As filed with the Securities and Exchange Commission on February 27, 201428, 2017
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K
(MARK ONE)
 ý☒Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
  For the Fiscal Year Ended December 31, 2013
or
2016
 oor
☐Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
  
For the transition period from                  to                 

Commission File No. 1-6571

Merck & Co., Inc.
One Merck Drive2000 Galloping Hill Road
Whitehouse Station,Kenilworth, N. J. 08889-010007033
(908) 423-1000740-4000
Incorporated in New Jersey 
I.R.S. Employer
Identification No. 22-1918501
Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class 
Name of Each Exchange
on which Registered
Common Stock ($0.50 par value) New York Stock Exchange
1.125% Notes due 2021New York Stock Exchange
0.500% Notes due 2024New York Stock Exchange
1.875% Notes due 2026New York Stock Exchange
2.500% Notes due 2034New York Stock Exchange
1.375% Notes due 2036New York Stock Exchange
Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2014: 2,940,622,461.2017: 2,745,571,067.
Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 20132016 based on closing price on June 30, 2013: $135,893,000,000.2016: $159,263,000,000.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý☒      No  o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o☐      No  ý☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý☒      No  o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý☒      No  o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filerý☒Accelerated filero☐Non-accelerated filero☐Smaller reporting companyo☐
  (Do (Do not check if a smaller reporting company) 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o☐      No  ý☒
Documents Incorporated by Reference:
Document Part of Form 10-K
Proxy Statement for the Annual Meeting of
Shareholders to be held May 27, 2014, 23, 2017,
to be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report
 Part III

Table of Contents

Table of Contents
   Page
Part I
Item 1.
Business
1
Item 1A.
Risk Factors
1718
 
Cautionary Factors that May Affect Future Results
27
Item 1B.
Unresolved Staff Comments
28
Item 2.
Properties
28
Item 3.
Legal Proceedings
2928
Item 4.
Mine Safety Disclosures
2928
 
Executive Officers of the Registrant
29
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
3230
Item 6.
Selected Financial Data
3432
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3533
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
7368
Item 8.
Financial Statements and Supplementary Data
7469
 (a)
Financial Statements
7469
  
Notes to Consolidated Financial Statements
7873
  
Report of Independent Registered Public Accounting Firm
130126
 (b)
Supplementary Data
131127
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
132128
Item 9A.
Controls and Procedures
132128
 
Management’s Report
132128
Item 9B.
Other Information
133129
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
134130
Item 11.
Executive Compensation
134130
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
135131
Item 13.
Certain Relationships and Related Transactions, and Director Independence
135131
Item 14.
Principal Accountant Fees and Services
135131
Part IV
Item 15.
Exhibits and Financial Statement Schedules
136132
Item 16.
Form 10-K Summary
135
 
Signatures
142136

Table of Contents

PART I
 
Item 1.Business.
Merck & Co., Inc. (“Merck”(Merck or the “Company”)Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health and consumer care products, which it markets directly and through its joint ventures.products. The Company’s operations are principally managed on a products basis and are comprised ofinclude four operating segments, which are the Pharmaceutical, Animal Health, Consumer CareHealthcare Services and Alliances segments, and one reportablesegments.
The Pharmaceutical segment which is the Pharmaceuticalonly reportable 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. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets, which were previously part of the joint venture.
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’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014. On October 1, 2014, the Company has consumer care operationsdivested its Consumer Care segment that develop, manufacturedeveloped, manufactured and marketmarketed over-the-counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets, as well as club stores and specialty channels.products. The Company was incorporated in New Jersey in 1970.
For financial information and other information about the Company’s segments, 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.
Product Sales
SalesTotal Company sales, including sales of the Company’s top pharmaceutical products, as well as total sales of animal health and consumer care products, were as follows:
($ in millions)2013 2012 20112016 2015 2014
Total Sales$44,033
 $47,267
 $48,047
$39,807
 $39,498
 $42,237
Pharmaceutical37,437
 40,601
 41,289
35,151
 34,782
 36,042
Januvia4,004
 4,086
 3,324
Zetia2,658
 2,567
 2,428
Januvia/Janumet6,109
 6,014
 6,002
Zetia/Vytorin3,701
 3,777
 4,166
Gardasil/Gardasil 9
2,173
 1,908
 1,738
ProQuad/M-M-R II/Varivax
1,640
 1,505
 1,394
Keytruda1,402
 566
 55
Isentress1,387
 1,511
 1,673
Remicade2,271
 2,076
 2,667
1,268
 1,794
 2,372
Gardasil1,831
 1,631
 1,209
Janumet1,829
 1,659
 1,363
Isentress1,643
 1,515
 1,359
Vytorin1,643
 1,747
 1,882
Nasonex1,335
 1,268
 1,286
ProQuad/M-M-R II/Varivax
1,306
 1,273
 1,202
Cubicin1,087
 1,127
 25
Singulair1,196
 3,853
 5,479
915
 931
 1,092
Pneumovax 23
641
 542
 746
Animal Health3,362
 3,399
 3,253
3,478
 3,331
 3,454
Consumer Care(1)1,894
 1,952
 1,840
—
 3
 1,547
Other Revenues(1)(2)
1,340
 1,315
 1,665
1,178
 1,382
 1,194
(1) 
On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products.
(2)
Other revenues are primarily comprised of alliance revenue, miscellaneous corporate revenues, including revenue hedging activities, and third-party manufacturing sales. On October 1, 2013, the Company divested a substantial portion of its third-party manufacturing sales.

1
Table of Contents

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:
Primary Care and Women’s Health
Cardiovascular: Zetia (ezetimibe) (marketed as Ezetrol in most countries outside the United States); and Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States); and Atozet (ezetimibe and atorvastatin) (marketed in certain countries outside of the United States), cholesterol modifying medicines.
Diabetes and Obesity:Diabetes: Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of type 2 diabetes.
Respiratory: NasonexGeneral Medicine and Women’s Health: (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms; SingulairNuvaRing (montelukast)(etonogestrel/ethinyl estradiol vaginal ring), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis;vaginal contraceptive product; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant/Nexplanon (etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive implant; Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate), a combination medicine for the treatment of asthma; and Asmanex Twisthaler (mometasone furoate inhalation powder), an inhaled corticosteroid for first-line maintenance treatment of asthma in patients 4 years of age and older.
Women’s Health and Endocrine: NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive ring; Fosamax (alendronate sodium) for the treatment and prevention of osteoporosis; Follistim AQ (follitropin beta injection) (marketed as Puregon in most countries outside the United States), a fertility treatment;treatment.
Hospital and Specialty
Hepatitis: ImplanonZepatier (etonogestrel implant), a single-rod subdermal contraceptive implant;(elbasvir and Cerazette (desogestrel), a progestin only oral contraceptive.
Other: Arcoxia (etoricoxib)grazoprevir) for the treatment of arthritis and pain, which the Company markets outside the United States;adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with ribavirin in certain patient populations; and AveloxPegIntron (moxifloxacin)(peginterferon alpha-2b) and Victrelis (boceprevir), a broad-spectrum fluoroquinolonemedicines for the treatment of chronic HCV.
HIV: Isentress (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection.
Hospital Acute Care: Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections or bacteremia, when caused by designated susceptible organisms; Noxafil (posaconazole) for the prevention of invasive fungal infections; Invanz (ertapenem sodium) for the treatment of certain respiratoryinfections; Cancidas (caspofungin acetate), an anti-fungal product; Bridion (sugammadex) Injection, a medication for the reversal of two types of neuromuscular blocking agents used during surgery; and skin infections, which the Company only markets in the United States.
HospitalPrimaxin (imipenem and Specialtycilastatin sodium), an anti-bacterial product.
Immunology: Remicade (infliximab), a treatment for inflammatory diseases; and Simponi (golimumab), a once-monthly subcutaneous treatment for the treatment ofcertain inflammatory diseases, which the Company markets in Europe, Russia and Turkey.
Oncology
Infectious Disease:Keytruda Isentress (raltegravir), an antiretroviral therapy for use in combination therapy(pembrolizumab) for the treatment of HIV-1 infection;previously untreated metastatic non-small-cell lung cancer (NSCLC) in patients whose tumors express high levels of PD-L1 (Tumor Proportion Score [TPS] of 50% or more) and previously treated metastatic NSCLC in patients whose tumors express PD-L1 (TPS of 1% or more), as well as advanced melanoma and previously treated recurrent or metastatic head and neck cancer; CancidasEmend (caspofungin acetate), an anti-fungal product; PegIntron (peginterferon alpha-2b), a treatment for chronic hepatitis C; Invanz (ertapenem sodium) for the treatment of certain infections; Victrelis (boceprevir), a treatment for chronic hepatitis C; and Noxafil (posaconazole)(aprepitant) for the prevention of invasive fungal infections.
Oncology:chemotherapy-induced and post-operative nausea and vomiting; and Temodar (temozolomide) (marketed as Temodal outside the United States), a treatment for certain types of brain tumors; and Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting.tumors.
Other: Cosopt (dorzolamide hydrochloride-timolol maleate ophthalmic solution), which the Company markets outside the United States, and Trusopt (dorzolamide hydrochloride ophthalmic solution), ophthalmic products; Bridion (sugammadex sodium injection), a medication for the reversal of certain muscle relaxants used during surgery; and Integrilin (eptifibatide), a treatment for patients with acute coronary syndrome.
Diversified Brands
Respiratory: Singulair (montelukast), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis; and Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms.
Other: Cozaar (losartan potassium) and Hyzaar (losartan potassium and hydrochlorothiazide), treatments for hypertension; PrimaxinArcoxia (imipenem(etoricoxib) for the treatment of arthritis and cilastatinpain, which the Company markets outside the United States; Fosamax (alendronate sodium), an anti-bacterial product; (marketed as Fosamac in Japan) for the treatment and prevention of osteoporosis; andZocor (simvastatin), a statin for modifying cholesterol; cholesterol.Propecia (finasteride), a product for the treatment of male pattern hair loss; Clarinex (desloratadine), a non-sedating antihistamine; Remeron (mirtazapine), an antidepressant; Claritin Rx (loratadine) for treatment of seasonal outdoor allergies and year-round indoor allergies; Proscar (finasteride), a urology product for the treatment of symptomatic benign prostate enlargement; and Maxalt (rizatriptan benzoate), a product for acute treatment of migraine.

Vaccines
Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), a vaccinevaccines to help prevent certain diseases caused by fourcertain types of human papillomavirus (“HPV”)(HPV); ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps,

2
Table of Contents

rubella and varicella; M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella); Zostavax (Zoster Vaccine Live), a vaccine to help prevent shingles (herpes zoster); Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease; and RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and childrenchildren; and .Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease.
Animal Health
The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. Principal products in this segment include:
Livestock Products: Nuflor (Florfenicol) antibiotic range for use in cattle and swine; Bovilis/Vista vaccine lines for infectious diseases in cattle; Banamine (Flunixin meglumine) bovine and swine anti-inflammatory; Estrumate (cloprostenol sodium) for the treatment of fertility disorders in cattle; Regumate/Matrix (altrenogest) fertility management for swine and horses;swine; Resflor (florfenicol and flunixin meglumine), a combination broad-spectrum antibiotic and non-steroidal anti-inflammatory drug for bovine respiratory disease; Zuprevo (Tildipirosin) for bovine respiratory disease; Zilmax (zilpaterol hydrochloride) and Revalor (trenbolone acetate and estradiol) to improve production efficiencies in beef cattle; Safe-Guard (fenbendazole) de-wormer for cattle; M+Pac(Mycoplasma Hyopneumoniae Bacterin) swine pneumonia vaccine; and Porcilis (Lawsonia intracellularis baterin) and Circumvent (Porcine Circovirus Vaccine, Type 2, Killed Baculovirus Vector) vaccine linelines for infectious diseases in swine.
Poultry Products: Nobilis/Innovax (Live Marek’s Disease Vector), vaccine lines for poultry; and Paracox and Coccivac coccidiosis vaccines.
Companion Animal Products: Bravecto (fluralaner), a line of products that kills fleas and ticks in dogs for up to 12 weeks; Nobivac vaccine lines for flexible dog and cat vaccination; Otomax (Gentamicin sulfate, USP; Betamethasone valerate USP; and Clotrimazole USP ointment)/Mometamax (Gentamicin sulfate, USP, Mometasone Furoate Monohydrate and Clotrimazole, USP, Otic Suspension)/Posatex (Orbifloxacin, Mometasone Furoate Monohydrate and Posaconazole, Suspension) ear ointments for acute and chronic otitis; Caninsulin/Vetsulin (porcine insulin zinc suspension) diabetes mellitus treatment for dogs and cats; Panacur (fenbendazole)/Safeguard (fenbendazole) broad-spectrum anthelmintic (de-wormer) for use in many animals; Regumate (altrenogest) fertility management for horses; Prestige vaccine line for horses; and Activyl/Scalibor/Activyl (Indoxacrb)/Scalibor (Deltamethrin)/Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.
Aquaculture Products: Slice (Emamectin benzoate) parasiticide for sea lice in salmon; Aquavac (Avirulent Live Culture)/Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; and Aquaflor (Florfenicol) 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 for relief of occasional constipation; Coricidin HBP decongestant-free cold/flu medicine for people with high blood pressure; Afrin nasal decongestant spray; Zegerid OTC treatment for frequent heartburn; and Oxytrol For Women, a treatment for overactive bladder in women.
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.
Joint Ventures
AstraZeneca LP
Product Approvals
In 1982,January 2016, Merck entered into an agreementannounced that the U.S. Food and Drug Administration (FDA) approved Zepatier for the treatment of adult patients with Astra AB (“Astra”) to developchronic HCV GT1 or GT4 infection, with ribavirin in certain patient populations.
In February 2016, Merck announced that the FDA approved a supplemental new drug application for single-dose Emend for injection for the prevention of delayed nausea and market Astra productsvomiting in adults receiving initial and repeat courses of moderately emetogenic chemotherapy.
In May 2016, the United States. In 1994, MerckCompany received marketing approval from the European Medicines Agency (EMA) for Bravecto Spot-On Solution for cats and Astra formed an equally owned joint venture that developeddogs and, marketed most of Astra’s new prescription medicinesin July 2016, the Company received approval in the United States including Prilosec (omeprazole)to market the product under the tradename Bravecto Topical.

In July 2016, the European Commission (EC) approved Zepatier, 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 interestonce-daily, single tablet combination therapy 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”),treatment of chronic HCV GT1 or GT4 infection, with ribavirin in exchange for a 1% limited partner interest. Astra contributedcertain patient populations.
In August 2016, Merck announced that 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.

