aimed at assuring that Company policies and procedures are understood throughout the organization. In establishing internal controls, management weighs the costs of such systems against the benefits it believes such systems will provide. A staff of internal auditors regularly monitors the adequacy and application of internal controls on a worldwide basis. To insure that personnel continue to understand the system of internal controls and procedures, and policies concerning good and prudent business practices, the Company periodically conducts the Management's Stewardship Program for key management and financial personnel. This program reinforces the importance and understanding of internal controls by reviewing key corporate policies, procedures and systems. In addition, an ethical business practices program has been implemented to reinforce the Company's long-standing commitment to high ethical standards in the conduct of its business. The independent public accountants have audited the Company's consolidated financial statements as described in their report. Although their audits were not designed for the purpose of forming an opinion on internal controls, the Company's accounting systems, procedures and internal controls were subject to testing and other auditing procedures sufficient to enable the independent public accountants to render their opinion on the Company's financial statements. The recommendations of the internal auditors and independent public accountants are reviewed by management. Control procedures have been implemented or revised as appropriate to respond to these recommendations. No material control weaknesses have been brought to the attention of management. In management's opinion, for the year ended December 31, 1996, the internal control system was strong and accomplished the objectives discussed herein. /s/ Raymond V. Gilmartin /s/ Judy C. Lewent RAYMOND V. GILMARTIN JUDY C. LEWENT Chairman, President and Senior Vice President and Chief Executive Officer Chief Financial Officer - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- To the Stockholders and Board of Directors of Merck & Co., Inc.: We have audited the accompanying consolidated balance sheets of Merck & Co., Inc. (a New Jersey corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Merck & Co., Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York ARTHUR ANDERSEN LLP January 28, 1997 54 - -------------------------------------------------------------------------------- AUDIT COMMITTEE'S REPORT - -------------------------------------------------------------------------------- The Audit Committee of the Board of Directors is comprised of five outside directors. The members of the Committee are: Charles E. Exley Jr., Chairman; Carolyne K. Davis, Ph.D., Vice Chairman; Sir Derek Birkin; William N. Kelley, M.D., and Samuel O. Thier, M.D. The Committee held three meetings during 1996. The Audit Committee meets with the independent public accountants, management and internal auditors to assure that all are carrying out their respective responsibilities. The Audit Committee reviews the performance and fees of the independent public accountants prior to recommending their appointment, and meets with them, without management present, to discuss the scope and results of their audit work, including the adequacy of internal controls and the quality of financial reporting. Both the independent public accountants and the internal auditors have full access to the Audit Committee. /s/ Charles E. Exley Jr. Charles E. Exley Jr. Chairman, Audit Committee - -------------------------------------------------------------------------------- COMPENSATION AND BENEFITS COMMITTEE'S REPORT - -------------------------------------------------------------------------------- The Compensation and Benefits Committee is comprised of five outside directors. The members