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The following is an excerpt from a 10-K SEC Filing, filed by MERCK & CO. INC. on 2/28/2012.
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MERCK & CO., INC. - 10-K - 20120228 - BUSINESS
Item 1. Business.

Merck & Co., Inc. (“Merck” or the “Company”) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The Company’s operations are principally managed on a products basis and are comprised of four operating segments, which are the Pharmaceutical, Animal Health, Consumer Care and Alliances segments, and one reportable segment, which is the Pharmaceutical segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. Additionally, the Company has consumer care operations that develop, manufacture and market over-the-counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets.

For financial information and other information about the Pharmaceutical segment, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” below.

All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted. All other trademarks or services marks are those of their respective owners.

Overview

During 2011, the Company focused on accelerating revenue growth, reducing costs to drive efficiencies, allocating resources to drive future growth by making strategic investments in product launches, as well as in the emerging markets, and advancing and augmenting its research and development pipeline.

Worldwide sales totaled $48.0 billion in 2011, an increase of 4% compared with $46.0 billion in 2010. Foreign exchange favorably affected global sales performance by 2%. The revenue increase was driven largely by growth in Januvia (sitagliptin) and Janumet (sitagliptin/metformin hydrochloride HCI), treatments for type 2 diabetes, Singulair (montelukast sodium), a medicine for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis, Isentress (raltegravir), an antiretroviral therapy for use in combination therapy for the treatment of HIV-1 infection, Gardasil [human papillomavirus quadrivalent (types 6, 11, 16 and 18) vaccine, recombinant], a vaccine to help prevent certain diseases caused by four types of human papillomavirus (“HPV”), Simponi (golimumab), a treatment for inflammatory diseases, RotaTeq [Rotavirus Vaccine, Live, Oral, Pentavalent], a vaccine to help protect against rotavirus gastroenteritis in infants and children, Zetia (ezetimibe), a cholesterol absorption inhibitor, Pneumovax [pneumococcal vaccine polyvalent], a vaccine to help prevent pneumococcal disease, and Bridion (sugammadex), for the reversal of certain muscle relaxants used during surgery. In addition, revenue in 2011 benefited from higher sales of the Company’s animal health products and from the launch of Victrelis (boceprevir), a treatment for chronic hepatitis C. These increases were partially offset by lower sales of Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), treatments for hypertension, which lost patent protection in the United States in April 2010 and in a number of major European markets in March 2010, as well as by lower sales of Caelyx, Subutex and Suboxone as the Company no longer has marketing rights to these products. Revenue was also negatively affected by lower sales of Vytorin (ezetimibe/simvastatin), a cholesterol modifying medicine, Temodar (temozolomide), a treatment for certain types of brain tumors, ProQuad [Measles, Mumps, Rubella and Varicella Virus Vaccine Live], a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, and Varivax [Varicella Virus Vaccine Live], a vaccine to help

 

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prevent chickenpox (varicella). In addition, as discussed below, the ongoing implementation of certain provisions of U.S. health care reform legislation during 2011 resulted in further increases in Medicaid rebates and other impacts that reduced revenues. Additionally, many countries in the European Union (the “EU”) have undertaken austerity measures aimed at reducing costs in health care and have implemented pricing actions that negatively impacted sales in 2011.

In April 2011, Merck and Johnson & Johnson (“J&J”) reached an agreement to amend the agreement governing the distribution rights to Remicade (infliximab) and Simponi . This agreement concluded the arbitration proceeding J&J initiated in May 2009. Under the terms of the amended distribution agreement, Merck relinquished marketing rights for Remicade and Simponi to J&J in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific effective July 1, 2011. Merck retained exclusive marketing rights throughout Europe, Russia and Turkey (the “Retained Territories”). The Retained Territories represented approximately 70% of Merck’s 2010 revenue of $2.8 billion from Remicade and Simponi . In addition, beginning July 1, 2011, all profits derived from Merck’s exclusive distribution of the two products in the Retained Territories are being equally divided between Merck and J&J. J&J also received a one-time payment from Merck of $500 million in April 2011.

During 2011, the Company continued the advancement of drug candidates through its pipeline. Victrelis , the Company’s innovative oral medicine for the treatment of chronic hepatitis C, was approved by the U.S. Food and Drug Administration (the “FDA”) and the European Commission (the “EC”). The FDA also approved Juvisync (sitagliptin and simvastatin), a new treatment for type 2 diabetes that combines the active ingredient in the glucose-lowering medication Januvia with the cholesterol-lowering medication Zocor (simvastatin). In addition, the EC approved Zoely (NOMAC/E2), a monophasic combined oral contraceptive tablet for use by women to prevent pregnancy. Cubicin, an antibacterial agent with activity against methicillin-resistant Staphylococcus aureus (“MRSA”), for which the Company has licensed development and distribution rights in Japan, was approved for use in that country.

In February 2012, the FDA approved Janumet XR (sitagliptin and metformin HCI extended-release), a new treatment for type 2 diabetes that combines sitagliptin, which is the active component of Januvia , with extended-release metformin in a once-daily formulation; Cosopt PF (dorzolamide hydrochloride-timolol maleate ophthalmic solution) 2.0%/0.5%, Merck’s preservative-free formulation of Cosopt , indicated for the reduction of elevated intraocular pressure in appropriate patients with open-angle glaucoma or ocular hypertension; and Zioptan (tafluprost ophthalmic solution), a preservative-free prostaglandin analogue ophthalmic solution.

The Company also received additional indications for several of its existing products. During 2011, the FDA approved an expanded age indication for Zostavax [Zoster Vaccine Live], a vaccine to help prevent shingles (herpes zoster), to include adults ages 50 to 59. In addition, the FDA approved Sylatron (peginterferon alfa-2b) for Injection for the adjuvant treatment of melanoma in patients with microscopic or gross nodal involvement. Also, Simponi received an indication in the EU for use in combination with methotrexate in adults with severe, active and progressive rheumatoid arthritis not previously treated with methotrexate, having been shown to reduce the rate of progression of joint damage as measured by X-ray and to improve physical function. In January 2012, the FDA approved the use of Isentress , in combination with other antiretroviral medicines, for the treatment of HIV-1 infection in pediatric patients two years of age and older and weighing at least 10 kg.

The Company currently has two candidates under review with the FDA: MK-8669, ridaforolimus, for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy and MK-0653C, Zetia combined with atorvastatin for the treatment of primary or mixed hyperlipidemia. MK-8669 is also under review in the EU.

The Company currently has 19 candidates in Phase III development and anticipates filing a New Drug Application (“NDA”) with the FDA with respect to certain of these candidates in 2012 including MK-4305, suvorexant, an investigational treatment for insomnia; MK-8616, Bridion , a medication for the reversal of certain muscle relaxants used during surgery; and V503, a nine-valent HPV vaccine. The Company also anticipates filings in 2013 for, among others, MK-0822, odanacatib, an investigational treatment for osteoporosis, and MK-0524A, Tredaptive (extended-release niacin/laropiprant/simvastatin), which is under development for the treatment of atherosclerosis.

Merck continues to pursue opportunities that have the potential to drive both near- and long-term growth. During 2011, the Company completed a variety of transactions including the acquisition of Inspire

 

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Pharmaceuticals, Inc., a specialty pharmaceutical company focused on developing and commercializing ophthalmic products. Additionally, the Company entered into transactions designed to strengthen its presence in emerging markets in the longer term.