3FDA approved
Keytruda

The Company earns certain Partnership returns as well as ongoing revenue based on sales of 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 2014, AstraZeneca has the option to purchase Merck’s interest in KBI based in part on the value of Merck’s interest in Nexium and Prilosec. AstraZeneca’s option is exercisable between March 1, 2014 and April 30, 2014. If AstraZeneca chooses to exercise this option, the closing date is expected to be June 30, 2014. Under the amended agreement, AstraZeneca will make a payment to Merck upon closing of $327 million, reflecting an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018. The exercise price will also include an additional amount equal to a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. The Company believestreatment of patients with recurrent or metastatic head and neck cancer with disease progression on or after platinum-containing chemotherapy.
In October 2016, Merck announced that it is likely that AstraZeneca will exercise its option in 2014. If AstraZeneca exercises its option, the Company willFDA approved Keytruda for the first-line treatment of patients with NSCLC whose tumors have high PD-L1 expression (TPS of 50% or more) as determined by an FDA-approved test, with no longer record equity income from AZLP and supply sales to AZLP will terminate. EGFR or ALK genomic tumor aberrations.
In addition, in October 2016, Merck announced that the Company will recognize a non-cash pretax gainFDA approved Zinplava Injection 25 mg/mL. Zinplava is indicated to reduce recurrence of approximately $700 million.Clostridium difficile infection (CDI) in patients 18 years of age or older who are receiving antibacterial drug treatment of CDI and are at high risk for CDI recurrence.
On January 3, 2017, Merck announced that the EC has approved Keytruda for the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression (TPS of 50% or more) with no EGFR or ALK positive tumor mutations.
Joint Ventures
Sanofi Pasteur MSD
In 1994,On December 31, 2016, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) formed a(Sanofi) terminated the equally-owned joint venture formed by the companies in 1994 to develop and market human vaccines in Europe and to collaborate in the development of combination vaccines for distribution in the then-existing European Union (“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.Europe.
Licenses
In 1998, a subsidiary of Schering-Plough Corporation (“Schering-Plough”)(Schering-Plough) entered into a licensing agreement with Centocor Ortho Biotech Inc. (“Centocor”)(Centocor), a Johnson & Johnson (“J&J”)(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 has exclusive marketing rights to both products throughout Europe, Russia and Turkey. In December 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade lost market exclusivity in major European markets in February 2015 and Simponi, extending the Company’s rightsCompany no longer has market exclusivity in any of its marketing territories. The Company continues to exclusivelyhave market Remicade to match the duration of the Company’s exclusive marketing rightsexclusivity 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 European Commission (“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’sall of its 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.territories. All profits derived from Merck’s exclusive distribution of the two products in these countries are equally divided between Merck and J&J.
Competition and the Health Care Environment
Competition
The markets in which the Company conducts its business and the pharmaceutical industry in general 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 consumermanufacturers and animal health care manufacturers.companies. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent positionsrights 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 payment of royalties or in the recognition of an impairment charge with respect to intangible assets

4

associated with 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,licensing arrangements, 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 or reduced sales for the Company’s products in that therapeutic category.
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 and Government Regulation
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 hospitals serving a disproportionate share of low income or uninsured patients.
Against this backdrop, the United States enacted major health care reform legislation in 2010 (the Patient Protection and Affordable Care Act (ACA)), which began to be implemented in 2010. Various insurance market reforms have advanced and will continue through full implementationstate and federal insurance exchanges were launched in 2014. The law is expected to expand access to health care to about 32 million Americans by the end of the decade who did not previously have insurance coverage. 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% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $280$415 million, $210$550 million and $150$430 million was recorded by Merck as a reduction to revenue in 2013, 20122016, 2015 and 2011,2014, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $2.8 billion in 2013 and will be $3.0 billion in 2014.2016 and will increase to $4.0 billion in 2017. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. The Company recorded $151$193 million, $190$173 million and $162$390 million of costs within Marketing and administrative expenses in 2013, 20122016, 2015 and 2011,2014, respectively, for the annual health care reform fee. The full impact of U.S.higher expenses in 2014 reflect final regulations on the annual health care reform cannot be predictedfee issued by the Internal Revenue Service (IRS) on July 28, 2014. The final IRS regulations accelerated the recognition criteria for the fee obligation by one year to the year in which the underlying sales used to allocate the fee occurred rather than the year in which the fee was paid. As a result of this change, Merck recorded an additional year of expense of $193 million in 2014. In February 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The Company will evaluate the financial impact of these two elements when they become effective.
There is significant uncertainty about the future of the ACA in particular and healthcare laws in general in the United States. The Company is participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of operations, financial condition or business.
Also, during 2016, the Vermont legislature passed a pharmaceutical cost transparency law. The law requires manufacturers identified by the Vermont Green Mountain Care Board to report certain product price information to the Vermont Attorney General. The Attorney General is then required to submit a report to the legislature. A number of other states have introduced legislation of this kind and the Company expects that states will continue their focus on pharmaceutical price transparency. The extent to which these proposals will pass into law is unknown at this time.
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,organizations, federal and state exchanges, 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 of 2010. ACA.
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. As an example, health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
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. These types of revenue

5

generating or cost saving proposals include additional 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 the U.S. private sector, consolidation and integration among healthcare providers is a major factor in the competitive marketplace for pharmaceutical products. Health plans and pharmacy benefit managers have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. Private third-party insurers, as well as governments, increasingly employ formularies to control costs by negotiating discounted prices in exchange for formulary inclusion. Failure to obtain timely or adequate pricing or formulary placement for Merck’s products or obtaining such pricing or placement at unfavorable pricing could adversely impact revenue. In addition to formulary tier co-pay differentials, private health insurance companies and self-insured employers have been raising co-payments required from beneficiaries, particularly for branded pharmaceuticals and biotechnology products. Private health insurance companies also are increasingly imposing utilization management tools, such as clinical protocols, requiring prior authorization for a branded product if a generic product is available or requiring the patient to first fail on one or more generic products before permitting access to a branded medicine. These same utilization management tools are also used in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. As the U.S. payer market concentrates further and as more drugs become available in generic form, pharmaceutical companies may face greater pricing pressure from private third-party payers.
In order to provide information about the Company’s pricing practices, the Company recently posted  on its website its first Pricing Action Transparency Report for the United States for the years 2010 - 2016. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010.  The report shows that the Company’s average annual net price increases (after taking sales deductions such as rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits since 2010.  Additionally, the weighted average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of the ACA. In 2016, the Company’s gross U.S. sales were reduced by 40.9% as a result of rebates, discounts and returns.
Efforts toward health care cost containment also remain intense in several European countries. Many countries have continued to announce and execute austerity measures, which include the implementation ofThe Company faces competitive pricing actions to reduce prices ofpressure resulting from generic and patented drugs and mandatory switches to genericbiosimilar drugs. While the Company is taking steps to mitigate the impact in these countries, the austerity measures continued to negatively affect the Company’s revenue performance in 2013 and the Company anticipates the austerity measures will continue to negatively affect revenue performance in 2014. In addition, a majority of countries in Europe attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, including the Company’s. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.
In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines.vaccines, which occurred in 2016. Furthermore, the government can order repricings for classes of drugs if it determines that it is appropriate under applicable rules.
Certain markets outside of the United States have also implemented other cost management strategies, such as health technology assessments (HTA), which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement. In the United States, HTAs are also being used by government and private payers.
The Company’s focus on and share of revenue from emerging markets has increased.continued. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures, such as compulsory

licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access challenges will continue in 20142017 to varying degrees in the emerging markets.
Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms 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 also subject to regulation by regional, country, state and local agencies around the world. Governmental regulation and legislation tend to focusworld focused 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.reimbursement.
Of particular importance is the U.S. Food and Drug Administration (the “FDA”),FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription

6

pharmaceuticals. In manysome 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. At the same time, the FDA has committed to expediting the development and review of products bearing the “breakthrough therapy” designation, which has accelerated the regulatory review process for medicines with this designation.
The EUEuropean Union (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, in this regulatory environment. (See “Research and Development” below for a discussion of the regulatory approval process.)
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 and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines. In 2011, Merck announced that it would launchlaunched “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Through this initiative, Merck is leveraging its scientific and business expertise to help make proven solutions more widely available, develop new technologies and improve public and policymaker awareness of these issues.
Merck has also in the past provided funds to the Merck Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health. One of these partnerships is the African Comprehensive HIV/AIDS Partnership in Botswana, a collaboration with the government of Botswana 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 significant number of privacy and data protection laws and regulations globally.globally, many of which place restrictions on the Company’s ability to transfer, access and use personal data across its business. 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 enacteda new EU General Data Protection Regulation, which will become effective in 2018 and impose penalties up to 4% of global revenue, additional laws and regulations enacted in the United States, Europe, Asia and Latin America, and increased enforcement and litigation activity in the United States and other developed markets.markets, and increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global privacy program to manage these evolving risks which has been certified as compliant with and approved by the Asia Pacific Economic Cooperation Cross-Border Privacy Rules System, the EU-U.S. Privacy Shield Program, and the Binding Corporate Rules in the EU.
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, as well as club stores and specialty channels.
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.

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Patents, Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of material importance into 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 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. 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. The EU also provides an additional six months of pediatric market exclusivity attached to a product’s Supplementary Protection Certificate (SPC). Japan provides the additional term for pediatric studies attached to market exclusivity unrelated to patent rights.

Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key U.S. patent protection in the United States, the EU and Japan (including Patent Term Restorationthe potential for patent term extensions (PTE) and Pediatric Exclusivity)SPCs where indicated) for majorthe following marketed products:
Product
Year of Expiration (in the U.S.)(1)
Asmanex2014 (use)/2018 (formulation)
Dulera2014 (use)/2017(formulation)/2020 (combination)
Integrilin2014 (compound)/2015 (use/formulation)
Nasonex(2)
2014 (use/formulation)/2018(formulation)
Emend2015
Follistim AQ2015
PegIntron2015 (conjugates)/2020 (Mature IFN-alpha)
Invanz2016 (compound)/2017 (composition)
Zostavax2016 (use)
Zetia(3)/Vytorin/Liptruzet
2017
NuvaRing2018 (delivery system)
Emend for Injection
2019
Noxafil2019
RotaTeq2019
Intron A2020
Recombivax2020 (method of making/vectors)
Januvia/Janumet/Janumet XR2022 (compound)/2026 (salt)
Zioptan2022 (with pending Patent Term Restoration)
Isentress2023
Victrelis2024 (with pending Patent Term Restoration)
Gardasil2028
ProductYear of Expiration (U.S.)
Year of Expiration (EU)(1)
Year of Expiration (Japan)
Invanz2017 (composition)2017N/A
ArcoxiaNot Marketed2017Not Marketed
Cancidas2017 (formulation)20172019
ZostavaxExpired2018 (use)N/A
Dulera
2017 (formulation)/
2020 (combination)
N/AN/A
Zetia(2)
201720182019
Vytorin201720192019
Asmanex2018 (formulation)2018 (formulation)2020 (formulation)
NuvaRing(3)
2018 (delivery system)2018 (delivery system)N/A
Emend for Injection
2019(4)
2020(4)
2020
Follistim AQ2019 (formulation)2019 (formulation)2019 (formulation)
Noxafil20192019N/A
RotaTeq2019ExpiredExpired
Recombivax2020 (method of making)ExpiredExpired
Januvia
2022(4)
2022(4)
2025-2026(5)
Janumet
2022(4)
2023N/A
Janumet XR
2022(4)
N/AN/A
Isentress
2023(4)
2022(4)
2022
Simponi
N/A(6)
2024
N/A(6)
Bridion
2026(4) (with pending PTE)
20232024
Nexplanon2027 (device)2025 (device)Not Marketed
Bravecto2027 (with pending PTE)2025 (patent), 2029 (SPCs)2029
Gardasil2028
2021(4)
2017
Gardasil 9
2028
2025 (patent), 2030(4) (SPCs)
N/A
Keytruda2028
2028 (patent), 2030(4) (SPCs)
2032 (with pending PTE)
Zerbaxa
2028(4) (with pending PTE)
2023 (patent), 2028(4) (SPCs)
N/A
Sivextro
2028(4)
2024 (patent), 2029(4) (SPCs)
N/A
Zinplava2028 (with pending PTE)
2025(7)
N/A
Belsomra
2029(4)
N/A2031
Zepatier
2031(4)
2030 (patent), 2031(4) (SPCs)
2030
(1)
N/A:		Currently no marketing approval.
Note:Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
(1)
The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the UK (Major EU Markets). If an SPC has been granted in some but not all Major EU Markets, both the patent expiry date and the SPC expiry date are listed.
(2) 
By agreement, Apotex, a generic manufacturer has been granted rights under Merck’s Nasonex use patent in the United States. In addition, a district court decision (upheld on appeal to the Court of Appeals for the Federal Circuit) found that Apotex’s proposed generic product would not infringe on Merck’s Nasonex formulation patent. Thus, if Apotex’s application is approved by the FDA, it can enter the market in the United States withlaunched a generic version of NasonexZetia. in the United States in December 2016.
(3) 
By agreement,In August 2016, a generic manufacturerdistrict court decision found invalid the Company’s patent claiming NuvaRing’s delivery system. That decision is currently under appeal.
(4)
Eligible for 6 months Pediatric Exclusivity.
(5)
The PTE system in Japan allows for a patent to be extended more than once provided the later approval is directed to a different indication from that of the previous approval. This may launchresult in multiple PTE approvals for a generic version ofgiven patent, each with its own expiration date.
(6) Zetia
The Company has no marketing rights in the United States in December 2016.U.S. and Japan.
(7)
SPC applications to be filed by July 2017. Expected expiry 2030. Eligible for pediatric exclusivity.
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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By agreement, Apotex Inc. and Apotex Corp. (collectively, “Apotex”) has been granted rights under Merck’s Nasonex use patent in the United States. In addition, a district court decision (upheld on appeal to the Court of Appeals for the Federal Circuit) found that Apotex’s proposed generic product would not infringe Merck’s Nasonex formulation patent. Thus, if Apotex’s application is approved by the FDA, it can enter the market in the United States with a generic version of Nasonex. The Company anticipates that sales of Nasonex in the United States will decline significantly after these patent expiries and generic entry.
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 an 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 in the United States by the FDA. Additional patent term may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity. 
Under Review (in the U.S.)
Currently Anticipated
Year of Expiration (in the U.S.)
MK-8962 (corifollitropin alfa injection)V419 (pediatric hexavalent combination vaccine)2018 (formulation/use)
MK-8616 (sugammadex sodium injection)(1)
2021
MK-5348 (vorapaxar)2024
MK-7243 (Timothy grass pollen allergen extract)2026 (use)
MK-3641 (short ragweed pollen allergen extract)2026 (use)
V503 (HPV vaccine (9 valent))2028
MK-4305 (suvorexant)(2)
20292020 (method of making)
(1)
In September 2013, Merck received a Complete Response Letter (“CRL”) from the FDA for the resubmission of the New Drug Application for sugammadex sodium injection (MK-8616). To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing a New Drug Application resubmission with the FDA in 2014.
(2)
In June 2013, Merck received a CRL from the FDA for suvorexant (MK-4305). In February 2014, the Company resubmitted its New Drug Application to the FDA.
The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development: 
Phase 3 Drug Candidate
Currently Anticipated
Year of Expiration (in the U.S.)
V212 (inactivated varicella zoster virus (“VZV”)V920 (ebola vaccine)2016 (use)2023
V419 (pediatric hexavalent combination vaccine)2020 (method of making/vectors)
MK-0822 (odanacatib)2024
MK-8109 (vintafolide)MK-8228 (letermovir)2024
MK-0859 (anacetrapib)2027
MK-3222 (tildrakizumab)2028 (composition)
MK-3415A (actoxumab/bezlotoxumab)2028
MK-34752028
MK-3102 (omarigliptin)MK-7655A (relebactam + imipenem/cilastatin)2030
MK-8931 (verubecestat)2030
MK-1439 (doravirine)2031
MK-8835 (ertugliflozin)(ertuglifozin)2030
MK-8835A (ertuglifozin + sitagliptin)2030
MK-8835B (ertuglifozin + metformin)2030
MK-1242 (vericiguat)2031
Unless otherwise noted, the patents in the above charts are compound patents. Each patent is 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. In addition, 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. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five

9

years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.
For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 10. “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 20132016 on patent and know-how licenses and other rights amounted to $339$222 million. Merck also incurred royalty expenses amounting to $1.3$1.1 billion in 20132016 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 12,300 people are employed in the Company’s research activities. Research and development expenses were $7.5$10.1 billion in 2013, $8.22016, $6.7 billion in 2012,2015 and $8.5$7.2 billion in 20112014 (which included restructuring costs and acquisition and divestiture-related costs in all years, as well as $279 million, $200 million and $587 million of in-process research and development impairment charges in 2013, 2012 and 2011, respectively)years). The Company prioritizes its research and development efforts and focusfocuses on candidates that it believes represent breakthrough science that will make a difference for patients and payers, with an increased emphasis on externally sourced programs.payers.