of the Committee are: H. Brewster Atwater Jr., Chairman; Lawrence A. Bossidy, Vice Chairman; William G. Bowen, Ph.D.; Johnnetta B. Cole, Ph.D., and Lloyd C. Elam, M.D. The Committee held five meetings during 1996. The Compensation and Benefits Committee's major responsibilities include providing for senior management succession and overseeing the Company's compensation and benefit programs. The Committee seeks to provide rewards which are highly leveraged to performance and clearly linked to Company and individual results. The objective is to ensure that compensation and benefits are at levels which enable Merck to attract and retain high quality employees. The Committee views stock ownership as a vehicle to align the interests of employees with those of the stockholders. A long-term focus is essential for success in the pharmaceutical industry and is encouraged by making a high proportion of executive officer compensation dependent on long-term performance and on enhancing stockholder value. /s/ H. Brewster Atwater Jr. H. BREWSTER ATWATER JR. Chairman, Compensation and Benefits Committee - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA(1) - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts) ............ 1996 1995 1994 1993 1992(2) 1991 1990 - --------------------------------------------------------------------------------------------------------------------------- Results for Year: Sales ......................... $19,828.7 $16,681.1 $14,969.8 $10,498.2 $ 9,662.5 $8,602.7 $7,671.5 Materials and production costs ............ 9,319.2 7,456.3 5,962.7 2,497.6 2,096.1 1,934.9 1,778.1 Marketing/administrative expenses .................... 3,841.3 3,297.8 3,177.5 2,913.9 2,963.3 2,570.3 2,388.0 Research/development expenses .................... 1,487.3 1,331.4 1,230.6 1,172.8 1,111.6 987.8 854.0 Equity (income) loss from affiliates ............. (600.7) (346.3) (56.6) 26.1 (25.8) 21.1 22.4 Gains on sales of specialty chemical businesses ......... -- (682.9) -- -- -- -- -- Restructuring charge .......... -- -- -- 775.0 -- -- -- Gain on joint venture formation -- -- (492.0) -- -- -- -- Provision for joint venture obligation .................. -- -- 499.6 -- -- -- -- Other (income) expense, net ... 240.8 827.6 232.8 10.1 (46.3) (78.1) (69.8) Income before taxes ........... 5,540.8 4,797.2 4,415.2 3,102.7 3,563.6 3,166.7 2,698.8 Taxes on income ............... 1,659.5 1,462.0 1,418.2 936.5 1,117.0 1,045.0 917.6 Net income .................... 3,881.3 3,335.2 2,997.0 2,166.2 2,446.6 2,121.7 1,781.2 Earnings per common share ..... $3.20 $2.70 $2.38 $1.87 $2.12 $1.83 $1.52 Dividends declared ............ 1,793.4 1,578.0 1,463.1 1,239.0 1,106.9 920.3 788.1 Dividends paid per common share $1.42 $1.24 $1.14 $1.03 $.92 $.77 $.64 Capital expenditures .......... 1,196.7 1,005.5 1,009.3 1,012.7 1,066.6 1,041.5 670.8 Depreciation .................. 521.7 463.3 475.6 348.4 290.3 242.7 231.4 - --------------------------------------------------------------------------------------------------------------------------- Year-End Position: Working capital ............... $ 2,897.4 $ 3,870.2 $ 2,291.4 $ 541.6 $ 1,241.1 $ 1,496.5 $ 939.2 Property, plant and equipment (net) ............. 5,926.7 5,269.1 5,296.3 4,894.6 4,271.1 3,504.5 2,721.7 Total assets .................. 24,293.1 23,831.8 21,856.6 19,927.5 11,086.0 9,498.5 8,029.8 Long-term debt ................ 1,155.9 1,372.8 1,145.9 1,120.8 495.7 493.7 124.1 Stockholders' equity .......... 11,970.5 11,735.7 11,139.0 10,021.7 5,002.9 4,916.2 3,834.4 - --------------------------------------------------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales ....................... 19.6% 20.0% 20.0% 20.6% 25.3% 24.7% 23.2% Average total assets ........ 16.1% 14.6% 14.3% 14.0% 24.1% 24.2% 24.1% - --------------------------------------------------------------------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions) ...... 