Merck continues to realize cost savings across all areas of the Company. These savings result from various actions, including the Merger Restructuring Program discussed below, previously announced ongoing cost reduction activities, as well as from non-restructuring-related activities. As of the end of 2011, the Company has realized approximately $2.9 billion in annual net cost savings from these activities since the merger of legacy Merck & Co., Inc. and Schering-Plough Corporation (“Schering-Plough”) on November 3, 2009 (the “Merger”).

In July 2011, the Company announced the latest phase of its global restructuring program (the “Merger Restructuring Program”) that was initiated in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. As part of this latest phase, the Company expects to reduce its workforce measured at the time of the Merger by an additional 12% to 13% across the Company worldwide. A majority of the workforce reductions in this phase of the Merger Restructuring Program relate to manufacturing (including Animal Health), administrative and headquarters organizations. Previously announced workforce reductions of approximately 17% in earlier phases of the program primarily reflect the elimination of positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company will continue to hire employees in strategic growth areas of the business as necessary. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis which may result in future restructuring actions. The Company recorded total pretax restructuring costs of $1.8 billion in 2011, $1.8 billion in 2010 and $1.5 billion in 2009 related to this program. The restructuring actions under the Merger Restructuring Program are expected to be substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related, which are expected to be substantially completed by 2015, with the total cumulative pretax costs estimated to be approximately $5.8 billion to $6.6 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects the Merger Restructuring Program to yield annual savings by the end of 2013 of approximately $3.5 billion to $4.0 billion and annual savings upon completion of the program of approximately $4.0 billion to $4.6 billion.

During 2011, the Company continued to be affected by the U.S. health care reform legislation that was enacted in 2010 as additional provisions went into effect. Beginning in 2011, the law requires pharmaceutical manufacturers to pay a 50% discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $150 million was recorded as a reduction to revenue in 2011 related to the estimated impact of this provision of health care reform. Also, the Company recorded $162 million of expenses for the annual health care reform fee, which the Company was required to pay beginning in 2011. The law also increased mandated Medicaid rebates, which reduced revenues by approximately $179 million and $170 million in 2011 and 2010, respectively.

Effective December 1, 2011, Richard T. Clark, chairman, retired from the Company and the Merck Board of Directors. Kenneth C. Frazier, Merck’s president and chief executive officer, was elected by the Board to serve as chairman following Mr. Clark’s retirement.

In November 2011, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.42 per share from $0.38 per share.

Earnings per common share assuming dilution attributable to common shareholders (“EPS”) for 2011 were $2.02, which reflect a net unfavorable impact resulting from acquisition-related costs, restructuring costs, as well as the charge related to the settlement of the arbitration proceeding with J&J discussed above, partially offset by the favorable impact of certain tax items and gains on the disposition of the Company’s interest in the Johnson & Johnson°Merck Consumer Pharmaceuticals Company joint venture and the sale of certain manufacturing facilities and related assets. Non-GAAP EPS in 2011 were $3.77 excluding these items (see “Non-GAAP Income and Non-GAAP EPS” below).

 

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Product Sales

Sales (1) of the Company’s products were as follows:

 

Years Ended December 31    2011      2010      2009  

Pharmaceutical:

        

Cardiovascular

        

Zetia

   $ 2,428       $ 2,297       $ 403   

Vytorin

     1,882         2,014         441   

Integrilin

     230         266         46   

Diabetes and Obesity

        

Januvia

     3,324         2,385         1,922   

Janumet

     1,363         954         658   

Diversified Brands

        

Cozaar/Hyzaar

     1,663         2,104         3,561   

Zocor

     456         468         558   

Propecia

     447         447         440   

Claritin Rx

     314         296         71   

Remeron

     241         223         38   

Vasotec/Vaseretic

     231         255         311   

Proscar

     223         216         291   

Infectious Disease

        

Isentress

     1,359         1,090         752   

PegIntron

     657         737         149   

Cancidas

     640         611         617   

Primaxin

     515         610         689   

Invanz

     406         362         293   

Avelox

     322         316         66   

Noxafil

     230         198         34   

Crixivan/Stocrin

     192         206         206   

Rebetol

     174         221         36   

Victrelis

     140                   

Neurosciences and Ophthalmology

        

Maxalt

     639         550         575   

Cosopt/Trusopt

     477         484         503   

Oncology

        

Temodar

     935         1,065         188   

Emend

     419         378         317   

Intron A

     194         209         38   

Respiratory and Immunology

        

Singulair

     5,479         4,987         4,660   

Remicade

     2,667         2,714         431   

Nasonex

     1,286         1,219         165   

Clarinex

     621         623         101   

Arcoxia

     431         398         358   

Simponi

     264         97         4   

Asmanex

     206         208         37   

Proventil

     155         210         26   

Dulera

     96         8           

Vaccines (2)

        

Gardasil

     1,209         988         1,118   

ProQuad/M-M-R II/Varivax

     1,202         1,378         1,369   

RotaTeq

     651         519         522   

Pneumovax

     498         376         346   

Zostavax

     332         243         277   

Women’s Health and Endocrine

        

Fosamax

     855         926         1,100   

NuvaRing

     623         559         88   

Follistim AQ

     530         528         96   

Implanon

     294         236         37   

Cerazette

     268         209         35   

Other pharmaceutical (3)

     3,521         3,879         1,263   

Total Pharmaceutical segment sales

     41,289         39,267         25,236   

Other segment sales (4)

     6,327         6,059         2,114   

Total segment sales

     47,616         45,326         27,350   

Other (5)

     431         661         78   
     $ 48,047       $ 45,987       $ 27,428   

 

(1)

Sales of legacy Schering-Plough products in 2009 are included only for the post-Merger period. In addition, prior to the Merger, substantially all sales of Zetia and Vytorin were recognized by the MSP Partnership and the results of Merck’s interest in the MSP Partnership were recorded in Equity income from affiliates . As a result of the Merger, the MSP Partnership became wholly owned by the Company; accordingly, all sales of MSP Partnership products after the Merger are reflected in the table above. Sales of Zetia and Vytorin in 2009 reflect Merck’s sales of these products in Latin America which was not part of the MSP Partnership, as well as sales of these products for the post-Merger period in 2009.

 

(2)  

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

 

(3)  

Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.

 

(4)  

Reflects other non-reportable segments, including Animal Health and Consumer Care, and revenue from the Company’s relationship with AZLP primarily relating to sales of Nexium, as well as Prilosec . Revenue from AZLP was $1.2 billion, $1.3 billion and $1.4 billion in 2011, 2010 and 2009, respectively.

 

(5)

Other revenues are primarily comprised of miscellaneous corporate revenues, third-party manufacturing sales, sales related to divested products or businesses and other supply sales not included in segment results.

 

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Pharmaceutical

The Company’s pharmaceutical products include therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. Certain of the products within the Company’s franchises are as follows:

Cardiovascular:     Zetia (marketed as Ezetrol outside the United States); Vytorin (marketed as Inegy outside the United States); and Integrilin (eptifibatide) Injection, a treatment for patients with acute coronary syndrome.

Diabetes and Obesity:     Januvia and Janumet for the treatment of type 2 diabetes.

Diversified Brands:     Cozaar ; Hyzaar ; Zocor; Propecia (finasteride), a product for the treatment of male pattern hair loss; Claritin Rx (loratadine) for treatment of seasonal outdoor allergies and year-round indoor allergies ; Remeron (mirtazapine), an antidepressant; Vasotec (enalapril maleate) and Vaseretic (enalapril maleate-hydrochlorothiazide) , hypertension and/or heart failure products ; and Proscar (finasteride), a urology product for the treatment of symptomatic benign prostate enlargement.