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 candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. Further, Merck has moved to diversify its portfolio through a collaboration on the development of biosimilars, which have the potential to harness the market opportunity presented by biological medicine patent expiries by delivering high quality biosimilars to enhance access for patients worldwide. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a renewed focus on supplementing 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 access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company is evaluatingcontinues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential. In January 2014, the Company entered into an agreement to divest its Sirna Therapeutics, Inc. subsidiary and related RNAi technology assets.
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, osteoporosis,and respiratory diseases and women’s health.diseases.
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 New Drug Application (“NDA”)(NDA) for a drug or the Biologics License Application (“BLA”)(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 moleculebiologic 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 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans.

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If favorable, additional, larger Phase 2 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 effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 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 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 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 or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, 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. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, 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 CRLComplete Response Letter (CRL) 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 CRL, 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.
The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review ���— to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced review staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review.
In addition, under the Generating Antibiotic Incentives Now Act, the FDA may grant Qualified Infectious Disease Product (QIDP) status to antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority Review of the NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and Cosmetic Act.
The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new chemical compounds and

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products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (“MAA”)(MAA) with the European Medicines Agency (“EMA”).EMA. After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.
Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the PharmaceuticalPharmaceuticals and Medical Devices Agency in Japan, Health Canada, AgenciaAgência Nacional de VigilanciaVigilância Sanatária in Brazil, Korea Food and Drug Administration in South Korea, and Therapeutic Goods Administration in Australia.Australia and China Food and Drug Administration. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.

Research and Development Update
The Company currently has several candidates under regulatory review in the United States or internationally.States.
MK-5348, vorapaxar,Keytruda is an investigational anti-thrombotic medicine under review byFDA-approved anti-PD-1 (programmed death receptor-1) therapy in clinical development for expanded indications in different cancer types. Keytruda is currently approved for the treatment of NSCLC, melanoma, advanced melanoma, and head and neck cancer.
In February 2017, the FDA and EMA. Merck is seeking approval of vorapaxaraccepted for the reduction of atherothrombotic events, when added to standard of care,review two supplemental BLAs (sBLA) for Keytruda in patients with a historylocally advanced or metastatic urothelial cancer, including most bladder cancers. The application for first-line use was granted Priority Review for the treatment of heart attack and no history of strokethese patients who are ineligible for cisplatin-containing therapy. The application for second-line use was granted Priority Review for these patients with disease progression on or transient ischemic attack. In January 2014, the FDA’s Cardiovascular and Renal Drugs Advisory Committee recommended approval of vorapaxar.after platinum-containing chemotherapy. The PDUFA action date for both applications is June 14, 2017. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines.
V503, the Company’s nine-valent HPV vaccine in developmentpreviously granted Breakthrough Therapy designation to help protect against certain HPV-related diseases, is under review by the FDA. V503 incorporates antigens against five additional cancer-causing HPV types as compared with GardasilKeytruda. The Company anticipates submitting an MAA to the EMA in the first half of 2014.
MK-8962, corifollitropin alfa injection, is an investigational fertility treatment under review by the FDA for controlled ovarian stimulation in women participating in assisted reproductive technology. If approved, corifollitropin alfa would be the first sustained follicular stimulant for use in a fertility treatment regimen in the United States. Merck’s corifollitropin alfa is currently approved in more than 50 markets outside the United States, including the EU.
MK-7243, Grastek (Timothy Grass Pollen Allergen Extract), an investigational Timothy grass pollen allergy immunotherapy tablet (“AIT”), and MK-3641, Ragwitek (Short Ragweed Pollen Allergen Extract), an investigational ragweed pollen AIT, are both under review by the FDA. Grastek is the proposed trade name for MK-7243 and Ragwitek is the proposed trade name for MK-3641. MK-7243 and MK-3641 are investigational sublingual tablets designed to help treat the underlying cause of allergic rhinitis by generating an immune response to help protect allergic patients against effects triggered by the targeted allergen. Merck has partnered with ALK-Abello to develop its investigational sublingual allergy immunotherapy tablets for Timothy grass pollen, ragweed pollen and house dust mites in North America. In December 2013, the FDA’s Allergenic Products Advisory Committee had a positive discussion of MK-7243. In January 2014, the same Advisory Committee had a positive discussion of MK-3641. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines. Merck expects the FDA’s review for both MK-7243 and MK-3641 to be completed in the first half of 2014. In February 2014, the Company announced that Grastek received regulatory approval in Canada.
MK-4305, suvorexant, is an investigational insomnia medicine in a new class of medicines called orexin receptor antagonists for use in patients with difficulty falling or staying asleep. In July 2013, the Company announced that it had received a CRL from the FDA regarding the NDA for suvorexant. In the CRL, the FDA advised Merck that: (1) the efficacy of suvorexant has been established at doses of 10 mg to 40 mg in elderly and non-elderly adult patients; (2) 10 mg should be the starting dose for most patients and must be available before suvorexant can be approved; (3) 15 mg and 20 mg doses would be appropriate in patients in whom the 10 mg dose is well-tolerated but not effective; and (4), for patients taking concomitant moderate CYP3A4 inhibitors, a 5 mg dose would be necessary. In addition, the FDA determined that the safety data do not support the approval of suvorexant 30 mg and 40 mg. In February 2014, the Company resubmitted its NDA to the FDA. As previously disclosed, both FDA approval and a separate scheduling

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determination by the U.S. Drug Enforcement Administration are required before Merck can introduce suvorexant in the United States. Insomnia is a condition characterized by difficulty falling asleep and/or staying asleep. The Company has submitted a new drug application for suvorexant to the health authorities in Japan and is continuing with plans to seek approval for suvorexant in other countries around the world.
MK-8616, sugammadex sodium injection, is an investigational agent for the reversal of neuromuscular blockade induced by rocuronium or vecuronium (neuromuscular blocking agents). Neuromuscular blockade is used in anesthesiology to induce muscle relaxation during surgery. In September 2013, Merck announced that it had received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection. The FDA’s letter raised concerns about operational aspects of a hypersensitivity study that the agency had requested in 2008. To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing an NDA resubmission with the FDA in 2014. Sugammadex sodium injection is approved and has been launched in many countries outside of the United States where it is marketed as Bridion.
MK-8109, vintafolide, is an investigational cancer candidate under review by the EMA. As part of an exclusive license agreement with Endocyte, Inc. (“Endocyte”), Merck is responsible for the development and worldwide commercialization of vintafolide in oncology. The EMA accepted the MAA filings for vintafolide and Endocyte’s investigational companion diagnostic imaging agent, etarfolatide, for the targetedsecond-line treatment of patients with folate-receptor positive platinum-resistant ovarianlocally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy.
In January 2017, the FDA accepted for review an sBLA for Keytruda plus chemotherapy (pemetrexed plus carboplatin) for the first-line treatment of patients with metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations. This is the first application for regulatory approval of Keytruda in combination with pegylated liposomal doxorubicin. Both vintafolide and etarfolatide have beenanother treatment. The FDA granted orphan drug status byPriority Review with a PDUFA action date of May 10, 2017. The sBLA will be reviewed under the EC. Vintafolide is in Phase 3 development in the United States.FDA’s Accelerated Approval program.
MK-7009, vaniprevir, is an investigational, oral twice-daily protease inhibitor for the treatment of chronic hepatitis C virus (“HCV”) infection under review in Japan.
In addition to the candidates under regulatory review, the Company has 12 drug candidates in Phase 3 development targeting a broad range of diseases. The Company anticipates filing an NDA or a BLA, as applicable, withDecember 2016, the FDA with respect to several of these candidates in 2014.
MK-3475,accepted for review an investigational anti-PD-1 immunotherapy, is currently being evaluatedsBLA for Keytruda for the treatment of patients with advanced melanoma and other tumor types. refractory classical Hodgkin lymphoma or for patients who have relapsed after three or more prior lines of therapy. The FDA granted Priority Review with a PDUFA action date of March 15, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program.
In January 2014, the Company announced it has started a rolling submission toNovember 2016, the FDA accepted for review an sBLA for Keytruda, for the treatment of a BLA for MK-3475 forpreviously treated patients with advanced melanoma who have previously been treatedmicrosatellite instability-high (MSI-H) cancer. The FDA granted Priority Review with ipilimumab. A rolling submission allows completed portionsa PDUFA action date of March 8, 2017. The sBLA will be reviewed under the application to be submitted and reviewed by theFDA’s Accelerated Approval program. The FDA on an ongoing basis. The Company expects to complete the application in the first half of 2014. In April 2013, Merck announced that MK-3475 received arecently granted Breakthrough Therapy designation to Keytrudafor advanced melanomaunresectable or metastatic MSI-H non-colorectal cancer, and previously granted it for the treatment of patients with unresectable or metastatic MSI-H colorectal cancer.
Additionally, Keytruda has also received Breakthrough Therapy designation from the FDA. As noted above,FDA for the designationtreatment of an investigational drug as a Breakthrough Therapy is intended to expedite the development and review of a candidatepatients with primary mediastinal B-cell lymphoma that is planned for use, alonerefractory to or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.has relapsed after two prior lines of therapy.
The MK-3475Keytruda clinical development program also includesconsists of more than 400 clinical trials, including more than 200 trials that combine Keytruda with other cancer treatments. These studies across a broad range ofencompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, non-small cell lung,multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal triple negativeand triple-negative breast, and hematological malignancies. In addition, the Company has announced four collaborations withmany of which are currently in Phase 3 clinical development. Further trials are being planned for other pharmaceutical companies to evaluate novel combination regimens with MK-3475.cancers.
MK-0822, odanacatib,MK-1293 is an oral, once-weekly investigational treatmentfollow-on biologic insulin glargine candidate for patients with osteoporosis. 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. In July 2012, Merck announced an update on the Phase 3 trial assessing fracture risk reduction with odanacatib. The independent Data Monitoring Committee (the “DMC”) for the study completed its first planned interim analysis for efficacy and recommended that the study be closed early due to robust efficacy and a favorable benefit-risk profile. The DMC noted that safety issues remain in certain selected areas and made recommendations with respect to following up on them. On February 1, 2013, Merck announced that it had recently received and was reviewing safety and efficacy data from the Phase 3 trial. As a result of its review of this data, the Company concluded that review of additional data from the previously planned, ongoing extension study was warranted and that filing an application for approval with the FDA

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should be delayed. As previously announced, the Company is conducting a blinded extension of the trial in approximately 8,200 women, which will provide additional safety and efficacy data. Merck continues to anticipate that it will file applications for approval of odanacatib in 2014 with additional data from the extension trial. The Company continues to believe that odanacatib will have the potential to address unmet medical needs in patients with osteoporosis.type 1 and type 2 diabetes under review by the FDA. MK-1293 was approved in the EU in January 2017. MK-1293 is being developed in collaboration with and partially funded by Samsung Bioepis.
V419 is an investigational pediatric hexavalent pediatric combination vaccine, which contains components of current vaccines,DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a partnership between Merck and Sanofi. This vaccine is designed to help protect against six potentially seriousimportant diseases —- diphtheria, tetanus, whooping cough (Bordetella pertussis) (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b (Hib), and hepatitis B. On November 2, 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are reviewing the CRL and plan to have further communication with the FDA. In February 2016, the EC granted marketing authorization for V419 for prophylaxis against diphtheria, tetanus, pertussis, hepatitis B, — thatpoliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 is being developedmarketed as Vaxelis in collaboration with Sanofi-Pasteur.the EU.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above.