1,213.6 1,236.1 1,257.2 1,156.5 1,153.5 1,159.9 1,172.1 Number of stockholders ........ 247,300 243,000 244,700 231,300 161,200 91,100 82,300 Number of employees ........... 49,100 45,200 47,500 47,100(3) 38,400 37,700 36,900 =========================================================================================================================== ($ in millions except per share amounts) ............ 1989 1988 1987 1986 - ---------------------------------------------------------------------------------- Results for Year: Sales ......................... $6,550.5 $5,939.5 $5,061.3 $4,128.9 Materials and production costs ............ 1,550.3 1,526.1 1,444.3 1,338.0 Marketing/administrative expenses .................... 2,013.4 1,880.3 1,684.6 1,270.0 Research/development expenses .................... 750.5 668.8 565.7 479.8 Equity (income) loss from affiliates ............. 11.5 (2.5) (2.5) (.1) Gains on sales of specialty chemical businesses ......... -- -- -- -- Restructuring charge .......... -- -- -- -- Gain on joint venture formation -- -- -- -- Provision for joint venture obligation .................. -- -- -- -- Other (income) expense, net ... (58.2) (4.2) (36.0) (32.1) Income before taxes ........... 2,283.0 1,871.0 1,405.2 1,073.3 Taxes on income ............... 787.6 664.2 498.8 397.6 Net income .................... 1,495.4 1,206.8 906.4 675.7 Earnings per common share ..... $1.26 $1.02 $.74 $.54 Dividends declared ............ 681.5 546.3 365.2 278.5 Dividends paid per common share $.55 $.43 $.27 $.21 Capital expenditures .......... 433.0 372.7 253.7 210.6 Depreciation .................. 206.4 189.0 188.5 167.2 - ---------------------------------------------------------------------------------- Year-End Position: Working capital ............... $1,502.5 $1,480.3 $ 798.3 $1,094.3 Property, plant and equipment (net) ............. 2,292.5 2,070.7 1,948.0 1,906.2 Total assets .................. 6,756.7 6,127.5 5,680.0 5,105.2 Long-term debt ................ 117.8 142.8 167.4 167.5 Stockholders' equity .......... 3,520.6 2,855.8 2,116.7 2,541.2 - ---------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales ....................... 22.8% 20.3% 17.9% 16.4% Average total assets ........ 23.2% 20.4% 16.8% 13.5% - ---------------------------------------------------------------------------------- Year-end Statistics: Average common shares outstanding (millions) ...... 1,188.3 1,186.9 1,221.2 1,253.9 Number of stockholders ........ 75,600 68,500 56,900 48,300 Number of employees ........... 34,400 32,000 31,100 30,700 ==================================================================================
(1) Amounts after 1992 include the impact of Medco from the date of acquisition on November 18, 1993. (2) Results of operations for 1992 exclude the cumulative effect of accounting changes. (3) Increase in 1993 is due to the inclusion of 10,300 Medco employees. 55
EX-21 6 MERCK & CO., INC. SUBSIDIARIES EXHIBIT 21 MERCK & CO., INC. SUBSIDIARIES as of 12/31/96 Each of the subsidiaries set forth below does business under the name stated. A subsidiary of a subsidiary is indicated by indentation under the immediate parent. All voting securities of the subsidiaries named are owned directly or indirectly by the Company, except where otherwise indicated. Country or State Name of Incorporation ---- ----------------- Chibret A/S Denmark Hangzhou MSD Pharmaceutical Company Limited/1/ China International Indemnity Ltd. Bermuda Johnson & Johnson - Merck Consumer Pharmaceuticals Company/1/ New Jersey Laboratorios Prosalud S.A. Peru MCM Vaccine Co./1/ Pennsylvania Merck-Medco Managed Care, Inc. Delaware CM Delaware Corporation Delaware DM-MG, Inc. Delaware Flex Rx of Pennsylvania, Inc. Pennsylvania Managed Care, Inc. Nevada MCCO Corp. New Jersey MCSI Corp. New Jersey Medco Containment Insurance Company