Infectious Disease:     Isentress ; PegIntron (peginterferon alpha-2b), a treatment for chronic hepatitis C; Cancidas (caspofungin acetate), an anti-fungal product; Primaxin (imipenem and cilastatin sodium), an anti-bacterial product ; Invanz (ertapenem sodium) for the treatment of certain infections; Avelox (moxifloxacin), which the Company only markets in the United States, a broad-spectrum fluoroquinolone antibiotic for certain respiratory and skin infections; Noxafil (posaconazole) for the prevention of invasive fungal infections; Crixivan (indinavir sulfate) and Stocrin (efavirenz), antiretroviral therapies for the treatment of HIV infection; Rebetol (ribavirin, USP) Capsules and Oral Solution for use in combination with PegIntron or Intron A (interferon alpha-2b, recombinant) for treating chronic hepatitis C; and Victrelis .

Neurosciences and Ophthalmology:     Maxalt (rizatriptan benzoate) , a product for acute treatment of migraine; and Cosopt and Trusopt (dorzolamide hydrochloride ophthalmic solution), ophthalmic products.

Oncology:     Temodar (marketed as Temodal outside the United States); Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting; and Intron A for Injection, marketed for chronic hepatitis B and C and numerous anticancer indications worldwide, including as adjuvant therapy for malignant melanoma.

Respiratory and Immunology:     Singulair ; Remicade ; Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms; Clarinex (desloratadine), a non-sedating antihistamine; Arcoxia (etoricoxib) for the treatment of arthritis and pain; Simponi; Asmanex Twisthaler (mometasone furoate inhalation powder), an oral dry-powder corticosteroid inhaler for first-line maintenance treatment of asthma in patients 4 and older; Proventil HFA (albuterol sulfate) inhalation aerosol for the relief of bronchospasm in patients 12 years or older; and Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate), a fixed-dose combination asthma treatment in patients 12 years of age or older.

Vaccines:     Gardasil; ProQuad ; M-M-R II [Measles, Mumps and Rubella Virus Vaccine Live], a vaccine to help prevent measles, mumps and rubella; Varivax ; RotaTeq; Pneumovax; and Zostavax , a vaccine to help prevent shingles (herpes zoster) in patients aged 50 and older.

Women’s Health and Endocrine:     Fosamax (alendronate sodium) for the treatment and prevention of osteoporosis ; NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive ring ; Follistim AQ (follitropin beta injection), a biological fertility treatment; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant; and Cerazette (desogestrel), a progestin only oral contraceptive.

Animal Health

The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. Principal marketed products in this segment include:

Livestock Products:     Nuflor antibiotic range for use in cattle and swine; Bovilis / Vista vaccine lines for infectious diseases in cattle; Banamine bovine and swine anti-inflammatory; Estrumate for the treatment of fertility disorders in cattle; Regumate / Matrix fertility management for swine and horses; Resflor combination broad-spectrum antibiotic and non-steroidal anti-inflammatory drug for bovine respiratory disease; Zilmax and Revalor to

 

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improve production efficiencies in beef cattle; M+Pac swine pneumonia vaccine; and Porcilis vaccine line for infectious diseases in swine.

Poultry Products:     Nobilis / Innovax, vaccine lines for poultry; and Paracox and Coccivac coccidiosis vaccines.

Companion Animal Products:     Nobivac / Continuum vaccine lines for flexible dog and cat vaccination; Otomax / Mometamax / Posatex ear ointments for acute and chronic otitis; Caninsulin / Vetsulin diabetes mellitus treatment for dogs and cats; Panacur / Safeguard broad-spectrum anthelmintic (de-wormer) for use in many animals; and Scalibor / Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.

Aquaculture Products:     Slice parasiticide for sea lice in salmon; Aquavac / Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor antibiotic for farm-raised fish.

Consumer Care

The Consumer Care segment develops, manufactures and markets over-the-counter, foot care and sun care products. Principal products in this segment include:

Over-the-Counter Products:     Claritin non-drowsy antihistamines; MiraLAX treatment for occasional constipation; Coricidin HBP decongestant-free cold/flu medicine for people with high blood pressure; Afrin nasal decongestant spray; and Zegerid OTC treatment for frequent heartburn.

Foot Care:     Dr. Scholl’s foot care products; Lotrimin topical antifungal products; and Tinactin topical antifungal products and foot and sneaker odor/wetness products.

Sun Care:     Coppertone sun care lotions, sprays and dry oils.

For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Product Approvals

In February 2012, the FDA approved Zioptan (tafluprost), a preservative-free prostaglandin analog ophthalmic solution for reducing elevated intraocular pressure in patients with open-angle glaucoma or ocular hypertension. Merck has exclusive commercial rights to tafluprost in Western Europe (excluding Germany), North America, South America, Africa, the Middle East, India and Australia. Zioptan is marketed as Saflutan in certain markets outside the United States.

Also, in February 2012, the FDA approved Janumet XR , a new treatment for type 2 diabetes that combines sitagliptin, which is the active component of Januvia , with extended-release metformin. Janumet XR provides a convenient once-daily treatment option for health care providers and patients who need help to control their blood sugar.

In addition, in February 2012, the FDA approved Cosopt PF , Merck’s preservative-free formulation of Cosopt ophthalmic solution, indicated for the reduction of elevated intraocular pressure in appropriate patients with open-angle glaucoma or ocular hypertension.

In October 2011, the FDA approved Juvisync , a new treatment for type 2 diabetes that combines the glucose-lowering medication sitagliptin with the cholesterol-lowering medication Zocor . Juvisync is the first treatment option for health care providers to help patients who need the blood sugar-lowering benefits of a DPP-4 inhibitor and the cholesterol-lowering benefits of simvastatin, with the convenience of a single tablet once daily.

In August 2011, Zoely , an oral contraceptive, was granted marketing authorization by the EC for use by women to prevent pregnancy. Zoely is a combined oral contraceptive tablet containing a unique monophasic combination of two hormones: nomegestrol acetate, a highly selective progesterone-derived progestin, and 17-beta estradiol, an estrogen that is similar to the one naturally present in a woman’s body. The marketing authorization of Zoely applies to all 27 EU member states plus Iceland, Liechtenstein and Norway. Teva Pharmaceutical Industries Ltd. holds exclusive marketing rights for Zoely in France, Italy, Belgium and Spain.

 

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In May 2011, the FDA approved Victrelis , the Company’s innovative oral medicine for the treatment of chronic hepatitis C. Victrelis is approved for the treatment of chronic hepatitis C genotype 1 infection, in combination with peginterferon alfa and ribavirin, in adult patients (18 years of age and older) with compensated liver disease, including cirrhosis, who are previously untreated or who have failed previous interferon and ribavirin therapy. Victrelis is an antiviral agent designed to interfere with the ability of the hepatitis C virus to replicate by inhibiting a key viral enzyme. In July 2011, the EC approved Victrelis . The EC’s decision grants a single marketing authorization that is valid in the 27 countries that are members of the EU, as well as unified labeling applicable to Iceland, Liechtenstein and Norway. In addition to the United States, Victrelis has been launched in 19 markets including France, Germany, Canada and Brazil.

Joint Ventures

AstraZeneca LP

In 1982, Merck entered into an agreement with Astra AB (“Astra”) to develop and market Astra products in the United States. In 1994, Merck and Astra formed an equally owned joint venture that developed and marketed most of Astra’s new prescription medicines in the United States including Prilosec (omeprazole), the first in a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.

In 1998, Merck and Astra restructured the joint venture whereby Merck acquired Astra’s interest in the joint venture, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership named Astra Pharmaceuticals, L.P. (the “Partnership”), in exchange for a 1% limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99% general partner interest. The Partnership, renamed AstraZeneca LP (“AZLP”) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights.