MK-8931, verubecestat, is an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1) for the treatment of Alzheimer’s disease. In February 2017, Merck announced that its external Data Monitoring Committee (eDMC) recommended termination of the Phase 2/3 EPOCH study of verubecestat in mild-to-moderate Alzheimer’s disease based on the low probability of success of this study. The Company continuessame eDMC recommended that a separate Phase 3 study, APECS, evaluating verubecestat for amnestic mild cognitive impairment due to anticipate filing a BLAAlzheimer’s disease, also known as prodromal Alzheimer’s disease, continue as planned. Estimated primary completion date for V419 with the FDA in 2014.APECS study, which is fully enrolled, is February 2019.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (“CETP”) that is being investigated(CETP) in lipid management to raisedevelopment for raising HDL-C and reducereducing LDL-C. Anacetrapib is being evaluated in a large,30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular diseasedisease. In November 2015, Merck announced that is predictedthe Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck remains blinded to be completedthe actual results of this analysis and to other REVEAL safety and efficacy data. Under the study, the last patient’s last visit occurred in January 2017. The Company anticipates receiving the top-line results from the study mid-year 2017.
MK-8931MK-7655A is Merck’s novela combination of relebactam, an investigational oral ß-amyloid precursor protein site-cleaving enzyme (“BACE”)beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a QIDP with designated Fast Track status for the treatment of Alzheimer’s disease being evaluated in a Phase 2/3 clinical trial (EPOCH) designed to evaluate the safetyhospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and efficacy of MK-8931 versus placebo in patients with mild-to-moderate Alzheimer’s disease. Based on a positive DMC recommendation made following a planned analysis of interim safety data that included a safety cohort of 200 patients treated with MK-8931 for at least three months, the Company recently began enrolling patients in the Phase 3 portion of the trial, as well as a new Phase 3 trial (APECS) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease.complicated urinary tract infections.
MK-3415A, actoxumab/bezlotoxumab,MK-8228, letermovir, is an investigational oral once-daily or an intravenous infusion antiviral candidate for the prevention of Clostridium difficile infection recurrence, is a combinationclinically-significant cytomegalovirus (CMV) infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track designation. In October 2016, Merck announced that the pivotal Phase 3 clinical study of two monoclonal antibodies usedletermovir met its primary endpoint. The global, multicenter, randomized, placebo-controlled study evaluated the efficacy and safety of letermovir in adult (18 years and older) CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant. Merck plans to treat patients with a single infusion.
MK-3102, omarigliptin, is an investigational once-weekly dipeptidyl peptidase-4 (“DPP-4”) inhibitor in developmentsubmit regulatory applications for the treatmentapproval of type 2 diabetes.letermovir in the United States and EU in 2017.
MK-8835, ertugliflozin, is an investigational oral sodium glucose cotransporter (“SGLT2”)SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes. During 2013, the Company entered into a worldwide (except Japan)diabetes in collaboration agreement with Pfizer Inc. (Pfizer). In September 2016, Merck and Pfizer announced that a Phase 3 study (VERTIS SITA2) of ertugliflozin met its primary endpoint. Both 5 mg and 15 mg daily doses of ertugliflozin showed significantly greater reductions in A1C (an average measure of blood glucose over the past two to three months) when added to patients on a background of sitagliptin and metformin. Ertugliflozin is also being studied in combination with Januvia (sitagliptin) and metformin. In December 2016, Merck submitted NDAs to the FDA for ertugliflozin and the two fixed-dose combinations: MK-8835A, ertugliflozin plus Januvia, and MK-8835B, ertugliflozin plus metformin. The Company anticipates a response from the FDA in the first quarter of 2017. Ertugliflozin and the two fixed-dose combinations are currently under review in the EU.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the developmentinvestigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and commercializationListing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of ertugliflozin.vaccines needed for public health emergencies such as another outbreak of Ebola. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that
MK-1293
V920 offers substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-randomized clusters. Results from other ongoing studies are anticipated in the second half of 2017.
MK-1242, vericiguat, is an insulin glargine candidateinvestigational treatment for the treatmentheart failure being studied in a Phase 3 clinical trial in patients suffering from chronic heart failure. The development of patients with type 1vericiguat is part of a worldwide strategic collaboration between Merck and type 2 diabetes. In February 2014, the Company announced that it had expanded its collaboration with Samsung Bioepis to develop, manufacture and commercialize MK-1293. Under the terms of the agreement, the companies will collaborate on clinical development, regulatory filings and manufacturing. If approved, Merck will commercialize this candidate.Bayer AG.
V212 is an inactivated VZVvaricella zoster virus (VZV) vaccine in development for the prevention of herpes zoster. The Company is conducting twocompleted the Phase 3 trials, onetrial in autologous hematopoietic cell transplant patients and the otheris conducting another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017.
MK-3222, tildrakizumab,MK-1439, doravirine, is an anti-interleukin-23 monoclonal antibody candidateinvestigational non-nucleoside reverse transcriptase inhibitor being investigateddeveloped by Merck for the treatment of psoriasis.
MK-5172/MK-8742,HIV-1 infection. In February 2017, the Company received positive results from a first Phase 3 study showing that doravirine was non-inferior to an all-oral combinationalternative regimen in Phase 2achieving and maintaining HIV-1 suppression in infected adults during 48 weeks of treatment.
In 2016, the Company also divested or discontinued certain drug candidates.
Merck announced that it is discontinuing the development consisting of MK-5172,odanacatib, an investigational HCV NS3/4A proteasecathepsin K inhibitor for osteoporosis, and MK-8742,will not seek regulatory approval for its use. Merck previously reported a numeric imbalance in adjudicated stroke events in the pivotal Phase 3 fracture outcomes study in postmenopausal women. The Company has decided to discontinue development after an independent adjudication and analysis of major adverse cardiovascular events confirmed an increased risk of stroke.
The Company determined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that included MK-8237, an investigational HCV NS5A replication complex inhibitor, was granted a Breakthrough Therapy designation in October 2013 by the FDAallergy immunotherapy tablet for treatment of chronic HCV infection. MK-5172 and MK-8742 are being investigated in a broad clinical program that includes studies in patients with multiple HCV genotypes who are treatment-naïve, treatment failures as well as other important HCV subpopulations such as patients with cirrhosis and those co-infected with HIV.
MK-8175A, NOMAC/E2, which is being marketed as Zoely in the EU, is an investigational oral contraceptive for use by women to prevent pregnancy. In November 2011, Merck received a CRL from the FDA for NOMAC/E2.house dust mite allergy. Merck has madegiven ALK-Abelló six months’ notice that it is terminating the agreement and therefore this compound will be returned to ALK-Abelló. This decision was not due to efficacy or safety concerns.
The Company also decided, for business reasons, to discontinue the Phase 3 clinical trialdevelopment of MK-8342B, referred to as the Next Generation Ring, an investigational combination (etonogestrel and 17ß-estradiol) vaginal ring for NOMAC/E2 being conductedcontraception and the treatment of dysmenorrhea in women seeking contraception. This decision was not due to efficacy or safety concerns.
Merck announced that, for business reasons, it will not proceed with submitting marketing applications for omarigliptin, an investigational, once-weekly DPP-4 inhibitor, in the United States.States or Europe. This decision is not based on any new safety or efficacy findings. 

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In May 2013, the Company provided an update on the clinical program for preladenant, Merck’s investigational adenosine A2A receptor antagonist for the treatment of Parkinson’s disease. An initial review of data from three separate Phase 3 trials did not provide evidenceresult from concerns about the efficacy or safety of efficacy for preladenant compared with placebo. Based on these results, Merck has taken steps to discontinue the extension phases of these studies and no longer plans to pursue regulatory filings for preladenant. The decision to discontinue these studies was not based on any safety finding. The Company recorded an impairment charge of $181 million in 2013 related to the discontinuation of the clinical development program for preladenant.omarigliptin.

The chart below reflects the Company’s research pipeline as of February 21, 2014.24, 2017. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 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. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to Keytruda) and additional claims, line extensions or formulations for in-line products are not shown.

Phase 2Phase 3 (Phase 3 entry date)Under Review
Allergy
MK-8237, Immunotherapy(1)
Alzheimer’s Disease
MK-7622
Asthma
MK-1029
Bacterial Infection
MK-7655
Cancer
MK-0646 (dalotuzumab)MK-3475 Keytruda
PMBCL (Primary Mediastinal
Large B-Cell Lymphoma)
Advanced Solid Tumors
Nasopharyngeal
Ovarian
Prostate
MK-2206
CMV Prophylaxis in Transplant PatientsCough, including cough with IPF
MK-8228 (letermovir)MK-7264
Contraception, Medicated IUSDiabetes Mellitus
MK-8342
Contraception, Next Generation Ring
MK-8175A
MK-8342BMK-8521
Hepatitis C
MK-3682B (MK-3682 (uprifosbuvir)/MK-5172 (grazoprevir)/MK-8408 (ruzasvir))
MK-8742
HIV
MK-1439 (doravirine)
Non-Small Cell Lung Cancer
MK-3475(2,3)
Pneumoconjugate Vaccine
V114
Rheumatoid ArthritisAlzheimer’s Disease
MK-8457MK-8931 (verubecestat) (December 2013)
Atherosclerosis
MK-0859 (anacetrapib) (May 2008)
Alzheimer’s DiseaseBacterial Infection
MK-8931 (December 2013)MK-7655A (relebactam+imipenem/cilastatin)
(October 2015)
Cancer
Clostridium difficileMK-3475 InfectionKeytruda
MK-3415A (actoxumab/bezlotoxumab)Bladder (October 2014) (EU)
Breast (October 2015)
Colorectal (November 2011)2015)
Esophageal (December 2015)
Gastric (May 2015)
Head and Neck (November 2014) (EU)
Hepatocellular (May 2016)
Hodgkin Lymphoma (July 2016) (EU)
Multiple Myeloma (December 2015)
Renal (October 2016)
CMV Prophylaxis in Transplant Patients
MK-8228 (letermovir) (June 2014)
Diabetes Mellitus
MK-3102 (omarigliptin) (September 2012)
MK-8835 (ertugliflozin) (November 2013)
MK-1293 (February 2014)(U.S.)(1)
MK-8835A (ertugliflozin+sitagliptin)
(September 2015) (U.S.)(1)
MK-8835B (ertugliflozin+metformin)
(August 2015) (U.S.)(1)
MK-0431J (sitagliptin+ipragliflozin)
(October 2015) (Japan)(1)
Ebola Vaccine
V920 (March 2015)
Heart Failure
MK-1242 (vericiguat) (September 2016)(1)
Herpes Zoster
V212 (inactivated VZV vaccine) (December 2010)
MelanomaHIV
MK-1439 (doravirine) (December 2014)

New Molecular Entities/Vaccines
Allergy
MK-3475 (August 2013)MK-8237, House Dust Mite (U.S.)(2,4)(2)
OsteoporosisDiabetes Mellitus
MK-0822 (odanacatib) (September 2007)MK-1293 (U.S.)(1)
MK-8835 (ertugliflozin) (EU)(1)
MK-8835A (ertugliflozin+sitagliptin) (EU)(1)
MK-8835B (ertugliflozin+metformin) (EU)(1)
Pediatric Hexavalent Combination Vaccine
V419 (April 2011)
Platinum-Resistant Ovarian Cancer
MK-8109 (vintafolide) (U.S.) (April 2011)
Psoriasis
MK-3222 (tildrakizumab) (December 2012)

Allergy
MK-7243, Grass pollen (U.S.)(1)(3)
MK-3641, Ragweed (U.S.)(1)
Fertility
MK-8962 (corifollitropin alfa injection)Certain Supplemental Filings
Cancer
Keytruda
• Previously Treated Microsatellite Instability-High Cancer (U.S.)
Hepatitis C
MK-7009 (vaniprevir) (Japan)
HPV-Related Cancers
V503 (HPV vaccine (9 valent))• Relapsed or Refractory Classical Hodgkin Lymphoma (U.S.)
Insomnia• Combination with Chemotherapy in first-line non-squamous Non-Small-Cell Lung Cancer (U.S.)
MK-4305 (suvorexant)• First Line Cis-ineligible Bladder Cancer (U.S.)(5)
Neuromuscular Blockade Reversal• Second Line Metastatic Bladder Cancer (U.S.)
MK-8616 (sugammadex sodium injection)
   (U.S.)(6)
Platinum-Resistant Ovarian Cancer
MK-8109 (vintafolide) (EU)
Thrombosis
MK-5348 (vorapaxar) (U.S./EU)
Footnotes:
(1) North American rights only.Being developed in a collaboration.
(2)A new nonproprietary name for MK-3475  MK-8237 was being developed as part of a North America partnership with ALK-Abelló. Merck has given ALK-Abelló six months’ notice that it is under review.terminating the agreement and, therefore, this compound will be returned to ALK-Abelló.
(3)  Phase 2/3 adaptive design.
(4)  In January 2014, the Company announced it has startedV419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a rolling submission topartnership of Merck and Sanofi. On November 2, 2015, the FDA of a BLA for MK-3475 for patients with advanced melanoma who have previously been treated with ipilimumab.
(5)  In June 2013, Merck receivedissued a CRL fromwith respect to V419. Both companies are reviewing the FDA for suvorexant (MK-4305). In February 2014, the Company resubmitted its NDACRL and plan to have further communication with the FDA.
(6)  In September 2013, Merck received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection (MK-8616). To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing an NDA resubmission with the FDA in 2014.
.

Employees
As of December 31, 2013,2016, the Company had approximately 76,00068,000 employees worldwide, with approximately 29,10026,500 employed in the United States, including Puerto Rico. Approximately 32%29% of worldwide

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employees of the Company are represented by various collective bargaining groups.
Restructuring Activities
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In addition, the Company’s joint ventures in China2010 and Brazil, which are included in the consolidated results of Merck, had about 1,300 employees.
2013 Restructuring Program
In October 2013, the Company announced a newcommenced actions under global restructuring program (the “2013 Restructuring Program”) as part of a global initiativeprograms designed to sharpenstreamline its commercial and research and development focus. As part of the new program, the Company expects to reduce its total workforce by approximately 8,500 positions. These workforce reductions will primarily come fromcost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as research and development. The Company will also reduce its global real estate footprint and continue to improve the efficiency of its manufacturing and supply network. The Company will continue to hire employees in strategic growth areas of the business as necessary.
Merger Restructuring Program
In 2010, subsequent to the Merck and Schering-Plough merger (the “Merger”), the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) designed to streamline the cost structure of the combined company. Further actions under this program were initiated in 2011. The actions under this 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 also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations. Since inception of the Merger Restructuring Programprograms through December 31, 2013,2016, Merck has eliminated approximately 26,88040,900 positions comprised of

employee separations, as well as the elimination of contractors and vacant positions. Approximately 6,300 position eliminations remain pending under this program and an older program as of December 31, 2013. The restructuringCompany expects to substantially complete the remaining actions under the Merger Restructuring Program were substantially completedthese programs by the end of 2013, with the exception of certain actions, principally manufacturing-related. Subsequent to the Merger, the Company has rationalized a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2016.2017.
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 $20$11 million in 2013, $14 million in 2012 and $25 million in 2011,2016, and are estimated at $117$44 million in the aggregate for the years 20142017 through 2018.2021. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and providingaccruing for these costs and, in management’s opinion, the liabilities for all environmental matters whichthat are probable and reasonably estimable have been accrued and totaled $213$83 million and $109 million at December 31, 2013.2016 and 2015, respectively. 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 $84$64 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 as a percentage of total Company sales were 59%54% of sales in 2013, 57%2016, 56% of sales in 20122015 and 57%60% of sales in 2011.2014.
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

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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.
Financial information about geographic areas of the Company’s business is provided 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 U.S. Securities and Exchange Commission (“SEC”)(SEC). In addition, the Company will provide without charge a copy of its Annual Report on Form 10-K, including financial statements and schedules, upon the written request of any shareholder to Merck Shareholder Services, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, NJ 07033 U.S.A.
The Company’s corporate governance guidelines and the charters of the Board of Directors’ four 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.

Item 1A.Risk Factors.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.
The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely affected.
Patent protection is considered, in the aggregate, to be of material importance into the Company’s marketing of human health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.
Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or claims by third parties of infringement and similar claims against the Company. The Company aggressively defends its important patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file Abbreviated New Drug ApplicationsNDAs with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned or licensed by the Company. The Company normally responds by vigorously defending its patent, including by filing lawsuits alleging patent infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other

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companies’ U.S. patents, potential U.S. legislation relating to patent reform,patents, as well as regulatory initiatives may result in further erosiona more general weakening of intellectual property protection.
If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available and, in the case of certain products, such a loss could result in a material non-cash impairment charge. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement products.
A chart listing the patent protection for certain of the Company’s marketed products, and U.S. patent protection for the Company’s major marketed productscandidates under review and Phase 3 candidates is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”
As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.
The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales for that product, as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of patent protectionmarket exclusivity can have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects. The patent that provides market exclusivity in the EU for For example, pursuant

Nasonex expired on January 1, 2014 and the Company anticipates that sales will decline significantly. Also, a court has ruled that a proposed generic form of Nasonex, made by Apotex,to an agreement with a generic manufacturer, does not infringe the Company’s U.S. patent for Nasonex. If Apotex receives approval to marketthat manufacturer launched in the United States itsa generic formversion of Nasonex,Zetia in December 2016. In addition, the Company will experiencelose U.S. patent protection for Vytorin in April 2017. The Company expects a significant and rapid loss of Nasonex sales.sales of
In addition,Zetia and Vytorin in September 2013, the EC approved a biosimilar for Remicade. While the Company is experiencing generic competitionUnited States in certain smaller European markets, the Company anticipates a more substantial decline in Remicade sales following loss of market exclusivity in major European markets in February 2015.2017.
Key Company products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material and negative impact on results of operations and cash flows.
The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as Januvia, Zetia, RemicadeJanumet, Keytruda, Gardasil/Gardasil Janumet,9, Isentress Vytorin, andNasonex Zepatier. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant adverse impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-marketpost-approval trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. If any of theseSuch events hadcould have a material adverse effect on the sales of certain products,any such an event could result in a material non-cash impairment charge.products.
The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that have lost patent protection.
Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products each year. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products which it may develop through joint ventures and products which it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may

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take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.
For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals, therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the FDAregulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.
The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.