of New Jersey New Jersey Medco Containment Insurance Company of New York New York Medco Containment Life Insurance Company Pennsylvania Medco Containment Services, Inc. Political Action Committee Corp. New Jersey Medco Holdings Corp. Delaware Medical Marketing Group, Inc. Delaware Medical Marketing, Inc. Delaware MMGI Corp. New Jersey Medco MM Corp. New Jersey MW Holdings, Inc. Delaware NJRE Corp. New Jersey NRx Federal Corp. Delaware NRx Services, Inc. New York National Administrative Services, Inc. Delaware National Pharmacies, Inc. New Jersey National Rx Services No. 2, Inc. Florida National Rx Services No. 2, Inc. Ohio Country or State Name of Incorporation ---- ----------------- National Rx Services No. 3, Inc. of Ohio Ohio National Rx Services, Inc. California National Rx Services, Inc. Florida National Rx Services, Inc. Ohio National Rx Services, Inc. of Mass. Massachusetts National Rx Services, Inc. of Missouri Missouri National Rx Services, Inc. of Nevada Nevada National Rx Services, Inc. of Oklahoma Oklahoma National Rx Services, Inc. of Pennsylvania Pennsylvania National Rx Services, Inc. of Texas Texas National Rx Services, Inc. of Virginia Virginia National Rx Services, Inc. of Washington Washington New York Paid Independent Practice Association No. 1, Inc. New York New York Paid Independent Practice Association No. 2, Inc. New York New York Paid Independent Practice Association No. 3, Inc. New York New York Paid Independent Practice Association No. 4, Inc. New York New York Paid Independent Practice Association No. 5, Inc. New York New York Paid Independent Practice Association No. 9, Inc. New York Paid Direct, Inc. Delaware Paid Prescriptions, Inc. Nevada Replacement Distribution Center, Inc. Ohio SysteMed, Inc. Delaware American Medical Outcomes Repository, Inc. Delaware Systemed Pharmacy, Inc. Delaware Systemed Pharmacy, Inc. Ohio Merck and Company, Incorporated Delaware Merck Capital Investment, Inc. Delaware Merck Capital Resources, Inc. Delaware MSD Technology, L.P./1/ Bermuda Merck Finance Co., Inc. Delaware Merck de Puerto Rico, Inc. Delaware Merck Enterprises Canada, Ltd. Canada Merck Foreign Sales Corporation Ltd. Bermuda Merck Holdings, Inc. Delaware Astra Merck, Inc./1/ Delaware Chugai MSD Co., Ltd./1/ Japan Frosst Laboratories, Inc. Delaware Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal 2 Country or State Name of Incorporation ---- ----------------- Hubbard Farms, Inc. Delaware Hubbard France, S.A.R.L. France Merck Resource Management, Inc. Delaware Merck Sharp & Dohme de Venezuela, C.A. Venezuela Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico Merck Sharp & Dohme de Mexico, S.A. de C.V. Mexico Merck Sharp & Dohme (I.A.) Corp. Delaware Merck Sharp & Dohme (Argentina) Inc. Delaware MSD Korea Ltd. Korea Merck Sharp & Dohme Ilaclari A.S. Turkey Merck Sharp & Dohme Industrial e Exportadora Ltda. Brazil Merck Sharp & Dohme Farmaceutica e Veterinaria Ltda. Brazil Prodome Quimica e Farmaceutica Ltda./1/ Brazil Merck Sharp & Dohme (International) Limited Bermuda Merck Sharp & Dohme (Asia) Limited Hong Kong Merck Sharp & Dohme (China) Limited Hong Kong Merck Sharp & Dohme S.A. France Merck Sharp & Dohme International Services B.V. Netherlands Merck Sharp & Dohme - Lebanon S.A.L. Lebanon Merck Sharp & Dohme L.L.C. Russian Federation Merck Sharp & Dohme (Middle East) Limited Cyprus Merck Sharp & Dohme of Pakistan Limited Pakistan Merck Sharp & Dohme Quimica de Puerto Rico, Inc. Delaware Merck Ventures, Inc. Delaware MH II Corp. Delaware Merck Sharp & Dohme Overseas Finance Luxembourg Merck Frosst Canada, Inc. Canada Merck Sharp & Dohme (Australia) Pty. Limited Australia AMRAD Corporation Limited/1/ Australia AMRAD Pharmaceuticals Ptd. Ltd./1/ Australia Merck Sharp & Dohme B.V. Netherlands Abello Farmacia, S.L./1/ Spain Financiere MSD S.A.S. France Chibret Pharmazeutische GmbH Germany