The Company earns certain Partnership returns as well as ongoing revenue based on sales of current and future KBI products. The Partnership returns include a priority return provided for in the Partnership Agreement, a preferential return representing the Company’s share of undistributed Partnership AZLP generally accepted accounting principles (“GAAP”) earnings, and a variable return related to the Company’s 1% limited partner interest.

In conjunction with the 1998 restructuring discussed above, Astra purchased an option (the “Asset Option”) for a payment of $443 million, which was recorded as deferred income, to buy Merck’s interest in the KBI products, excluding the gastrointestinal medicines Nexium and Prilosec (the “Non-PPI Products”). In April 2010, AstraZeneca exercised the Asset Option. Merck received $647 million from AstraZeneca representing the net present value as of March 31, 2008 of projected future pretax revenue to be received by Merck from the Non-PPI Products, which was recorded as a reduction to the Company’s investment in AZLP. The Company recognized the $443 million of deferred income in 2010 as a component of Other (income) expense, net . In addition, in 1998, Merck granted Astra an option (the “Shares Option”) to buy Merck’s common stock interest in KBI and, through it, Merck’s interest in Nexium and Prilosec, exercisable in 2012. The exercise price for the Shares Option will be primarily based on the net present value of projected future pretax revenue to be received by Merck from Nexium and Prilosec as determined at the time of exercise, subject to certain true-up mechanisms. The Company believes that it is likely that AstraZeneca will exercise the Shares Option.

Sanofi Pasteur MSD

In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) formed a joint venture to market human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the then-existing EU and the European Free Trade Association. Merck and Sanofi Pasteur contributed, among other things, their European vaccine businesses for equal shares in the joint venture, known as Pasteur Mérieux MSD, S.N.C. (now Sanofi Pasteur MSD, S.N.C.). The joint venture maintains a presence, directly or through affiliates or branches, in Belgium, Italy, Germany, Spain, France, Austria, Ireland, Sweden, Portugal, the Netherlands, Switzerland and the United Kingdom and through distributors in the rest of its territory.

 

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Licenses

In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (“Centocor”), a J&J company, to market Remicade, which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize Simponi , a fully human monoclonal antibody. The Company had exclusive marketing rights to both products outside the United States, Japan and certain other Asian markets. In December 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade and Simponi , extending the Company’s rights to exclusively market Remicade to match the duration of the Company’s exclusive marketing rights for Simponi . In addition, Schering-Plough and Centocor agreed to share certain development costs relating to Simponi ’s auto-injector delivery system. On October 6, 2009, the EC approved Simponi as a treatment for rheumatoid arthritis and other immune system disorders in two presentations — a novel auto-injector and a prefilled syringe. As a result, the Company’s marketing rights for both products extend for 15 years from the first commercial sale of Simponi in the EU following the receipt of pricing and reimbursement approval within the EU.

In April 2011, Merck and J&J reached an agreement to amend the agreement governing the distribution rights to Remicade and Simponi . This agreement concluded the arbitration proceeding J&J initiated in May 2009. Under the terms of the amended distribution agreement, Merck relinquished marketing rights for Remicade and Simponi to J&J in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific effective July 1, 2011. Merck retained exclusive marketing rights throughout Europe, Russia and Turkey (the “Retained Territories”). In addition, beginning July 1, 2011, all profits derived from Merck’s exclusive distribution of the two products in the Retained Territories are being equally divided between Merck and J&J. Under the prior terms of the distribution agreement, the contribution income (profit) split, which was at 58% to Merck and 42% percent to J&J, would have declined for Merck and increased for J&J each year until 2014, when it would have been equally divided. J&J also received a one-time payment from Merck of $500 million in April 2011.

Competition and the Health Care Environment

Competition

The markets in which the Company conducts its business and the pharmaceutical industry are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, and generic drug and consumer health care manufacturers. The Company’s operations may be affected by technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, new information from clinical trials of marketed products or post-marketing surveillance and generic competition as the Company’s products mature. In addition, patent positions are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the recognition of an impairment charge with respect to certain products. Competitive pressures have intensified as pressures in the industry have grown. The effect on operations of competitive factors and patent disputes cannot be predicted.

Pharmaceutical competition involves a rigorous 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 positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as joint ventures and licenses, and has been refining 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 displacements, even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in slowed sales growth for the Company’s products in that therapeutic category.

 

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The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by competitors.

The Company’s consumer care operations face competition from other consumer health care businesses as well as retailers who carry their own private label brands. The Company’s competitive position is affected by several factors, including regulatory and legislative issues, scientific and technological advances, the quality and price of the Company’s products, promotional efforts and the growth of lower cost private label brands.

Health Care Environment

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health Service entities and “disproportionate share” hospitals (hospitals meeting certain criteria). Under the Federal Vaccines for Children entitlement program, the U.S. Centers for Disease Control and Prevention funds and purchases recommended pediatric vaccines at a public sector price for the immunization of Medicaid-eligible, uninsured, Native American and certain underinsured children. Merck is contracted to provide its pediatric vaccines to this program.

Against this backdrop, the United States enacted major health care reform legislation in 2010, which began to be implemented in 2011. Various insurance market reforms advanced in 2011 and will continue through full implementation in 2014. The new law is expected to expand access to health care to more than 32 million Americans by the end of the decade who did not previously have regular access to health care. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also requires pharmaceutical manufacturers to pay a 50% discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, pharmaceutical manufacturers are now required to pay an annual health care reform fee. The total annual industry fee was $2.5 billion in 2011 and will be $2.8 billion in 2012. The fee is assessed on each company in proportion to its share of sales to certain government programs, such as Medicare and Medicaid.

The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the Patient Protection and Affordable Care Act. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures.

In addition, in the effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative proposals that have been debated but not enacted in prior years. These types of revenue generating or cost saving proposals include direct price controls in the Medicare prescription drug program (Part D). In addition, Congress may again consider proposals to allow, under certain conditions, the importation of medicines from other countries. It remains very uncertain as to what proposals, if any, may be included as part of future federal budget deficit reduction proposals that would directly or indirectly affect the Company.

In 2011 and 2010, global efforts toward health care cost containment were intense in several European countries. Many countries have announced austerity measures, which include the implementation of pricing actions to reduce prices of generic and patented drugs. While the Company is taking steps to mitigate the impact in the EU, the austerity measures have negatively affected the Company’s revenue performance in 2011 and 2010 and the Company anticipates the austerity measures will continue to negatively affect revenue performance in 2012.

Additionally, the global economic downturn and the sovereign debt issues in certain European countries, among other factors, have adversely impacted foreign receivables in certain European countries. While the

 

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Company continues to receive payment on these receivables, these conditions have resulted in an increase in the average length of time it takes to collect accounts receivable outstanding thereby adversely affecting cash flows.

The full impact of U.S. health care reform, as well as continuing budget pressures on governments around the world, cannot be predicted at this time.

In addressing cost containment pressures, the Company continues to attempt to demonstrate that its medicines provide value to patients and to those who pay for health care. In markets with historically low rates of government health care spending, the Company encourages those governments to increase their investments in order to improve their citizens’ access to appropriate health care, including medicines.

Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its business practices to better meet customer needs and believes that it is well positioned to respond to the evolving health care environment and market forces.

Government Regulation

The pharmaceutical industry is subject to regulation by regional, country, state and local agencies around the world. Governmental regulation and legislation tend to focus on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement, especially related to the pricing of products.

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 and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States.

The EU has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. 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 believes that it will continue to be able to conduct its operations, including launching new drugs into the market, in this regulatory environment.