The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.
Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:
findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;
failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, and increasing uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;
failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;
lack of economic feasibility due to manufacturing costs or other factors; and
preclusion from commercialization by the proprietary rights of others.
In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with mergersacquisitions.
Failure to successfully develop and acquisitions.
The Company is devoting substantial resources to the development of MK-3475, Merck’s anti-PD-1 immunotherapy, and there can be no assurance that it will be approved for marketing by the FDA.
On January 13, 2014, the Company announced that it had initiated a rolling submission to the FDA of a BLA for MK-3475, the Company's anti-PD-1 immunotherapy, for patients with advanced melanoma who have been previously treated with ipilimumab. The Company also stated that it expected to complete the submissionmarket new products in the first halfshort term or long term would have a material adverse effect on the Company’s business, results of 2014. There can be no assurance that the Company will complete the submission, or that the FDA will approve MK-3475 for marketingoperations, cash flow, financial position and sale in the United States for the initial indication or for additional indications. In addition, if approved, there can be no assurance that MK-3475 will succeed in the marketplace.prospects.
The Company’s products, including products in development, can notcannot be marketed unless the Company obtains and maintains regulatory approval.
The Company’s activities, including research, preclinical testing, clinical trials and manufacturing and marketing its products, are subject to extensive regulation by numerous federal, state and local governmental authorities

19

in the United States, including the FDA, and by foreign regulatory authorities, including in the EU. In the United States, the FDA is of particular importance to the Company, as it administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, cost reduction. The FDA and foreign regulatory authorities have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.
Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.
Developments following regulatory approval may adversely affect sales of the Company’s products.
Even after a product reaches market, certain developments following regulatory approval, including results in post-marketingpost-approval Phase 4 trials or other studies, may decrease demand for the Company’s products, including the following:
the re-review of products that are already marketed;
new scientific information and evolution of scientific theories;
the recall or loss of marketing approval of products that are already marketed;


changing government standards or public expectations regarding safety, efficacy or labeling changes; and
greater scrutiny in advertising and promotion.
In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, following the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and Japan’s Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities.
The Company faces intense competition from lower cost-generic products.
In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is

20

significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures which encourages the use of generic and biosimilar products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial position and prospects.
The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.
The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such an event, the competitors’ products may be safer or more effective, more convenient to use or more effectively marketed and sold than the Company’s products. Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial position and prospects. In addition, if products that were measured at fair value and capitalized in connection with mergers and acquisitions such as the Company’s portfolio products marketed for the treatment of chronic hepatitis C or Vytorin or Zetia, experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.

The Company faces pricing pressure with respect to its products.
The Company faces increasing pricing pressure globally and, particularly in mature markets, 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 ProtectionACA, and Affordable Care Act of 2010.(iii) state activities aimed at increasing price transparency. 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 U.S., larger customers may, in the future, ask for and receive higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the managed care organization.
In order to provide information about the Company’s pricing practices, the Company facesrecently posted  on its website its first Pricing Action Transparency Report for the riskUnited States for the years 2010 - 2016. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010.  The report shows that the Company’s average annual net price increases (after taking sales deductions such as rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits since 2010.  Additionally, the weighted average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of litigation with the government over its pricing calculations.ACA. In 2016, the Company’s gross U.S. sales were reduced by 40.9% as a result of rebates, discounts and returns.
Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in funding health care and, in that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with respect to its products.
The Company expects pricing pressures to increase in the future.
The health care industry in the United States will continue to be subject to increasing regulation and political action.
The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by Congress and state legislatures.
In 2010, the United States enacted major health care reform was adopted into law and importantlegislation in the form of the ACA. Various insurance market reforms have begunadvanced and will continue through full implementationstate and federal insurance exchanges were launched in 2014. The new law is expectedWith respect to expand access to health care to about 32 million Americans by the endeffect of the decade. In 2010,law on the minimumpharmaceutical industry, the law increased the mandated Medicaid rebate to states participating in the Medicaid program increased from 15.1% to 23.1% on, expanded the Company’s branded prescription drugs; the Medicaid rebate was extended to Medicaid Managed Care Organizations;managed care utilization, and eligibilityincreased the types of entities eligible for the federal 340B drug discount program was

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extended to rural referral centers, sole community hospitals, critical access hospitals, certain free standing cancer hospitals, and certain additional children’s hospitals.program.
In addition, theThe law also requires pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Also, the Company ispharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee whichwas $3.0 billion in 2016 and will increase to $4.0 billion in 2017. The fee is assessed on alleach company in proportion to its share of prior year branded prescriptionpharmaceutical sales to certain government programs, such as Medicare and Medicaid.
On January 21, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers and importers. The fee is calculated based on the industry’s total sales of branded prescription drugsare required to specified governmentpay to state Medicaid programs. The percentageimpact of a manufacturer’s sales that are included is determined by a tiered scale based onchanges resulting from the manufacturer’s individual revenues. Each manufacturer’s portionissuance of the total annual feerule is basednot material to Merck, at this time. However, the Company is still awaiting guidance from CMS on the manufacturer’s proportiontwo aspects of the total includable salesrule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the prior year.participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The annual industry fee for 2013 was $2.8 billion andCompany will be $3.0 billion in 2014.evaluate the financial impact of these two elements when they become effective.

The Company cannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have on the Company’s results of operations, financial condition or business.
Changes in laws and regulations could materially adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.
In particular, there is significant uncertainty about the future of the ACA and healthcare laws in general in the United States. The Company is participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of operations, financial condition or business.
The uncertainty in global economic conditions together with austerity measures being taken by certain governments could negatively affect the Company’s operating results.
The uncertainty in global economic conditions may result in a further slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2013.2016. The Company anticipates these pricing actions including the biennial price reductions in Japan, and other austerity measures will continue to negatively affect revenue performance in 2014.
The Company continues to monitor the credit and economic conditions within Greece, Spain, Italy and Portugal, among other members of the EU. These economic conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect on the accounts receivable outstanding in these countries and may also impact the likelihood of collecting 100% of outstanding accounts receivable. As of December 31, 2013, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $900 million. Of this amount, hospital and public sector receivables were approximately $600 million in the aggregate, of which approximately 9%, 41%, 40% and 10% related to Greece, Italy, Spain and Portugal, respectively. As of December 31, 2013, the Company’s total accounts receivable outstanding for more than one year were approximately $200 million, of which approximately 50% related to accounts receivable in Greece, Italy, Spain and Portugal, mostly comprised of hospital and public sector receivables.2017.
If credit and economic conditions in Europe worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.
The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material negative impact on the Company’s results of operations.
The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:
changes in medical reimbursement policies and programs and pricing restrictions in key markets;
multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;
trade protection measures and import or export licensing requirements;
foreign exchange fluctuations;

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diminished protection of intellectual property in some countries; and
possible nationalization and expropriation.
In addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.

Failure to attract and retain highly qualified personnel could affect its ability to successfully develop and commercialize products.
The Company’s success is largely dependent on its continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical research and development, governmental regulation and commercialization. Competition for qualified personnel in the pharmaceutical industry is intense. The Company is evaluating the strategic options for its Merck Consumer Care and Animal Health businesses, however, there cancannot be no assurance that any transactions will occur.
On January 13, 2014, the Company announced that it was evaluating the respective roles of Merck’s Animal Health and Consumer Care businesses in the Company’s strategy for long-term value creation. Furthermore, the Company stated that it expects to complete the evaluation process and take action, if any, in 2014. The Company could reach different decisions about the two businesses. There can be no assurance that the Company will determine to take action with respect to either business orsure that it will be able to effectuate any action it determines to take.attract and retain quality personnel or that the costs of doing so will not materially increase.
TheIn the past, the Company has experienced difficulties and delays in manufacturing of certain of its products.
As previously disclosed, Merck has, in the past, experienced difficulties in manufacturing certain of its vaccines and other products. The Company may, in the future, experience difficulties and delays inherent in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in product manufacturing; (ii) construction delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. Manufacturing difficulties can result in product shortages, leading to lost sales.
The Company faces significant litigation related to Vioxx.
On September 30, 2004, Merck voluntarily withdrew Vioxx, its arthritissales and acute pain medication, from the market worldwide. Although Merck has settled the major portion of the U.S. Product Liability litigation, the Company still faces material litigation arising from the voluntary withdrawal of Vioxx.
In additionreputational harm to the Vioxx Product Liability Lawsuits and lawsuits from certain states that did not participate in a previously-disclosed settlement, various purported class actions and individual lawsuits have been brought against Merck and several current and former officers and directors of Merck alleging that Merck made false and misleading statements regarding Vioxx in violation of the federal securities laws and state laws (all of these suits are referred to as the “Vioxx Securities Lawsuits”). The Vioxx Securities Lawsuits have been transferred by the Judicial Panel on Multidistrict Litigation to the U.S. District Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a nationwide multidistrict litigation, and have been consolidated for all purposes. Merck has also been named as a defendant in actions in various countries outside the United States. (All of these suits are referred to as the “Vioxx International Lawsuits”.)
The Vioxx litigation is discussed more fully in Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. The Company believes that it has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx Securities Lawsuits and Vioxx International Lawsuits (collectively, the “Vioxx Litigation”) and will vigorously defend against them. The Company’s insurance coverage with respect to the Vioxx Litigation will not be adequate to cover its defense costs and any losses.
The Company is not currently able to estimate any additional amounts that it may be required to pay in connection with the Vioxx Litigation. These proceedings are still expected to continue for years and the Company cannot predict the course the proceedings will take. In view of the inherent difficulty of predicting the outcome of litigation, the Company is unable to predict the outcome of these matters, and at this time cannot reasonably estimate the possible loss or range of loss with respect to the remaining Vioxx Litigation. The Company has not established any material reserves for any potential liability relating to the remaining Vioxx Litigation although it has established reserves related

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to the settlement of certain Vioxx International Lawsuits and with respect to certain other Vioxx Product Liability Lawsuits, all of which are discussed in Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
Unfavorable outcomes in the Vioxx Litigation resulting in the payment of substantial damages could have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
Issues concerningVytorinand the ENHANCE clinical trial have had an adverse effect on sales ofVytorinandZetiain the United States and results from the IMPROVE-IT trial could have a material adverse effect on such sales.
The Company sells Vytorin and Zetia. As previously disclosed, in January 2008, the Company announced the results of the ENHANCE clinical trial, an imaging trial in 720 patients with heterozygous familial hypercholesterolemia, a rare genetic condition that causes very high levels of LDL “bad” cholesterol and greatly increases the risk for premature coronary artery disease. As previously reported, despite the fact that ezetimibe/simvastatin 10/80 mg (Vytorin) significantly lowered LDL “bad” cholesterol more than simvastatin 80 mg alone, there was no significant difference between treatment with ezetimibe/simvastatin and simvastatin alone on the pre-specified primary endpoint, a change in the thickness of carotid artery walls over two years as measured by ultrasound. In January 2009, the FDA announced that it had completed its review of the final clinical study report of ENHANCE. The FDA stated that the results from ENHANCE did not change its position that elevated LDL cholesterol is a risk factor for cardiovascular disease and that lowering LDL cholesterol reduces the risk for cardiovascular disease.
The IMPROVE-IT trial, which is currently underway and is designed to provide cardiovascular outcomes data for ezetimibe/simvastatin in patients presenting with acute coronary syndrome, is scheduled for completion later in 2014. No incremental benefit of ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated for simvastatin has been established. In the IMPROVE-IT trial, blinded interim efficacy analyses were conducted by the Data Safety Monitoring Board (“DSMB”) for the trial when approximately 50% and 75% of the endpoints were accrued, respectively. In each case, the DSMB recommended continuing the trial without change in design. The DSMB completed another planned interim review of the study data in March 2013 and again recommended that the study continue.
The issues concerning the ENHANCE clinical trial have had an adverse effect on sales of Vytorin and Zetia and could continue to have an adverse effect on such sales. If the results of the IMPROVE-IT trial fail to demonstrate an incremental benefit of ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated for simvastatin, sales of Zetia and Vytorin could be materially adversely affected. If sales of such products are materially adversely affected, the Company’s business, cash flow, results of operations, financial position and prospects could also be materially adversely affected and the Company could be required to record a material non-cash impairment charge.Company.
The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its presencesales in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in emergingthese markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.
For instance, in February 2013, the Venezuelan government devalued its currency. As a result of that devaluation, the Company recognized losses due to exchange. If the Venezuelan government were to devalue its currency again in 2014, the Company would recognize additional losses due to exchange and the Company expects that the impact would be greater than in 2013.
In addition, in 2013 in China, governmental investigations involving other multinational pharmaceutical companiescommercial and domestic health care companies and medical instituteseconomic conditions may adversely affectedaffect the Company’s near term growth prospects in that market. While the Company continues to believe that China represents an important growth

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opportunity, these events, coupled with heightened scrutiny of the health care industry, may continue to have an impact on product pricing and market access generally. The Company anticipates that the reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in China may continue.
For all these reasons, sales within emerging markets carry significant risks. However, a failure to continue to expandmaintain the Company’s businesspresence in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and as such, virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into acquisition, licensing, borrowings or other financial transactions that may give rise to currency and interest rate exposure.
Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates and interest rates could negatively affect the Company’s results of operations, financial position and cash flows as occurred inwith respect to Venezuela in 2013.2015 and 2016.
In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.

The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.
The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
In April 2013, President Obama’s administration re-proposed significant changes to the U.S. international tax laws, including changes that would tax companies on “excess returns” attributable to certain offshore intangible assets, limit U.S. tax deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit rules. Other potentially significant changes to the U.S. international laws, including a move toward a territorial tax system and taxing currently the accumulated unrepatriated foreign earnings of controlled foreign corporations, have been set out by various Congressional committees. The Company cannot determine whether these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to their being enacted into law. If these or other changes to the U.S. international tax laws are enacted, they could have a significant impact on the financial results of the Company.
In addition, the Company may be affected by changes in tax laws, including tax rate changes, changes to the laws related to the remittance of foreign earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.
Pharmaceutical products can develop unexpected safety or efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.
Changes in laws and regulations could adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.

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Reliance on third party relationships and outsourcing arrangements could adversely affect the Company’s business.
The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third party service providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its information technology systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.
The Company is increasingly dependent on sophisticated information technologysoftware applications and computing infrastructure.
The Company is increasingly dependent on sophisticated software applications and computing infrastructure to conduct critical operations. Disruption, degradation, or manipulation of these applications and systems through intentional or accidental means could impact key business processes. Cyber-attacks against the Company’s applications and systems could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Misuse of these applications and systems could result in the disclosure of sensitive personal information or the theft of trade secrets and other confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency of its business processes; the use of which can create new risks. Although the aggregate impact on the Company’s operations and financial condition has not been material to date, the Company has been the target of events of this nature and expects them to continue. The Company monitors its data, information technology and infrastructure. The sizepersonnel usage of Company systems to reduce these risks and complexity of the Company’s computer systems makes them potentially vulnerablecontinues to service interruption, malicious intrusion and random attacks. In addition, data privacydo so on an ongoing basis for any current or security breaches by employees or others may pose a risk that data, including intellectual property or personal information, may be exposed to unauthorized individuals or to the public.potential threats. There can be no assurance that the Company’s efforts to protect its data and systems will prevent service interruption or the loss of critical or sensitive information whichfrom the Company’s or the Company’s third party providers’ databases or systems that could result in financial, legal, business or reputational harm to the Company.
Negative events in the animal health industry could have a negative impact on future results of operations.
Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as Bovine Spongiform Encephalopathy or mad cow disease, could lead to their widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely impact the Company’s results of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt production of vaccines at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to animal health include

epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.
In 2013, the Company voluntarily suspended sales of Zilmax, an animal feed supplement, in the United States and Canada after concerns were raised about cattle that had been fed Zilmax. The suspension materially reduced the sales of Zilmax. The Company can give no assurances as to when sales of Zilmax in the United States and Canada will resume.
Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.
The successful development, testing, manufacturing and commercialization of biologics, particularly human and animal health vaccines, is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics, including:
There may be limited access to, and supply of, normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.
The development, manufacturing and marketing of biologics are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both preclinical and clinical trial data and extensive data regarding the manufacturing

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procedures, is required for human vaccine candidates, and FDA approval is required for the release of each manufactured commercial lot.
Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.
Biologics are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
The use of biologically derived ingredients can lead to allegations of harm, including infections or allergic reactions, or closure of product facilities due to possible contamination. Any of these events could result in substantial costs.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. With respect to product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certain product liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.
Social media platforms present risks and challenges.
The inappropriate and/or unauthorized use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company on

any social networking web site could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely secure and protect information. Identifying new points of entry as social media continues to expand also presents new challenges.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential, and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:
•Competition from generic and/or biosimilar products as the Company’s products lose patent protection.
•Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.
•The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability

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to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.
•Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.
•Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.
•Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.
•Significant litigation related to Vioxxchanges in customer relationships or changes in the behavior and Fosamax.spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage.
•Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.
•Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.

•Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.
•Changes in tax laws including changes related to the taxation of foreign earnings.
•Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.
•Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
The Company’s corporate headquarters is currently located in Whitehouse Station, New Jersey, although the Company has announced that it intends to move its headquarters to Kenilworth, New Jersey in 2015.Jersey. The Company’s U.S. commercial operations are headquartered in Upper Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania and Whitehouse Station.Kenilworth, New Jersey. The Company’s vaccines business is conducted through divisional headquarters located in West Point, Pennsylvania. Merck’s Animal Health and Consumer Care global headquarters functions areis located in Summit,Madison, New Jersey, although the Company has announced it will vacate its Summit property.Jersey. Principal U.S. research facilities are located in Rahway Kenilworth and Summit,Kenilworth, New Jersey, West Point, Pennsylvania, Palo Alto, California, Boston, Massachusetts, and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in the Netherlands, Switzerland and China. Merck’s manufacturing operations are headquartered in Whitehouse Station, New Jersey. The Company also has production facilities for human health products at 12nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Australia, Canada, Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.

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Capital expenditures were $1.5$1.6 billion in 2013, $2.02016, $1.3 billion in 20122015 and $1.7$1.3 billion in 2011.2014. In the United States, these amounted to $902 million for 2013, $1.3 billion for 2012 and $1.2$1.0 billion in 2011.2016, $879 million in 2015 and $873 million in 2014. Abroad, such expenditures amounted to $646$594 million for 2013, $662in 2016, $404 million for 2012in 2015 and $516$444 million for 2011.in 2014.
The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company considersbelieves that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.
Item 3.Legal Proceedings.
The information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities”.
Item 4.Mine Safety Disclosures.
Not ApplicableApplicable.

Executive Officers of the Registrant (ages as of February 1, 2014)
At the time of the Merger, November 3, 2009, certain executive officers assumed their position in the newly merged company as noted below.
KENNETH C. FRAZIER — Age 59
December 2011 — Chairman, President and Chief Executive Officer, Merck & Co., Inc.
January 2011 — President and Chief Executive Officer, Merck & Co., Inc.
May 2010 — President, Merck & Co., Inc. — responsible for the Company’s three largest worldwide divisions — Global Human Health, Merck Manufacturing Division and Merck Research Laboratories
Prior to May 2010, Mr. Frazier was Executive Vice President and President, Global Human Health, Merck & Co., Inc. from 2007 to 2010.
ADELE D. AMBROSE — Age 57
November 2009 — Senior Vice President and Chief Communications Officer, Merck & Co., Inc. — responsible for the Global Communications organization
December 2007 — Vice President and Chief Communications Officer, Merck & Co., Inc. — responsible for the Global Communications organization
JOHN CANAN — Age 57
November 2009 — Senior Vice President Finance-Global Controller, Merck & Co., Inc. — responsible for the Company’s global controller’s organization including all accounting, controls, external reporting and financial standards and policies
January 2008 — Senior Vice President and Controller, Merck & Co., Inc. — responsible for the Corporate Controller’s Group
WILLIE A. DEESE — Age 58
November 2009 — Executive Vice President and President, Merck Manufacturing Division, Merck & Co., Inc. — responsible for the Company’s global manufacturing, procurement, and distribution and logistics functions
January 2008 — Executive Vice President and President, Merck Manufacturing Division, Merck & Co., Inc. — responsible for the Company’s global manufacturing, procurement, and distribution and logistics functions

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RICHARD R. DELUCA, JR. — Age 51
September 2011 — Executive Vice President and President, Merck Animal Health, Merck & Co., Inc. — responsible for the Merck Animal Health organization
Prior to September 2011, Mr. DeLuca was Chief Financial Officer, Becton Dickinson Biosciences (a medical technology company) since 2010 and President, Wyeth’s Fort Dodge Animal Health division from 2007 to 2010. He also served as Chief Operating Officer, Fort Dodge from 2006 to 2007 and Executive Vice President and Chief Financial Officer from 2002 to 2006.
CUONG VIET DO — Age 47
October 2011 — Executive Vice President and Chief Strategy Officer, Merck & Co., Inc. — responsible for leading the formulation and execution of the Company’s long term strategic plan
Prior to October 2011, Mr. Do was Senior Vice President, Corporate Strategy and Business Development, TE Connectivity (a global company that designs, manufactures and markets products for customers in a variety of industries) from 2009 to 2011 and Senior Vice President and Chief Strategy Officer, Lenovo (a personal technology company) from 2006 to 2009.
CLARK GOLESTANI — Age 47
December 2012 — Executive Vice President and Chief Information Officer, Merck & Co., Inc. — responsible for Merck’s global information technology (IT)
August 2008 — Vice President, Merck Research Laboratories Information Technology, Merck & Co., Inc. — responsible for global IT for Merck’s Research & Development division, including Basic Research, PreClinical, Clinical and Regulatory
MIRIAN M. GRADDICK-WEIR — Age 59
November 2009 — Executive Vice President, Human Resources, Merck & Co., Inc. — responsible for the Global Human Resources organization
January 2008 — Executive Vice President, Human Resources, Merck & Co., Inc. — responsible for the Global Human Resources organization
BRIDGETTE P. HELLER — Age 52
March 2010 — Executive Vice President and President, Merck Consumer Care, Merck & Co., Inc. — responsible for the Merck Consumer Care organization
Prior to March 2010, Ms. Heller was President, Johnson & Johnson’s Global Baby Business Unit from 2007 to 2010.
MICHAEL J. HOLSTON — Age 51
June 2012 — Executive Vice President and Chief Ethics and Compliance Officer, Merck & Co., Inc. — responsible for the Company’s compliance function, including Global Safety & Environment, Systems Assurance, Ethics and Privacy
Prior to June 2012, Mr. Holston was Executive Vice President, General Counsel and Board Secretary for Hewlett-Packard Company (a technology company) since 2007, where he oversaw the legal, compliance, government affairs, privacy and ethics operations.
PETER N. KELLOGG — Age 57
November 2009 — Executive Vice President and Chief Financial Officer, Merck & Co., Inc. — responsible for the Company’s worldwide financial organization, investor relations, corporate development, global facilities, and the Company’s joint venture relationships
August 2007 — Executive Vice President and Chief Financial Officer, Merck & Co., Inc. — responsible for the Company’s worldwide financial organization, investor relations, corporate development and licensing, and the Company’s joint venture relationships

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BRUCE N. KUHLIK — Age 57
November 2009 — Executive Vice President and General Counsel, Merck & Co., Inc. — responsible for legal, communications, and public policy functions
January 2008 — Executive Vice President and General Counsel, Merck & Co., Inc. — responsible for legal, communications, and public policy functions
ROGER M. PERLMUTTER — Age 61
April 2013 — Executive Vice President and President, Merck Research Laboratories, Merck & Co., Inc. — responsible for the Company’s research and development efforts worldwide
Prior to April 2013, Dr. Perlmutter was Executive Vice President of Research and Development, Amgen Inc. from 2001 to 2012.
MICHAEL ROSENBLATT, M.D. — Age 66
December 2009 — Executive Vice President and Chief Medical Officer, Merck & Co., Inc. — the Company’s primary voice to the global medical community on critical issues such as patient safety and oversight for the Company’s Global Center for Scientific Affairs
Prior to December 2009, Dr. Rosenblatt was the Dean of Tufts University School of Medicine since 2003.
ADAM H. SCHECHTER — Age 49
May 2010 — Executive Vice President and President, Global Human Health, Merck & Co., Inc. — responsible for the Company’s pharmaceutical and vaccine worldwide business
November 2009 — President, Global Human Health, U.S. Market-Integration Leader, Merck & Co., Inc. — commercial responsibility in the United States for the Company’s portfolio of prescription medicines. Leader for the integration efforts for the Merck/Schering-Plough merger across all divisions and functions.
August 2007 — President, Global Pharmaceuticals, Global Human Health, Merck & Co., Inc. — global responsibilities for the Company’s atherosclerosis/cardiovascular, diabetes/obesity, oncology, specialty/neuroscience, respiratory, bone, arthritis and analgesia franchises as well as commercial responsibility in the United States for the Company’s portfolio of prescription medicines
On February 3, 2014, the Board accepted the resignation of John Canan, who will retire from the Company on March 1, and elected Rita Karachun as Senior Vice President Finance - Global Controller, effective March 1, 2014, making her the Company’s principal accounting officer. Ms. Karachun, age 50, has served as Assistant Controller of the Company since November 2009. Prior to her appointment as Assistant Controller of the Company, Ms. Karachun served as the Assistant Controller of Schering-Plough Corporation since February 2007, responsible for preparing financial statements and for the worldwide consolidation of international entities.2017)
All officers listed above serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and the Board.

31
NameAgeOffices and Business Experience
Kenneth C. Frazier62Chairman, President and Chief Executive Officer (since December 2011); President and Chief Executive Officer (January 2011-December 2011), President (May 2010-January 2011)
Adele D. Ambrose60Senior Vice President and Chief Communications Officer (since November 2009)
Sanat Chattopadhyay57Executive Vice President and President, Merck Manufacturing Division (since March 2016); Senior Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)
Robert M. Davis50Executive Vice President, Global Services and Chief Financial Officer (since April 2016); Executive Vice President and Chief Financial Officer (April 2014-April 2016); Corporate Vice President and President, Medical Products, Baxter International, Inc. (2010-March 2014)
Richard R. DeLuca, Jr.54Executive Vice President and President, Merck Animal Health (since September 2011)
Julie L. Gerberding61Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health (since July 2016); Executive Vice President for Strategic Communications, Global Public Policy and Population Health (January 2015-July 2016); President, Merck Vaccines (January 2010-January 2015)
Mirian M. Graddick-Weir62Executive Vice President, Human Resources (since November 2009)
Michael J. Holston54Executive Vice President and General Counsel (since July 2015); Executive Vice President and Chief Ethics and Compliance Officer (June 2012-July 2015); Executive Vice President, General Counsel and Board Secretary, Hewlett-Packard Company (2007-December 2011)
Rita A. Karachun53Senior Vice President Finance - Global Controller (since March 2014); Assistant Controller (November 2009-March 2014)
Roger M. Perlmutter, M.D., Ph.D.64Executive Vice President and President, Merck Research Laboratories (since April 2013); Executive Vice President, Research and Development, Amgen Inc. (2001-February 2012)
Adam H. Schechter52Executive Vice President and President, Global Human Health (since May 2010)

PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal market for trading of the Company’s Common Stock is the New York Stock Exchange (“NYSE”) under the symbol MRK. The Common Stock market price information set forth in the table below is based on historical NYSE market prices.
The following table also sets forth, for the calendar periods indicated, the dividend per share information.
 Cash Dividends Paid per Common Share         
  Year
 4th Q
 3rd Q
 2nd Q
 1st Q
 2013$1.72
 $0.43
 $0.43
 $0.43
 $0.43
 2012$1.68
 $0.42
 $0.42
 $0.42
 $0.42
 Common Stock Market Prices
 
 2013  4th Q
 3rd Q
 2nd Q
 1st Q
 High  $50.42
 $49.08
 $50.16
 $45.42
 Low  $44.62
 $46.03
 $43.77
 $40.83
 2012         
 High  $48.00
 $45.70
 $41.75
 $39.43
 Low  $40.02
 $41.06
 $37.02
 $36.91
Access to Medicines
As of January 31, 2014, there were approximately 148,780 shareholders of record.
Issuer purchases of equity securities for the three months ended December 31, 2013 were as follows:
Issuer Purchases of Equity Securities
      ($ in millions)
Period 
Total Number
of Shares
Purchased(1)
 
Average Price
Paid Per
Share
 
Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs(1)
October 1 — October 31 
6,879,788(2)
 $47.55 $10,506
November 1 — November 30 1,411,050 $46.69 $10,440
December 1 — December 31 1,265,007 $49.13 $10,378
Total 9,555,845 $47.63 $10,378
(1)
All shares purchased during the period were made as part of a plan approved by the Board of Directors in May 2013 to purchase up to $15 billion in Merck shares.
(2)
Includes 5.5 million shares received in October upon settlement of an accelerated share repurchase agreement for which no cash was paid during the period.

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Performance Graph
The following graph assumes a $100 investment on December 31, 2008, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of the major U.S.-based pharmaceutical companies, which are: Abbott Laboratories, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, and Pfizer Inc.
Comparison of Five-Year Cumulative Total Return*
Merck & Co., Inc., Composite Peer Group and S&P 500 Index
 
End of
Period Value
 
2013/2008
CAGR**
MERCK$320
 26%
PEER GRP.***196
 14
S&P 500228
 18
 200820092010201120122013
MERCK100.00199.24204.95224.50252.10319.67
PEER GRP.100.00107.89107.41130.56150.00196.15
S&P 500100.00126.47145.55148.59172.34228.11
*The Performance Graph reflects Schering-Plough’s stock performance from December 31, 2008 through the close of the Merger and Merck’s stock performance from November 3, 2009 through December 31, 2013. Assumes the cash component of the merger consideration was reinvested in Merck stock at the closing price on November 3, 2009.
**Compound Annual Growth Rate
***As discussed above, on November 3, 2009, Merck and Schering-Plough completed the Merger in which Merck (subsequently renamed Merck Sharp & Dohme Corp. (“MSD”)) became a wholly-owned subsidiary of Schering-Plough (subsequently renamed Merck & Co., Inc.). As a result of the Merger, MSD no longer exists as a publicly traded entity and ceased all trading of its common stock as of the close of business on the Merger date. MSD has been permanently removed from the peer group index. In addition, Abbott Laboratories (“Abbott”) is currently included in the peer group; however, in 2013, Abbott spun off its pharmaceutical business into AbbVie Inc. In the future, the Company intends to remove Abbott from the peer group calculation.

This Performance Graph will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities and Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.  In addition, the Performance Graph will not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, other than as provided in Regulation S-K, or to the liabilities of section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.

