Merck & Co., Inc.
One Merck Drive
P.O. Box 100
Whitehouse Station, NJ 08889-0100
December 12, 2002
Mr. Jonathan G. Katz
Secretary, U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Proposed Rule: Conditions for Use of Non-GAAP Financial Measures
File No. S7-43-02
Dear Mr. Katz:
Merck & Co., Inc. is a New Jersey based corporation with its principal place of business at One Merck Drive, P.O. Box 100, Whitehouse Station, New Jersey 08889-0100. The Company is a global research-driven pharmaceutical products and services organization that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health and provides pharmacy benefit management services. We are pleased to respond to the request for comment by the Securities and Exchange Commission (the "Commission") on its proposal contained in Release No. 33-8145, Proposed Rule: Conditions for Use of Non-GAAP Financial Measures (the "Release").
We applaud the SEC's efforts in the area of non-GAAP financial reporting measures and have long supported this initiative as conveyed in our October 2001 letter to the FASB on their Financial Performance Reporting project in which we stated: "...pro forma reporting, whereby certain companies adjust historical results to exclude not only the effects of unusual or nonrecurring events but also certain discretionary items, is an issue that demands further review. The proliferation of alternative and inconsistent financial performance measures undermines high quality financial reporting which is essential to well-informed investment decisions and efficient capital markets. Because many of these problematic reporting practices appear in companies' earnings releases, this topic should be pursued as a collaborative effort among all relevant regulatory bodies to ensure that all potential areas of abuse are appropriately addressed." We are pleased that the Commission, as directed by the Sarbanes-Oxley Act, has taken on this relevant and timely issue. As we reviewed the Release, however, we did note certain areas requiring additional clarification or consideration upon which we have commented below.
It appears that certain non-GAAP financial measures, which would be prohibited in historical earnings releases (e.g., non-GAAP per-share measures, measures that exclude items identified as unusual that are reasonably likely to recur, etc.), could continue to be used in forward-looking announcements, which would be subject only to the more limited provisions of the Release's proposed Regulation G. The inconsistency of having two sets of rules for non-GAAP measures will be problematic, particularly as companies that have provided prospective forecasts incorporating these otherwise prohibited measures may be called upon to explain actual performance relative to those forecasts. We believe the requirements for SEC filings and for other announcements of non-GAAP financial information should be consistent and we support the more stringent criteria set forth in the proposed amendment to Regulation S-K.
Moreover, while registrants should be afforded flexibility in preparing the non-GAAP to GAAP reconciliations so the information can be conveyed in the most relevant manner, the staff may want to set forth some guidelines to ensure that reconciliations are presented consistently and provide an appropriate level of detail. Clarifications regarding the format of the reconciliations (e.g., narrative versus tabular presentations) and placement of the reconciliations within the associated documents may be useful in implementation.
Thank you for the opportunity to provide comments on the proposed rule regarding the use of non-GAAP financial measures. We would be pleased to discuss our views with you at your convenience.
/s/ Richard C. Henriques
Richard C. Henriques
Vice President, Controller
Merck & Co., Inc.