Laboratoires Jean-Paul Martin S.A.S./1/ France Laboratoires Merck Sharp & Dohme Chibret SNC France Pasteur Merieux MSD S.N.C./1/ France Pasteur Merieux MSD A/S Denmark Pasteur Merieux MSD GmbH Germany Pasteur Merieux MSD Ltd. (UK) Great Britain Pasteur Merieux MSD Ltd. (Ireland) Ireland Pasteur Merieux MSD N.V. Belgium Pasteur Merieux MSD S.A. Spain Pasteur Merieux MSD S.p.A. Italy Pasteur Vaccins S.A. France Pasteur Merieux MSD Gestion S.A./1/ France 3 Country or State Name of Incorporation ---- ----------------- Hubbard Nederland B.V. Netherlands Hubbard Belgium International N.V. Belgium Hubbard Deutschland GmbH Germany Hubbard Italia SRL Italy Hubbard Poultry U.K. Limited Great Britain Logos Pharmaceuticals (Proprietary) Limited South Africa Merck Sharp & Dohme GmbH Austria Merck Sharp & Dohme (Italia) S.p.A. Italy Abiogen Farma S.p.A. Italy Istituto Di Richerche Di Biologia Molecolare S.p.A./1/ Italy MSD (Proprietary) Limited South Africa MSD Sharp & Dohme GmbH Germany Dieckmann Arzneimittel GmbH Germany Woelm Pharma GmbH & Co./1/ Germany MSD Chibropharm GmbH Germany MSD Unterstutzungskasse GmbH Germany Varipharm Arzneimittel GmbH Germany Merck Sharp & Dohme Chibret A.G. Switzerland Merck Sharp & Dohme (Holdings) Limited Great Britain British United Turkeys Limited Great Britain Centra Healthcare/1/ Great Britain Turkey Research & Development Limited Great Britain Charles E. Frosst (U.K.) Limited Great Britain Merck Sharp & Dohme Limited Great Britain Merck Sharp & Dohme Finance Europe Great Britain The MSD Foundation Limited Great Britain Thomas Morson & Son Limited Great Britain Merck Sharp & Dohme Idea, Inc. Switzerland Merck Sharp & Dohme (Sweden) A.B. Sweden Merck Sharp & Dohme Trading & Service Limited Liability Company Hungary MSD Ireland (Holdings) S.A. Luxembourg Fabrica de Productos Quimicos y Farmaceuticos Abello, S.A. Spain Fregenal Holdings S.A. Panama Frosst Iberica, S.A. Spain Laboratorios Quimico-Farmaceuticos Chibret, Lda. Portugal Merck Sharp & Dohme de Espana, S.A. Spain Merck Sharp & Dohme (Ireland) Bermuda Blue Jay Investments C.V. Netherlands MSD Ireland (Investment) Ltd. Bermuda Merck Sharp & Dohme, Limitada Portugal MSD Finance, B.V. Netherlands Neopharmed S.p.A. Italy Ruskin Limited Bermuda MSD (Norge) A/S Norway Suomen MSD Oy Finland Kiinteisto Oy Irmelinpesa/1/ Finland Kiinteisto Oy Viistotie 11 Finland 4 Country or State Name of Incorporation ---- ----------------- MSD Chimie S.A. France MSD Lakemedel (Scandinavia) Aktiebolog Sweden Prosalud Peruana S.A. Peru TELERx Marketing Inc. Pennsylvania Merck Investment Co., Inc. Delaware Merck Sharp & Dohme (Europe) Inc. Delaware Merck Sharp & Dohme Industria Quimica e Veterinaria Limitada Brazil Merck Sharp & Dohme (New Zealand) Limited New Zealand Charles E. Frosst (New Zealand) Limited New Zealand Merck Sharp & Dohme Overseas Finance N.V. Neth. Antilles Merck Sharp & Dohme (Panama) S.A. Panama Merck Sharp & Dohme Peru S.C. Peru Merck Sharp & Dohme (Philippines) Inc. Philippines MI (FDL) Holdings, Inc./1/ Delaware MSD International Holdings, Inc. Delaware Banyu Pharmaceutical Company, Ltd./1/ Japan Banyu-A.S.C. Co., Ltd. Japan Nippon Merck-Banyu Co., Ltd. Japan MSD (Japan) Co., Ltd. Japan The Du Pont Merck Pharmaceutical Company/1/ Delaware ____________ /1/own less than 100% 5 EX-24 7 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY ----------------- Each of the undersigned does hereby appoint CELIA A. COLBERT, MARY M. McDONALD and KENNETH C. FRAZIER and each of them, severally, his/her true and lawful attorney or attorneys to execute on behalf of the undersigned (whether on behalf of the Company, or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) the Form l0-K Annual Report of Merck & Co., Inc. for the fiscal year ended December 3l, l996 under the Securities Exchange Act of l934, including amendments thereto and all exhibits and other documents