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Item 6.Selected Financial Data.                        
The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report.
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
 
2013(1)
 
2012(2)
 
2011(3)
 
2010(4)
 
2009(5)
 
Results for Year:          
Sales$44,033
 $47,267
 $48,047
 $45,987
 $27,428
 
Materials and production16,954
 16,446
 16,871
 18,396
 9,019
 
Marketing and administrative11,911
 12,776
 13,733
 13,125
 8,543
 
Research and development7,503
 8,168
 8,467
 11,111
 5,845
 
Restructuring costs1,709
 664
 1,306
 985
 1,634
 
Equity income from affiliates(404) (642) (610) (587) (2,235) 
Other (income) expense, net815
 1,116
 946
 1,304
 (10,668) 
Income before taxes5,545
 8,739
 7,334
 1,653
 15,290
 
Taxes on income1,028
 2,440
 942
 671
 2,268
 
Net income4,517
 6,299
 6,392
 982
 13,022
 
Less: Net income attributable to noncontrolling interests113
 131
 120
 121
 123
 
Net income attributable to Merck & Co., Inc.4,404
 6,168
 6,272
 861
 12,899
 
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$1.49
 $2.03
 $2.04
 $0.28
 $5.67
 
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$1.47
 $2.00
 $2.02
 $0.28
 $5.65
 
Cash dividends declared5,132
 5,173
 4,818
 4,730
 3,598
(6) 
Cash dividends declared per common share$1.73
 $1.69
 $1.56
 $1.52
 $1.52
 
Capital expenditures1,548
 1,954
 1,723
 1,678
 1,461
 
Depreciation2,225
 1,999
 2,351
 2,638
 1,654
 
Average common shares outstanding (millions)2,963
 3,041
 3,071
 3,095
 2,268
 
Average common shares outstanding assuming dilution (millions)2,996
 3,076
 3,094
 3,120
 2,273
 
Year-End Position:          
Working capital$17,817
 $16,509
 $16,936
 $13,423
 $12,791
 
Property, plant and equipment, net14,973
 16,030
 16,297
 17,082
 18,279
 
Total assets105,645
 106,132
 105,128
 105,781
 112,314
 
Long-term debt20,539
 16,254
 15,525
 15,482
 16,095
 
Total equity52,326
 55,463
 56,943
 56,805
 61,485
 
Year-End Statistics:          
Number of stockholders of record149,400
 157,400
 166,100
 171,000
 175,600
 
Number of employees (7)
76,000
 83,000
 86,000
 94,000
 100,000
 
(1)
Amounts for 2013 include the amortization of purchase accounting adjustments, the impact of restructuring actions, intangible asset impairment charges, including in-process research and development impairment charges reflected in research and development expenses, and the favorable impact of certain tax items.
(2)
Amounts for 2012 include the amortization of purchase accounting adjustments, a net charge recorded in connection with the settlement of certain shareholder litigation, in-process research and development impairment charges reflected in research and development expenses, the impact of restructuring actions and the favorable impact of certain tax items.
(3)
Amounts for 2011 include the amortization of purchase accounting adjustments, in-process research and development impairment charges reflected in research and development expenses, the impact of restructuring actions, an arbitration settlement charge, and the favorable impact of certain tax items, including a net favorable impact of approximately $700 million relating to the settlement of a federal income tax audit.
(4)
Amounts for 2010 include the amortization of purchase accounting adjustments, in-process research and development impairment charges of $2.4 billion reflected in research and development expenses, the impact of restructuring actions, a reserve related to Vioxx litigation, a gain recognized on AstraZeneca LP’s exercise of its option to acquire certain assets from the Company and the favorable impact of certain tax items.
(5)
Amounts for 2009 include the impact of the merger with Schering-Plough Corporation on November 3, 2009, including the recognition of a gain representing the fair value step-up of Merck’s previously held interest in the Merck/Schering-Plough partnership as a result of obtaining a controlling interest and the amortization of purchase accounting adjustments recorded in the post-merger period. Also included in 2009, is a gain on the sale of Merck’s interest in Merial Limited, the favorable impact of certain tax items and the impact of restructuring actions.
(6)
Amount reflects dividends declared on Merck common stock. In addition, approximately $144 million of dividends were paid subsequent to the merger with Schering-Plough, and $431 million were paid prior to the merger, relating to common stock and preferred stock dividends declared by Schering-Plough in 2009.
(7)
Number of employees at December 31, 2013, does not reflect 1,300 employees of the Company’s joint ventures in China and Brazil, which are included in the consolidated results of Merck.

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Description of Merck’s Business
Merck & Co., Inc. (“Merck” or the “Company”) is a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that delivers innovative health solutions throughit has an important role to play in helping to improve access to its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products which it markets directly and through its joint ventures.around the world. The Company’s efforts in this regard are wide-ranging and include a set of principles that the Company strives to embed into its operations are principally managedand business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines. In 2011, Merck launched “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Merck has also provided funds to the Merck Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health.

Privacy and Data Protection
The Company is subject to a significant number of privacy and data protection laws and regulations globally, many of which place restrictions on the Company’s ability to transfer, access and use personal data across its business. 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 a products basisnew EU General Data Protection Regulation, which will become effective in 2018 and are comprisedimpose penalties up to 4% of four operating segments,global revenue, additional laws and regulations enacted in the United States, Europe, Asia and Latin America, increased enforcement and litigation activity in the United States and other developed markets, and increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global privacy program to manage these evolving risks which are the Pharmaceutical, Animal Health, Consumer Carehas been certified as compliant with and Alliances segments, and one reportable segment, which is the Pharmaceutical segment. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directlyapproved by the Company or through joint ventures. Human health pharmaceutical products consist of therapeuticAsia Pacific Economic Cooperation Cross-Border Privacy Rules System, the EU-U.S. Privacy Shield Program, and preventive agents, generally sold by prescription, for the treatment of human disorders. Binding Corporate Rules in the EU.
Distribution
The Company sells theseits 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 adultHuman health vaccines primarily administered at physician offices. The Company sells these human health vaccinesare 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 also hassells its 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,
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 to 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 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. Current U.S. patent law provides additional patent term for periods when the patented product was under regulatory review by the FDA. The EU also provides an additional six months of pediatric market exclusivity attached to a product’s Supplementary Protection Certificate (SPC). Japan provides the additional term for pediatric studies attached to market exclusivity unrelated to patent rights.

Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has consumer care operations that develop, manufacturethe following key patent protection in the United States, the EU and market over-the-counter, foot careJapan (including the potential for patent term extensions (PTE) and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets, as well as club stores and specialty channels.
OverviewSPCs where indicated) for the following marketed products:
The Company’s revenue performance in 2013 was tempered by ongoing business challenges, including recent
ProductYear of Expiration (U.S.)
Year of Expiration (EU)(1)
Year of Expiration (Japan)
Invanz2017 (composition)2017N/A
ArcoxiaNot Marketed2017Not Marketed
Cancidas2017 (formulation)20172019
ZostavaxExpired2018 (use)N/A
Dulera
2017 (formulation)/
2020 (combination)
N/AN/A
Zetia(2)
201720182019
Vytorin201720192019
Asmanex2018 (formulation)2018 (formulation)2020 (formulation)
NuvaRing(3)
2018 (delivery system)2018 (delivery system)N/A
Emend for Injection
2019(4)
2020(4)
2020
Follistim AQ2019 (formulation)2019 (formulation)2019 (formulation)
Noxafil20192019N/A
RotaTeq2019ExpiredExpired
Recombivax2020 (method of making)ExpiredExpired
Januvia
2022(4)
2022(4)
2025-2026(5)
Janumet
2022(4)
2023N/A
Janumet XR
2022(4)
N/AN/A
Isentress
2023(4)
2022(4)
2022
Simponi
N/A(6)
2024
N/A(6)
Bridion
2026(4) (with pending PTE)
20232024
Nexplanon2027 (device)2025 (device)Not Marketed
Bravecto2027 (with pending PTE)2025 (patent), 2029 (SPCs)2029
Gardasil2028
2021(4)
2017
Gardasil 9
2028
2025 (patent), 2030(4) (SPCs)
N/A
Keytruda2028
2028 (patent), 2030(4) (SPCs)
2032 (with pending PTE)
Zerbaxa
2028(4) (with pending PTE)
2023 (patent), 2028(4) (SPCs)
N/A
Sivextro
2028(4)
2024 (patent), 2029(4) (SPCs)
N/A
Zinplava2028 (with pending PTE)
2025(7)
N/A
Belsomra
2029(4)
N/A2031
Zepatier
2031(4)
2030 (patent), 2031(4) (SPCs)
2030
N/A:Currently no marketing approval.
Note:Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
(1)
The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the UK (Major EU Markets). If an SPC has been granted in some but not all Major EU Markets, both the patent expiry date and the SPC expiry date are listed.
(2)
By agreement, a generic manufacturer launched a generic version of Zetia in the United States in December 2016.
(3)
In August 2016, a district court decision found invalid the Company’s patent claiming NuvaRing’s delivery system. That decision is currently under appeal.
(4)
Eligible for 6 months Pediatric Exclusivity.
(5)
The PTE system in Japan allows for a patent to be extended more than once provided the later approval is directed to a different indication from that of the previous approval. This may result in multiple PTE approvals for a given patent, each with its own expiration date.
(6)
The Company has no marketing rights in the U.S. and Japan.
(7)
SPC applications to be filed by July 2017. Expected expiry 2030. Eligible for pediatric exclusivity.
While the expiration of a product patent expiries and ongoing global efforts toward health care cost containment that continue to exert pressure on product pricing and market access. Worldwide sales were $44.0 billionnormally results in 2013, a decline of 7% compared with 2012, including a 2% unfavorable effect from foreign exchange. The decline was driven primarily by the recent loss of market exclusivity for severalthe 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 particularly Singulair, a medicine indicated foralso depends upon many other factors such as the chronic treatmentnature of asthmathe market and the reliefposition of symptomsthe product in it, the growth of allergic rhinitis,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.

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 an 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 in the United States by the FDA. Additional patent term may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity.
Under Review (in the U.S.)
Currently Anticipated
Year of Expiration (in the U.S.)
V419 (pediatric hexavalent combination vaccine)2020 (method of making)
The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development:
Phase 3 Drug Candidate
Currently Anticipated
Year of Expiration (in the U.S.)
V920 (ebola vaccine)2023
MK-8228 (letermovir)2024
MK-0859 (anacetrapib)2027
MK-7655A (relebactam + imipenem/cilastatin)2030
MK-8931 (verubecestat)2030
MK-1439 (doravirine)2031
MK-8835 (ertuglifozin)2030
MK-8835A (ertuglifozin + sitagliptin)2030
MK-8835B (ertuglifozin + metformin)2030
MK-1242 (vericiguat)2031
Unless otherwise noted, the patents in the above charts are compound patents. Each patent is 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. In addition, 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. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.
For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 10. “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 2016 on patent and know-how licenses and other rights amounted to $222 million. Merck also incurred royalty expenses amounting to $1.1 billion in 2016 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 12,300 people are employed in the Company’s research activities. Research and development expenses were $10.1 billion in 2016, $6.7 billion in 2015 and $7.2 billion in 2014 (which included restructuring costs and acquisition and divestiture-related costs in all years). The Company prioritizes its research and development efforts and focuses on candidates that it believes represent breakthrough science that will make a difference for patients and payers.

The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as Maxalt, aresearch programs directed toward product for acute treatment of migraine, Propecia, a product for the treatment of male pattern hair loss, and Temodar, a treatment for certain types of brain tumors.development. The Company experienced a significant and rapid decline in sales of these products following loss of market exclusivity. These declines were partially offset by higher sales of vaccines, immunology, diabetes and HIV products.
The Company continued to successfully execute on its cost reduction initiatives in 2013. Marketing and administrative expenses and Research and development costs were down over $1.5 billion on a combined basis in 2013 as compared with 2012 reflecting targeted reductions in promotional spending and lower costs as a result of portfolio prioritization.
In an effort to drive further company-wide efficiencies, Merck is taking several strategic and operating actions in response to its business challenges and the rapidly changing external environment it is facing that are designed to drive short- and long-term growth. In October 2013, the Company announced a multi-year global initiative to sharpen its commercial andCompany’s research and development focusmodel is designed to enable Merck to better allocate itsincrease productivity and improve the probability of success by prioritizing the Company’s research and development resources on candidates that itthe Company believes are capable of providing unambiguous, promotable advantages to patients and payers. This includes bolstering its pipelinepayers and implementing a more agile operating model, with a significantly reduced, more flexible cost structure while still maintaining a high level of cash returned to shareholders.
Geographically,delivering the Company will increase its focus on ten prioritized markets, which account for the majority of revenue in its pharmaceutical and vaccine business. These markets are the United States, Japan, France, Germany, Canada, United Kingdom, China, Brazil, Russia and Korea. The Company will continue to invest in high-growth and key emerging markets.
Within the core human pharmaceutical and vaccine business, Merck will continue to support its in-line portfolio and prepare for promising launches in the pipeline. The Company will increase its focus on the key therapeutic areas that meet unmet medical needs, provide the best opportunities for the business and deliver the greatestmaximum value for customers – diabetes, acute hospital care, vaccines and oncology. As part of its intensified portfolio assessment process, the Company has divested a portion of its U.S. ophthalmics businessapproved medicines and sold the U.S. marketing rights for Saphris,

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an antipsychotic indicated for the treatment of schizophreniavaccines through new indications and bipolar I disorder in adults. The Company’s portfolio assessment process is ongoing and future product divestitures may occur.
In addition, in January 2014, the Company announced that it was evaluating the respective roles of Merck’s Animal Health and Consumer Care businesses in the Company’s strategy for long-term value creation. The Company expects to complete the evaluation process and take action, if any, in 2014. The Company could reach different decisions about the two businesses.
The Company’s re-focused research and development efforts include programs such as the Company’s anti-PD-1 immunotherapy (MK-3475) in oncology, which has received a Breakthrough Therapy designation from the U.S. Food and Drug Administration (the “FDA”) for advanced melanoma, Merck’s BACE inhibitor for Alzheimer’s disease (MK-8931), the Company’s all oral combination regimen for the treatment of chronic hepatitis C virus infection (MK-5172/MK-8742), and V503, a nine-valent human papillomavirus (“HPV”) vaccine. In January 2014, the Company announced it has initiated the rolling submission of a Biologics License Application (“BLA”) to the FDA for MK-3475 in patients with advanced melanoma who have previously been treated with ipilimumab. During 2013, the Company received a Breakthrough Therapy designation for MK-5172/MK-8742 and has advanced the combination into Phase 2B in a diverse range of chronic hepatitis C patients. The Company has initiated Phase 3 trials for its BACE inhibitor (MK-8931) and filed a BLA with the FDA for V503.
new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company expectsis committed to makemaking externally sourced programs a greater component of its pipeline strategy. During 2013,strategy, with a focus on supplementing 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 access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company continues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, neurodegenerative diseases, and respiratory diseases.
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 New Drug Application (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 biologic that they believe has promise to treat a medical condition, the Company entered into a collaboration agreementcommences 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 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase 2 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 effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 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 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies.
In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, 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. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, 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 (CRL) 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 CRL, 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.
The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite development and commercializationreview of ertugliflozin,new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review.
In addition, under the Generating Antibiotic Incentives Now Act, the FDA may grant Qualified Infectious Disease Product (QIDP) status to antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority Review of the NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and Cosmetic Act.
The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new chemical compounds and products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (MAA) with the EMA. After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.
Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the Pharmaceuticals and Medical Devices Agency in Japan, Health Canada, Agência Nacional de Vigilância Sanatária in Brazil, Korea Food and Drug Administration in South Korea, Therapeutic Goods Administration in Australia and China Food and Drug Administration. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.