Access to Medicines

As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that it has an important role to play in helping to improve access to its products around the world. The Company’s efforts in this regard are wide-ranging. For example, the Company has been recognized for pricing many of its products through a differential pricing framework, taking into consideration such factors as a country’s level of economic development and public health need. In addition, the Merck Patient Assistance Program provides medicines and adult vaccines for free to people who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines.

Building on the Company’s own efforts, Merck has undertaken collaborations with many stakeholders to improve access to medicines and enhance the quality of life for people around the world.

For example, in 2011, Merck announced that it would launch “Merck for Mothers,” a long-term effort with global health partners to create a world where no woman has to die from preventable complications of pregnancy and childbirth. The launch includes a 10-year, $500 million initiative that applies Merck’s scientific and business expertise to making proven solutions more widely available, developing new technologies and improving public awareness, policy efforts and private sector engagement for maternal mortality.

Merck has also in the past provided funds to The Merck Company Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health. One of these

 

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partnerships is The African Comprehensive HIV/AIDS Partnership in Botswana, a collaboration with the government of Botswana and the Bill & Melinda Gates Foundation, that was renewed in 2010 and supports Botswana’s response to HIV/AIDS through a comprehensive and sustainable approach to HIV prevention, care, treatment, and support.

Privacy and Data Protection

The Company is subject to a number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the Company’s business, including recently enacted laws and regulations in the United States, Europe, Asia and Latin America and increased enforcement activity in the United States and other developed markets.

Distribution

The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccines are sold primarily to physicians, wholesalers, physician distributors and government entities. The Company’s professional representatives communicate the effectiveness, safety and value of the Company’s pharmaceutical and vaccine products to health care professionals in private practice, group practices, hospitals and managed care organizations. The Company sells its animal health products to veterinarians, distributors and animal producers. The Company’s over-the-counter, foot care and sun care products are sold through wholesale and retail drug, food chain and mass merchandiser outlets.

Raw Materials

Raw materials and supplies, which are generally available from multiple sources, are purchased worldwide and are normally available in quantities adequate to meet the needs of the Company’s business.

Patents, Trademarks and Licenses

Patent protection is considered, in the aggregate, to be of material importance in the Company’s marketing of its 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 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.

The Food and Drug Administration Modernization Act (the “FDA Modernization Act”) includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. These exclusivity provisions were re-authorized by the Prescription Drug User Fee Act passed in September 2007. Current U.S. patent law provides additional patent term under Patent Term Restoration for periods when the patented product was under regulatory review by the FDA.

 

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Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key U.S. patent protection (including Patent Term Restoration and Pediatric Exclusivity) for major marketed products:

 

Product

 

Year of Expiration (in the U.S.) (1)

Maxalt (2)

  2012

Singulair

  2012

Cancidas

  2013 (compound)/2015 (composition)

Propecia (3)

  2013 (formulation/use)

Asmanex

  2014 (use)/2018 (formulation)

Avelox (4)

  2014

Dulera

  2014 (use)/2020 (combination)

Integrilin

  2014 (compound)/2015 (use/formulation)

Nasonex

  2014 (use/formulation)/2018(formulation)

Temodar (5)

  2014

Emend

  2015

Follistim AQ

  2015

PegIntron

  2015 (conjugates)/2020 (Mature IFN-alpha)

Invanz

  2016 (compound)/2017 (composition)

Zostavax

  2016 (use)

Zetia (6) /Vytorin

  2017

Zioptan ( 7 )

  2017

NuvaRing

  2018 (delivery system)

Noxafil

  2019

RotaTeq

  2019

Clarinex ( 8 )

  2020 (formulation)

Comvax

  2020 (method of making/vectors)

Intron A

  2020

Recombivax

  2020 (method of making/vectors)

Saphris/Sycrest

  2020 (use/formulation) (with pending Patent Term Restoration)

Januvia/Janumet/Juvisync/Janumet XR

  2022 (compound)/2026 (salt)

Isentress

  2023

Victrelis

  2024 (with pending Patent Term Restoration)

Gardasil

  2026 (method of making/use/product by process)

 

(1 )  

Compound patent unless otherwise noted.

 

(2)  

The Company has determined that it will not enforce an additional patent that was set to expire in 2014.

 

(3)  

By agreement, one generic manufacturer has been given the right to enter the market in January 2013 and another has been given the right to enter in July 2013.

 

(4)  

By agreement, a generic manufacturer may launch a generic in the U.S. as early as February 2014. Six months Pediatric Exclusivity may extend this date to August 2014.

 

(5)  

By agreement, a generic manufacturer may launch a generic in the U.S. in August 2013.

 

(6)  

By agreement, a generic manufacturer may launch a generic version of Zetia in the U.S. in December 2016.

 

(7)  

An application for Patent Term Restoration of the Zioptan compound patent will be filed within the prescribed time limits. The Company expects five years of Patent Term Restoration.

 

( 8 )  

By virtue of litigation settlements, certain generic manufacturers have been given the right to enter the U.S. market in 2012.

While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical 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 novel compositions and formulations; and (iv) in the United States and certain other countries, market exclusivity that may be available under relevant law. The effect of product patent expiration on pharmaceutical products 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.

 

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The patent that provides U.S. market exclusivity for Singulair , the Company’s largest selling product, expires in August 2012. The Company expects that within the two years following patent expiration, it will lose substantially all U.S. sales of Singulair , with most of those declines coming in the first full year following patent expiration. Also, the patent that provides market exclusivity for Singulair will expire in a number of major European markets in February 2013 and the Company expects sales of Singulair in those markets will decline significantly thereafter. The patent that provides market exclusivity for Singulair in Japan will expire in 2016. In addition, the patent that provides U.S. market exclusivity for Maxalt will expire in December 2012. Also, the patent that provides market exclusivity for Maxalt will expire in a number of major European markets in February 2013. The Company anticipates that sales in the United States and in these European markets will decline significantly after these patent expiries.

Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by a general increase in the number of incentives for and use of generic products. Additionally, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties.

The Company has the following key U.S. patent protection for drug candidates under review:

 

Under Review

       

Currently Anticipated

Year of Expiration (in the U.S.) (1)(2)(3)(4)

MK-0653C (ezetimibe/atorvastatin)

   

2017

MK-8669 (ridaforolimus)

   

2023

The Company also has the following key U.S. patent protection for drug candidates in Phase III development:

 

Phase III Drug Candidate

 

Currently Anticipated

Year of Expiration (in the U.S.) (1)(2)(3)(4)

MK-7243 (grass pollen)

  N/A (5)

MK-3641 (ragweed)

  N/A (5)

MK-0524A (extended-release niacin/laropiprant)

  2023

MK-0524B (extended-release niacin/laropiprant/simvastatin)

  2023

MK-0859 (anacetrapib)

  2027

MK-6621 (vernakalant i.v.)

  2020

MK-3415A ( Clostridium difficile infection)

  2026

MK-8175A (NOMAC/E2)

  2017 (use)

MK-0431E (sitagliptin/atorvastatin)

  2022 (compound)/2026 (salt)

MK-8962 (corifollitropin alfa for injection)

  2018 (formulation)

MK-7009 (vaniprevir)

  2027

V212 (inactivated varicella zoster virus (“VZV”) vaccine)

  2016 (method of use)

V503 (HPV vaccine (9 valent))

  2024 (compound)/2026 (method of making/use)

MK-4305 (suvorexant)

  2029

MK-8616 ( Bridion )

  2021

MK-0822 (odanacatib)

  2024

MK-3814 (preladenant)

  2021

V419 (pediatric hexavalent combination vaccine)

  2020 (method of making/vectors)

MK-5348 (vorapaxar)

  2024

 

(1)  

Compound patent unless otherwise noted.