in connection therewith. IN WITNESS WHEREOF, this instrument has been duly executed as of the 25th day of February, l997. MERCK & CO., Inc. By /s/ Raymond V. Gilmartin --------------------------------- Raymond V. Gilmartin (Chairman of the Board, President and Chief Executive Officer) /s/ Raymond V. Gilmartin Chairman of the Board, President - ---------------------------- Raymond V. Gilmartin and Chief Executive Officer (Principal Executive Officer; Director) /s/ Judy C. Lewent Senior Vice President and Chief Financial Officer - ---------------------------- Judy C. Lewent (Principal Financial Officer) /s/ Peter E. Nugent Vice President, Controller - ---------------------------- Peter E. Nugent (Principal Accounting Officer) DIRECTORS /s/ H. Brewster Atwater, Jr. /s/ Lloyd C. Elam - -------------------------------- -------------------------------- H. Brewster Atwater, Jr. Lloyd C. Elam /s/ Derek Birkin /s/ Charles E. Exley, Jr. - -------------------------------- -------------------------------- Derek Birkin Charles E. Exley, Jr. /s/ Lawrence A. Bossidy /s/ William N. Kelley - -------------------------------- -------------------------------- Lawrence A. Bossidy William N. Kelley /s/ William G. Bowen /s/ Edward M. Scolnick - -------------------------------- -------------------------------- William G. Bowen Edward M. Scolnick /s/ Johnnetta B. Cole /s/ Samuel O. Thier - -------------------------------- -------------------------------- Johnnetta B. Cole Samuel O. Thier EXHIBIT 24 I, Nancy V. Van Allen, Assistant Secretary of MERCK & CO., Inc., a Corporation duly organized and existing under the laws of the State of New Jersey, do hereby certify that the following is a true copy of a resolution adopted at a meeting of the Directors of said Corporation held in New York City, New York, on February 25, l997, duly called in accordance with the provisions of the By-Laws of said Corporation, and at which a quorum of Directors was present: "Special Resolution No. 4 - 1997 ------------------------------- RESOLVED, that the proposed form of Form l0-K Annual Report of the Company for the fiscal year ended December 3l, l996 presented to this meeting is hereby approved with such changes as the proper officers of the Company, with the advice of counsel, deem appropriate; and RESOLVED, that each officer and director who may be required to execute the aforesaid Form l0-K Annual Report or any amendments thereto (whether on behalf of the Company or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) is hereby authorized to execute a power of attorney appointing Celia A. Colbert, Mary M. McDonald and Kenneth C. Frazier and each of them, severally, his/her true and lawful attorney or attorneys to execute in his/her name, place and stead (in any such capacity) such Form l0-K Annual Report and any and all amendments thereto and any and all exhibits and other documents necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys to have power to act with or without the others, and to have full power and authority to do and perform in the name and on behalf of each of said officers and directors, or both, as the case may be, every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any such officer or director might or could do in person." IN WITNESS WHEREOF, I have hereunto subscribed my signature and affixed the seal of the Corporation this 17th day of March, l997. [Corporate Seal] /s/ Nancy V. Van Allen ----------------------- Assistant Secretary EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR-ENDED DECEMBER 31, 1996 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 1,352 829 2,656 0 2,149 7,727 8,726 2,800 24,293 4,829 1,156 0 0 4,968 7,003 24,293 19,829 19,829 9,319 9,319 1,487 0 139 5,541 1,660 3,881 0 0 0 3,881 3.20 3.13 1. NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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