 

(2)  

Subject to any future patent term restoration of up to five years and six month pediatric market exclusivity, either or both of which may be available.

 

(3)  

Depending on the circumstances surrounding any final regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved; the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product.

 

(4)  

Regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in many cases, may provide more efficacious or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs 5 years from first marketing approval of a new chemical entity, extended to 7 years for an orphan drug indication and 12 years from first marketing approval of a biological product.

 

(5)  

Twelve years of data exclusivity from first marketing approval is expected.

 

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For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 12. “Contingencies and Environmental Liabilities” below.

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.

Royalty income in 2011 on patent and know-how licenses and other rights amounted to $367 million. Merck also incurred royalty expenses amounting to $1.3 billion in 2011 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 14,100 people are employed in the Company’s research activities. Research and development expenses were $8.5 billion in 2011, $11.1 billion in 2010, and $5.8 billion in 2009 (which included restructuring costs in all years, as well as $587 million and $2.4 billion of in-process research and development impairment charges in 2011 and 2010, respectively). The Company maintains its ongoing commitment to research over a broad range of therapeutic areas and clinical development in support of new products.

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. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the Company’s research and development resources on disease areas of unmet medical needs, scientific opportunity and commercial opportunity. Merck is managing its research and development portfolio across diverse approaches to discovery and development by balancing investments appropriately on novel, innovative targets with the potential to have a major impact on human health, on developing best-in-class approaches, and on delivering maximum value of its approved medicines and vaccines through new indications and new formulations. Another important component of the Company’s science-based diversification is based on expanding the Company’s portfolio of modalities to include not only small molecules and vaccines, but also biologics (peptides, small proteins, antibodies) and RNAi. Further, Merck has moved to diversify its portfolio through its Merck BioVentures division, which has the potential to harness the market opportunity presented by biological medicine patent expiries by delivering high quality follow-on biologic products to enhance access for patients worldwide. The Company supplements its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as new technologies.

The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, insomnia, neurodegenerative diseases, ophthalmics, osteoporosis, respiratory diseases and women’s health.

In the development of human 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 preclinical tests and controlled clinical evaluation. Before a new drug or vaccine may be marketed in the United States, recorded data on preclinical and clinical experience are included in the NDA for a drug or the Biologics License Application (“BLA”) for a vaccine or biologic submitted to the FDA for the required approval.

Once the Company’s scientists discover a new small molecule compound or biologics molecule that they believe has promise to treat a medical condition, the Company commences preclinical testing with that compound. Preclinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable preclinical data, the Company will initiate clinical testing in accordance with established regulatory requirements. The clinical testing begins with Phase I studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase II studies are initiated to determine the efficacy of the compound in the affected population, define appropriate dosing for the compound, as well as identify any adverse

 

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effects that could limit the compound’s usefulness. If data from the Phase II trials are satisfactory, the Company commences large-scale Phase III trials to confirm the compound’s efficacy and safety. Upon completion of those trials, if satisfactory, the Company submits regulatory filings with the appropriate regulatory agencies around the world to have the product candidate approved for marketing. 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.

Vaccine development follows the same general pathway as for drugs. Preclinical testing focuses on the vaccine’s safety and ability to elicit a protective immune response (immunogenicity). Pre-marketing vaccine clinical trials are typically done in three phases. Initial Phase I clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase II studies are dose-ranging studies. Finally, Phase III trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies. Also during this stage, the proposed manufacturing facility undergoes a pre-approval inspection during which production of the vaccine as it is in progress is examined in detail.

In the United States, the FDA review process begins once a complete NDA is submitted and received by the FDA. Pursuant to the Prescription Drug User Fee Act, the FDA review period targets for NDAs or supplemental NDAs is either six months, for priority review, or ten months, for a standard review. Within 60 days after receipt of an NDA, the FDA determines if the application is sufficiently complete to permit a substantive review. The FDA also assesses, at that time, whether the application will be granted a priority review or standard review. Once the review timelines are defined, the FDA will generally act upon the application within those timelines, unless a major amendment has been submitted (either at the Company’s own initiative or the FDA’s request) to the pending application. If this occurs, the FDA may extend the review period to allow for review of the new information, but by no more than three months. Extensions to the review period are communicated to the Company. The FDA can act on an application either by issuing an approval letter, or by issuing a Complete Response Letter stating that the application will not be approved in its present form and describing all deficiencies that the FDA has identified. Should the Company wish to pursue an application after receiving a Complete Response Letter, it can resubmit the application with information that addresses the questions or issues identified by the FDA in order to support approval. Resubmissions are subject to review period targets, which vary depending on the underlying submission type and the content of the resubmission.

Research and Development Update

The Company currently has two candidates under regulatory review in the United States and internationally.

MK-8669, ridaforolimus, is an investigational oral mTOR (mammalian target of rapamycin) inhibitor under development for the treatment of metastatic soft-tissue or bone sarcomas in patients who had a favorable response to chemotherapy that was accepted for standard review by the FDA in September 2011. In August 2011, the European Medicines Agency (“EMA”) accepted the marketing authorization application for ridaforolimus. As part of an exclusive license agreement with ARIAD Pharmaceuticals, Inc. (“ARIAD”), Merck is responsible for the development and worldwide commercialization of ridaforolimus. ARIAD has an option to co-promote ridaforolimus for sarcoma in the United States subject to execution of a co-promotion agreement.

MK-0653C, Zetia combined with atorvastatin was accepted for standard review by the FDA for the treatment of primary or mixed hyperlipidemia. In response to notice of the Company’s filing, Pfizer Inc. (“Pfizer”) filed a patent infringement lawsuit in U.S. District Court against the Company asserting certain Pfizer patent rights in respect of atorvastatin. This lawsuit has the potential to bar FDA approval of the Company’s NDA for up to 30 months (until January 6, 2014) subject to being shortened or lengthened by a court decision, or shortened by an agreement between the parties.

In addition to the candidates under regulatory review, the Company has 19 drug candidates in Phase III development targeting a broad range of diseases. The Company plans to file five major products for approval between 2012 and 2013, including: suvorexant (insomnia), Bridion (reversal of neuromuscular blockade), V503 (cervical cancer vaccine), odanacatib (osteoporosis) and Tredaptive (atherosclerosis).

MK-4305, suvorexant, is an investigational dual orexin receptor antagonist, a potential new approach to the treatment of insomnia. Orexins are neuropeptides (chemical messengers) that are released by specialized

 

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neurons in the hypothalamus region of the brain and are believed to be an important regulator of the brain’s sleep-wake process. In February 2012, Merck announced that based on the positive results of two pivotal Phase III efficacy trials for suvorexant, the Company anticipates filing an NDA for MK-4305 with the FDA in 2012.

MK-8616, Bridion , is a medication for the reversal of certain muscle relaxants used during surgery. Bridion is currently approved and has been launched in many countries outside of the United States. Prior to the Merger, Schering-Plough received a Not-Approvable Letter from the FDA for Bridion . The Company has conducted additional clinical trials to address the FDA’s comments and plans to file an NDA for Bridion with the FDA in 2012.

V503 is a nine-valent HPV vaccine in development to help protect against certain HPV-related diseases. V503 incorporates antigens against five additional cancer-causing HPV types as compared with Gardasil . The Phase III clinical program, which includes an event-driven clinical trial, is ongoing and Merck continues to anticipate filing a BLA for V503 with the FDA in 2012.

MK-0822, odanacatib, is an oral, once-weekly investigational treatment for osteoporosis in post-menopausal women. Osteoporosis is a disease that reduces bone density and strength and results in an increased risk of bone fractures. Odanacatib is a cathepsin K inhibitor that selectively inhibits the cathepsin K enzyme. Cathepsin K is known to play a central role in the function of osteoclasts, which are cells that break down existing bone tissue, particularly the protein components of bone. Inhibition of cathepsin K is a novel approach to the treatment of osteoporosis. Odanacatib continues to be studied to determine its safety and potential effects on hip, vertebral and non-vertebral fractures in an event-driven Phase III clinical trial. The Company anticipates filing an NDA for MK-0822 with the FDA in 2013.

MK-0524A is a drug candidate that combines extended-release niacin and a novel flushing inhibitor, laropiprant. MK-0524A has demonstrated the ability to lower LDL-cholesterol (“LDL-C” or “bad” cholesterol), raise HDL-cholesterol (“HDL-C” or “good” cholesterol) and lower triglycerides with significantly less flushing than traditional extended-release niacin alone. High LDL-C, low HDL-C and elevated triglycerides are risk factors associated with heart attacks and strokes. In April 2008, Merck received a Not-Approvable Letter from the FDA in response to its NDA for MK-0524A. At a meeting to discuss the letter, the FDA stated that additional efficacy and safety data were required and suggested that Merck wait for the results of the HPS2-THRIVE (Treatment of HDL to Reduce the Incidence of Vascular Events) event-driven cardiovascular outcomes study, which is expected to be completed in 2012. The Company anticipates filing an NDA with the FDA for MK-0524A in 2013. MK-0524A has been approved in more than 60 countries outside the United States for the treatment of dyslipidemia, particularly in patients with combined mixed dyslipidemia (characterized by elevated levels of LDL-C and triglycerides and low HDL-C) and in patients with primary hypercholesterolemia (heterozygous familial and non-familial) and is marketed as Tredaptive (or as Cordaptive in certain countries). Tredaptive should be used in patients in combination with statins when the cholesterol lowering effects of statin monotherapy is inadequate. Tredaptive can be used as monotherapy only in patients in whom statins are considered inappropriate or not tolerated.

MK-8962, Elonva , corifollitropin alpha injection, which has been approved in the EU for controlled ovarian stimulation in combination with a GnRH antagonist for the development of multiple follicles in women participating in an assisted reproductive technology program, is currently in Phase III development in the United States. Based on feedback from the FDA, additional data from an ongoing Phase III trial will be required at the time of filing. Merck now anticipates filing an NDA for Elonva with the FDA in 2013.

MK-6621, vernakalant i.v., is an investigational candidate for the treatment of atrial fibrillation which is being marketed as Brinavess in the EU. Merck acquired exclusive rights to develop and commercialize vernakalant i.v., as well as exclusive worldwide rights to oral formulations of vernakalant. Prior to Merck’s acquisition of the rights to vernakalant i.v. in Canada, Mexico and the United States, the program was placed on clinical hold by the FDA and the Phase III, ACT V trial was suspended in 2010. ACT V has now been terminated. In the United States, the program remains on hold. The Company plans to have further discussions with the FDA.

MK-8175A, NOMAC/E2, which is being marketed as Zoely in the EU, is an oral contraceptive for use by women to prevent pregnancy. NOMAC/E2 is a combined oral contraceptive tablet containing a unique monophasic combination of two hormones: nomegestrol acetate, a highly selective, progesterone-derived progestin, and 17-beta

 

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estradiol, an estrogen that is similar to the one naturally present in a women’s body. In November 2011, Merck received a Complete Response Letter from the FDA for NOMAC/E2. The Company is planning to conduct an additional clinical study requested by the FDA and update the application in the future.

MK-5348, vorapaxar, is a thrombin receptor antagonist being developed for the prevention of thrombosis, or clot formation, and the reduction of cardiovascular events. Vorapaxar has been evaluated in two major clinical outcomes studies in different patient groups: TRACER (Thrombin Receptor Antagonist for Clinical Event Reduction in Acute Coronary Syndrome), a clinical outcomes trial in patients with acute coronary syndrome, and TRA-2P (Thrombin Receptor Antagonist in Secondary Prevention of atherothrombotic ischemic events), a secondary prevention study in patients with a previous heart attack or ischemic stroke, or with documented peripheral vascular disease. In February 2012, Merck announced the top-line results of the TRA-2P study. TRA-2P showed that the addition of vorapaxar to standard of care significantly reduced the risk of the protocol-specified primary endpoint of the composite of cardiovascular death, heart attack (myocardial infarction), stroke or urgent coronary revascularization compared to standard of care. There was a significant increase in bleeding, including intracranial hemorrhage, among patients taking vorapaxar in addition to standard of care, although there was a lower risk of intracranial hemorrhage in patients without a history of stroke. The full results of TRA-2P will be presented at the American College of Cardiology Scientific Sessions in March 2012. In November 2011, researchers presented results from the TRACER outcomes study at the American Heart Association Scientific Sessions, and the results have been published. TRACER did not achieve its primary endpoint. In January 2011, Merck and the external study investigators announced that the combined Data and Safety Monitoring Board (“DSMB”) for the two clinical trials had reviewed the available safety and efficacy data and recommended that patients in the TRACER trial discontinue study drug and investigators close out the study. Merck will review the data from both TRA-2P and TRACER with the investigators and other outside experts to help better understand the profile of this investigational medicine in specific patient populations and to determine next steps, including potential regulatory filings.

MK-0524B is a drug candidate that combines the novel approach to raising HDL-C and lowering triglycerides from extended-release niacin combined with laropiprant with the proven benefits of simvastatin in one combination product. Merck anticipates filing an NDA for MK-0524B with the FDA in 2014.

MK-7243 is an investigational allergy immunotherapy sublingual tablet (“AIT”) in Phase III development for grass pollen allergy for which the Company has North American rights. AIT is a dissolvable oral tablet that is designed to prevent allergy symptoms by inducing a protective immune response against allergies, thereby treating the underlying cause of the disease. Merck is investigating AIT for the treatment of grass pollen allergic rhinoconjunctivitis in both children and adults. The Company anticipates filing an NDA for MK-7243 with the FDA in 2013.

MK-3641, an AIT for ragweed allergy, is also in Phase III development for the North American market. The Company anticipates filing an NDA for MK-3641 with the FDA in 2013.

MK-3814, preladenant, is a selective adenosine 2a receptor antagonist in Phase III development for treatment of Parkinson’s disease. The Company anticipates filing an NDA for preladenant with the FDA in 2014.

MK-3415A, an investigational candidate for the treatment of Clostridium difficile infection, is a combination of two monoclonal antibodies used to treat patients with a single infusion. The Company anticipates filing an NDA for MK-3415A with the FDA in 2014.

V212 is an inactivated varicella-zoster virus vaccine in development for the prevention of herpes zoster. The Company is enrolling two Phase III trials, one in autologous hematopoietic cell transplant patients and the other in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The Company anticipates filing a BLA first with the autologous hematopoietic cell transplant data in 2014 and filing for the second indication in cancer patients at a later date.

V419 is an investigational hexavalent pediatric combination vaccine, which contains components of current vaccines, designed to help protect against six potentially serious diseases: diphtheria, tetanus, whooping cough ( Bordetella pertussis ), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b, and hepatitis B that is being developed in collaboration with Sanofi-Pasteur. The Company anticipates filing a BLA for V419 with the FDA in 2014.

 

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MK-0431E combines Januvia and atorvastatin in a single tablet and is being developed for the treatment of diabetes and atherosclerosis. The Company anticipates filing an NDA for MK-0431E with the FDA in 2014.

MK-7009, vaniprevir, is an investigational, oral twice daily protease inhibitor for the treatment of chronic hepatitis C virus. The drug is in Phase III trials in Japan. The Company anticipates filing a new drug application for MK-7009 in Japan in 2014.

MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (“CETP”) that is being investigated in lipid management to raise HDL-C and reduce LDL-C. Based on the results from the Phase III DEFINE (Determining the EFficacy and Tolerability of CETP INhibition with AnacEtrapib) safety study of 1,623 patients with coronary heart disease or coronary heart disease risk equivalents, the Company initiated a large, event-driven cardiovascular clinical outcomes trial REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification) involving patients with preexisting vascular disease. The Company continues to anticipate filing an NDA for anacetrapib with the FDA beyond 2015.

In 2011, Merck discontinued the clinical development program for telcagepant, the Company’s investigational calcitonin gene-related peptide receptor antagonist for the treatment of acute migraine. The decision was based on an assessment of data across the clinical program. The Company also discontinued the clinical development program for MK-0431C, a combination of sitagliptin and pioglitazone, for the treatment of diabetes based on a review of the regulatory and commercial prospects for the combination drug candidate.

In 2012, Merck discontinued the clinical development program in the EU for MK-0887A, Zenhale , a fixed dose combination of two previously approved drugs for the treatment of asthma: mometasone furoate and formoterol fumarate dehydrate, which is marketed in the United States as Dulera Inhalation Aerosol.

 

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The chart below reflects the Company’s research pipeline as of February 21, 2012. Candidates shown in Phase III include specific products and the date such candidate entered into Phase III development. Candidates shown in Phase II include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Candidates in Phase I, additional indications in the same therapeutic area and additional claims, line extensions or formulations for in-line products are not shown.

 

Phase II   Phase III (Phase III entry date)   Under Review

Allergy

MK-8237, Immunotherapy (1)

 

Cancer

MK-0646 (dalotuzumab)

MK-1775

MK-2206

MK-7965 (dinaciclib)

 

Contraception, Medicated IUS

MK-8342

 

Diabetes Mellitus

MK-3102

 

Hepatitis C

MK-5172

 

Insomnia

MK-3697

MK-6096

 

Overactive Bladder

MK-4618

 

Pneumoconjugate Vaccine

V114

 

Psoriasis

MK-3222

 

Allergy

MK-7243, Grass pollen (1) (March 2008)

MK-3641, Ragweed (1)  (September  2009)

 

Atherosclerosis

MK-0524A (extended-release niacin/laropiprant) (U.S.)
(December 2005)

MK-0524B (extended-release niacin/laropiprant/
simvastatin) (July 2007)

MK-0859 (anacetrapib) (May 2008)

 

Atrial Fibrillation

MK-6621 (vernakalant i.v.) (U.S.) (August 2003) (2)

 

Clostridium difficile Infection

MK-3415A (November 2011)

 

Contraception

MK-8175A (NOMAC/E2) (4) (U.S.) (June 2006)

 

Diabetes and Atherosclerosis

MK-0431E (sitagliptin/atorvastatin) (October 2011)

 

Fertility

MK-8962 (corifollitropin alfa for injection) (U.S.) (July 2006)

 

Hepatitis C

MK-7009 (vaniprevir) (3) (June 2011)

 

Herpes Zoster

V212 (inactivated VZV vaccine) (December 2010)

 

HPV-Related Cancers

V503 (HPV vaccine (9 valent)) (September 2008)

 

Insomnia

MK-4305 (suvorexant) (December 2009)

 

Neuromuscular Blockade Reversal

MK-8616 ( Bridion ) (U.S.) (November 2005)

 

Osteoporosis

MK-0822 (odanacatib) (September 2007)

 

Parkinson’s Disease

MK-3814 (preladenant) (July 2010)

 

Pediatric Hexavalent Combination Vaccine

V419 (April 2011)

 

Thrombosis

MK-5348 (vorapaxar) (September 2007)

 

Atherosclerosis

MK-0653C (ezetimibe/atorvastatin) (U.S.)

Sarcoma

 

MK-8669 (ridaforolimus) (U.S.) (EU)

 

 

 

    Footnotes:
(1)    North American rights only.
(2 )   Prior to Merck’s acquisition of rights to
     vernakalant i.v. in Canada, Mexico and the
     United States, the program was placed on
     clinical hold by the FDA in 2010. The
     suspended Phase III trial, ACT V has now
     been terminated. The program remains on
     hold in the United States. The Company
     plans to have further discussions with the
      FDA.
(3)   For development in Japan only.
(4)   In November 2011, Merck received a
     Complete Response Letter from the FDA for
     NOMAC/E2 (MK-8175A). The Company is
     planning to conduct an additional clinical
     study requested by the FDA and update the
     application in the future.

Employees

As of December 31, 2011, the Company had approximately 86,000 employees worldwide, with approximately 33,100 employed in the United States, including Puerto Rico. Approximately 31% of worldwide employees of the Company are represented by various collective bargaining groups.

In February 2010, the Company commenced actions under the Merger Restructuring Program in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. In July 2011, the Company announced the latest phase of the Merger Restructuring Program during which the Company expects to reduce its workforce measured at the time of the

 

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Merger by an additional 12% to 13% across the Company worldwide. A majority of the workforce reductions in this phase of the Merger Restructuring Program relate to manufacturing (including Animal Health), administrative and headquarters organizations. Previously announced workforce reductions of approximately 17% in earlier phases of the program primarily reflect the elimination of positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. Since inception of the Merger Restructuring Program through December 31, 2011, Merck has eliminated approximately 18,430 positions comprised of employee separations, as well as the elimination of contractors and more than 2,500 positions that were vacant at the time of the Merger.

In October 2008, Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions — 6,800 active employees and 400 vacancies — across the Company worldwide. Since inception of the 2008 Restructuring Program through December 31, 2011, Merck has eliminated approximately 6,250 positions comprised of employee separations and the elimination of contractors and vacant positions.

Prior to the Merger, Schering-Plough commenced a Productivity Transformation Program, which was designed to reduce and avoid costs and increase productivity. The position eliminations associated with this program are largely complete.

Environmental Matters

The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $25 million in 2011, $16 million in 2010 and $17 million in 2009, and are estimated at $93 million in the aggregate for the years 2012 through 2016. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and providing for these costs and, in management’s opinion, the liabilities for all environmental matters, which are probable and reasonably estimable, have been accrued and totaled $171 million at December 31, 2011. Although it is not possible to predict with certainty the outcome of these environmental matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $133 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.

Merck believes that climate change could present risks to its business. Some of the potential impacts of climate change to its business include increased operating costs due to additional regulatory requirements, physical risks to the Company’s facilities, water limitations and disruptions to its supply chain. These potential risks are integrated into the Company’s business planning including investment in reducing energy, water use and greenhouse gas emissions. The Company does not believe these risks are material to its business at this time.

Geographic Area Information

The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United States were 57% of sales in 2011, 56% of sales in 2010 and 47% of sales in 2009. The increase in proportion of sales outside the United States in 2010 was primarily due to the inclusion of results of Schering-Plough following the close of the Merger.

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.

Merck has expanded its operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time.

 

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Financial information about geographic areas of the Company’s business is discussed in Item 8. “Financial Statements and Supplementary Data” below.

Available Information

The Company’s Internet website address is www.merck.com . The Company will make available, free of charge at the “Investors” portion of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

The Company’s corporate governance guidelines and the charters of the Board of Directors’ six standing committees are available on the Company’s website at www.merck.com/about/leadership and all such information is available in print to any stockholder who requests it from the Company.

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