Research and Development Update
The Company currently has several candidates under regulatory review in the United States.
Keytruda is an FDA-approved anti-PD-1 (programmed death receptor-1) therapy in clinical development for expanded indications in different cancer types. Keytruda is currently approved for the treatment of NSCLC, melanoma, advanced melanoma, and head and neck cancer.
In February 2017, the FDA accepted for review two supplemental BLAs (sBLA) for Keytruda in patients with locally advanced or metastatic urothelial cancer, including most bladder cancers. The application for first-line use was granted Priority Review for the treatment of these patients who are ineligible for cisplatin-containing therapy. The application for second-line use was granted Priority Review for these patients with disease progression on or after platinum-containing chemotherapy. The PDUFA action date for both applications is June 14, 2017. The FDA previously granted Breakthrough Therapy designation to Keytruda for the second-line treatment of patients with locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy.
In January 2017, the FDA accepted for review an sBLA for Keytruda plus chemotherapy (pemetrexed plus carboplatin) for the first-line treatment of patients with metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations. This is the first application for regulatory approval of Keytruda in combination with another treatment. The FDA granted Priority Review with a PDUFA action date of May 10, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program.
In December 2016, the FDA accepted for review an sBLA for Keytruda for the treatment of patients with refractory classical Hodgkin lymphoma or for patients who have relapsed after three or more prior lines of therapy. The FDA granted Priority Review with a PDUFA action date of March 15, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program.
In November 2016, the FDA accepted for review an sBLA for Keytruda, for the treatment of previously treated patients with advanced microsatellite instability-high (MSI-H) cancer. The FDA granted Priority Review with a PDUFA action date of March 8, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program. The FDA recently granted Breakthrough Therapy designation to Keytruda for unresectable or metastatic MSI-H non-colorectal cancer, and previously granted it for the treatment of patients with unresectable or metastatic MSI-H colorectal cancer.
Additionally, Keytruda has also received Breakthrough Therapy designation from the FDA for the treatment of patients with primary mediastinal B-cell lymphoma that is refractory to or has relapsed after two prior lines of therapy.
The Keytruda clinical development program consists of more than 400 clinical trials, including more than 200 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal and triple-negative breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
MK-1293 is an investigational follow-on biologic insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes under review by the FDA. MK-1293 was approved in the EU in January 2017. MK-1293 is being developed in collaboration with and partially funded by Samsung Bioepis.
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a partnership between Merck and Sanofi. This vaccine is designed to help protect against six important diseases - diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b (Hib), and hepatitis B. On November 2, 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are reviewing the CRL and plan to have further communication with the FDA. In February 2016, the EC granted marketing authorization for V419 for prophylaxis against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 is being marketed as Vaxelis in the EU.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above.

MK-8931, verubecestat, is an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1) for the treatment of Alzheimer’s disease. In February 2017, Merck announced that its external Data Monitoring Committee (eDMC) recommended termination of the Phase 2/3 EPOCH study of verubecestat in mild-to-moderate Alzheimer’s disease based on the low probability of success of this study. The same eDMC recommended that a separate Phase 3 study, APECS, evaluating verubecestat for amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease, continue as planned. Estimated primary completion date for the APECS study, which is fully enrolled, is February 2019.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (CETP) in development for raising HDL-C and reducing LDL-C. Anacetrapib is being evaluated in a 30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular disease. In November 2015, Merck announced that the Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck remains blinded to the actual results of this analysis and to other REVEAL safety and efficacy data. Under the study, the last patient’s last visit occurred in January 2017. The Company anticipates receiving the top-line results from the study mid-year 2017.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a QIDP with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.
MK-8228, letermovir, is an investigational oral sodium glucose cotransporter (“SGLT2”)once-daily or an intravenous infusion antiviral candidate for the prevention of clinically-significant cytomegalovirus (CMV) infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track designation. In October 2016, Merck announced that the pivotal Phase 3 clinical study of letermovir met its primary endpoint. The global, multicenter, randomized, placebo-controlled study evaluated the efficacy and safety of letermovir in adult (18 years and older) CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant. Merck plans to submit regulatory applications for the approval of letermovir in the United States and EU in 2017.
MK-8835, ertugliflozin, is an investigational oral SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes in collaboration with Pfizer Inc. (Pfizer). In September 2016, Merck and Pfizer announced that a Phase 3 clinical development.
study (VERTIS SITA2) of ertugliflozin met its primary endpoint. Both 5 mg and 15 mg daily doses of ertugliflozin showed significantly greater reductions in A1C (an average measure of blood glucose over the past two to three months) when added to patients on a background of sitagliptin and metformin. Ertugliflozin is also being studied in combination with Januvia (sitagliptin) and metformin. In December 2016, Merck submitted NDAs to the FDA for ertugliflozin and the two fixed-dose combinations: MK-8835A, ertugliflozin plus Januvia, and MK-8835B, ertugliflozin plus metformin. The Company anticipates a response from the FDA in the first quarter of 2017. Ertugliflozin and the two fixed-dose combinations are currently under review in the EU.
MK-0431J is out-licensing or discontinuing selected late-stagean investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical development assetstrials. In November 2014, Merck and reducing its focusNewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision to grant V920 EUAL status will be based on platform technologies. During 2013,data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the Company out-licensed MK-1775,vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that

V920 offers substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-randomized clusters. Results from other ongoing studies are anticipated in the second half of 2017.
MK-1242, vericiguat, is an investigational treatment for certain typesheart failure being studied in a Phase 3 clinical trial in patients suffering from chronic heart failure. The development of ovarian cancer,vericiguat is part of a worldwide strategic collaboration between Merck and Bayer AG.
V212 is an inactivated varicella zoster virus (VZV) vaccine in January 2014 entered into an agreement to divest its Sirna Therapeutics, Inc. subsidiary and related RNAi technology assets.
development for the prevention of herpes zoster. The Company currently has several candidates under reviewcompleted the Phase 3 trial in autologous hematopoietic cell transplant patients and is conducting another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the FDA: MK-5348, vorapaxar,results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017.
MK-1439, doravirine, is an investigational anti-thrombotic medicine (also under review in the European Union (the “EU”)); V503, a nine-valent HPV vaccine; MK-8962, corifollitropin alfa injection, an investigational fertility treatment; MK-7243, Grastek, an investigational Timothy grass pollenallergy immunotherapy tablet (“AIT”) and MK-3641, Ragwitek, an investigational ragweed pollen AIT. Also, MK-8109, vintafolide, an investigational cancer candidate, is under review in the EU and MK-7009, vaniprevir, an investigational, oral twice-daily proteasenon-nucleoside reverse transcriptase inhibitor being developed by Merck for the treatment of chronic hepatitis C virus infection is under review in Japan.HIV-1 infection. In February 2014, the Company resubmitted its New Drug Application (“NDA”) to the FDA for MK-4305, suvorexant, responding to the agency’s Complete Response Letter (“CRL”) received in 2013. In addition, the Company anticipates resubmitting its NDA application in 2014 to the FDA for MK-8616, sugammadex sodium injection, a medication for the reversal of certain muscle relaxants used during surgery for which2017, the Company received positive results from a CRLfirst Phase 3 study showing that doravirine was non-inferior to an alternative regimen in 2013 (see “Researchachieving and Development” below)maintaining HIV-1 suppression in infected adults during 48 weeks of treatment.
In 2016, the Company also divested or discontinued certain drug candidates.
Merck announced that it is discontinuing the development of odanacatib, an investigational cathepsin K inhibitor for osteoporosis, and will not seek regulatory approval for its use. Merck previously reported a numeric imbalance in adjudicated stroke events in the pivotal Phase 3 fracture outcomes study in postmenopausal women. The Company has decided to discontinue development after an independent adjudication and analysis of major adverse cardiovascular events confirmed an increased risk of stroke.
The Company determined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that included MK-8237, an investigational allergy immunotherapy tablet for house dust mite allergy. Merck has given ALK-Abelló six months’ notice that it is terminating the agreement and therefore this compound will be returned to ALK-Abelló. This decision was not due to efficacy or safety concerns.
The Company also has 12decided, for business reasons, to discontinue the clinical development of MK-8342B, referred to as the Next Generation Ring, an investigational combination (etonogestrel and 17ß-estradiol) vaginal ring for contraception and the treatment of dysmenorrhea in women seeking contraception. This decision was not due to efficacy or safety concerns.
Merck announced that, for business reasons, it will not proceed with submitting marketing applications for omarigliptin, an investigational, once-weekly DPP-4 inhibitor, in the United States or Europe. This decision did not result from concerns about the efficacy or safety of omarigliptin.

The chart below reflects the Company’s research pipeline as of February 24, 2017. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 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. Except as otherwise noted, candidates in Phase 3 development and anticipates filing a New Drug Application (“NDA”) or a BLA, as applicable, with1, additional indications in the FDAsame therapeutic area (other than with respect to severalKeytruda) and additional claims, line extensions or formulations for in-line products are not shown.
Phase 2Phase 3 (Phase 3 entry date)Under Review
Asthma
MK-1029
Cancer
MK-3475 Keytruda
PMBCL (Primary Mediastinal
Large B-Cell Lymphoma)
Advanced Solid Tumors
Nasopharyngeal
Ovarian
Prostate
MK-2206
Cough, including cough with IPF
MK-7264
Diabetes Mellitus
MK-8521
Hepatitis C
MK-3682B (MK-3682 (uprifosbuvir)/MK-5172 (grazoprevir)/MK-8408 (ruzasvir))
Pneumoconjugate Vaccine
V114
Alzheimer’s Disease
MK-8931 (verubecestat) (December 2013)
Atherosclerosis
MK-0859 (anacetrapib) (May 2008)
Bacterial Infection
MK-7655A (relebactam+imipenem/cilastatin)
(October 2015)
Cancer
MK-3475 Keytruda
Bladder (October 2014) (EU)
Breast (October 2015)
Colorectal (November 2015)
Esophageal (December 2015)
Gastric (May 2015)
Head and Neck (November 2014) (EU)
Hepatocellular (May 2016)
Hodgkin Lymphoma (July 2016) (EU)
Multiple Myeloma (December 2015)
Renal (October 2016)
CMV Prophylaxis in Transplant Patients
MK-8228 (letermovir) (June 2014)
Diabetes Mellitus
MK-8835 (ertugliflozin) (November 2013)
(U.S.)(1)
MK-8835A (ertugliflozin+sitagliptin)
(September 2015) (U.S.)(1)
MK-8835B (ertugliflozin+metformin)
(August 2015) (U.S.)(1)
MK-0431J (sitagliptin+ipragliflozin)
(October 2015) (Japan)(1)
Ebola Vaccine
V920 (March 2015)
Heart Failure
MK-1242 (vericiguat) (September 2016)(1)
Herpes Zoster
V212 (inactivated VZV vaccine) (December 2010)
HIV
MK-1439 (doravirine) (December 2014)

New Molecular Entities/Vaccines
Allergy
MK-8237, House Dust Mite (U.S.)(2)
Diabetes Mellitus
MK-1293 (U.S.)(1)
MK-8835 (ertugliflozin) (EU)(1)
MK-8835A (ertugliflozin+sitagliptin) (EU)(1)
MK-8835B (ertugliflozin+metformin) (EU)(1)
Pediatric Hexavalent Combination Vaccine
V419 (U.S.)(3)


Certain Supplemental Filings
Cancer
Keytruda
• Previously Treated Microsatellite Instability-High Cancer (U.S.)
• Relapsed or Refractory Classical Hodgkin Lymphoma (U.S.)
• Combination with Chemotherapy in first-line non-squamous Non-Small-Cell Lung Cancer (U.S.)
• First Line Cis-ineligible Bladder Cancer (U.S.)
• Second Line Metastatic Bladder Cancer (U.S.)

Footnotes:
(1) Being developed in a collaboration.
(2)  MK-8237 was being developed as part of a North America partnership with ALK-Abelló. Merck has given ALK-Abelló six months’ notice that it is terminating the agreement and, therefore, this compound will be returned to ALK-Abelló.
(3)V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi. On November 2, 2015, the FDA issued a CRL with respect to V419. Both companies are reviewing the CRL and plan to have further communication with the FDA.

Employees
As of these candidatesDecember 31, 2016, the Company had approximately 68,000 employees worldwide, with approximately 26,500 employed in 2014,the United States, including the completionPuerto Rico. Approximately 29% of worldwide employees of the rolling submission of the BLACompany are represented by various collective bargaining groups.
Restructuring Activities
The Company incurs substantial costs for MK-3475 for patients with advanced melanoma who have previously been treated with ipilimumab.
In October 2013,restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the implementationintegration of Company’s new global initiative,certain acquired businesses. In 2010 and 2013, the Company announced acommenced actions under global restructuring program (the “2013 Restructuring Program”). As part of the program, the Company expectsprograms designed to reducestreamline its total workforce by approximately 8,500 positions. These workforce reductions will primarily come fromcost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as research and development. The Company will also reduce its global real estate footprint and continue to improve the efficiency of its manufacturing and supply network. The Company recorded total pretax costs of $1.2 billion in 2013 related to this restructuring program. The actions under the 2013 Restructuring Program are expected to be substantially completed by the end of 2015 with the cumulative pretax costs estimated to be approximately $2.5 billion to $3.0 billion. The Company expects the actions under the 2013 Restructuring Program to result in annual net cost savings of approximately $2.0 billion by the end of 2015. The Company anticipates that the actions under the 2013 Restructuring Program, combined with remaining actions under the Merger Restructuring Program (discussed below), will result in annual net cost savings of $2.5 billion by the end of 2015 compared with full-year 2012 expense levels.

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The global restructuring program (the “Merger Restructuring Program”) that was initiated in 2010 subsequent to the Merck and Schering-Plough Corporation (“Schering-Plough”) merger (the “Merger”) is intended to streamline the cost structure of the combined company. The workforce reductions associated with this plan relate to 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 recorded total pretax costsalso continues to reduce its global real estate footprint and improve the efficiency of $1.1 billion in 2013, $951 million in 2012its manufacturing and $1.8 billion in 2011supply network. The non-facility related to this restructuring program. The restructuring actions under these programs are substantially complete; the Merger Restructuring Program wereremaining activities primarily relate to ongoing facility rationalizations. Since inception of the programs through December 31, 2016, Merck has eliminated approximately 40,900 positions comprised of

employee separations, as well as the elimination of contractors and vacant positions. The Company expects to substantially completedcomplete the remaining actions under these programs by the end of 2013,2017.
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 $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and, in management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. Although it is not possible to predict with certainty the outcome of these 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 $64 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 as a percentage of total Company sales were 54% of sales in 2016, 56% of sales in 2015 and 60% of sales in 2014.
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 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.
Financial information about geographic areas of the Company’s business is provided 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 U.S. Securities and Exchange Commission (SEC). In addition, the Company will provide without charge a copy of its Annual Report on Form 10-K, including financial statements and schedules, upon the written request of any shareholder to Merck Shareholder Services, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, NJ 07033 U.S.A.
The Company’s corporate governance guidelines and the charters of the Board of Directors’ four 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.

Item 1A.Risk Factors.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.
The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely affected.
Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of human health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.
Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or claims by third parties of infringement against the Company. The Company defends its patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file Abbreviated NDAs with the exceptionFDA seeking to market generic forms of certain actions, principally manufacturing-related. Subsequentthe Company’s products prior to the Merger,expiration of relevant patents owned or licensed by the Company has rationalized a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2016.Company. The Company expects the estimated total cumulative pretax costs for this programnormally responds by defending its patent, including by filing lawsuits alleging patent infringement. Patent litigation and other challenges to be approximately $7.4 billion to $7.7 billion and to yield annual savings upon completion of the program of approximately $4.0 billion to $4.6 billion.
Costs associated with the Company’s restructuring actionspatents are included in Materialscostly and production costs, Marketingunpredictable and administrative expenses, Research and development expenses and Restructuring costs. The Company estimates that of the projected costs associated with the above mentioned restructuring programs, 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.
During 2013,may deprive the Company returned $11.7 billion of cash to shareholders through stock buy-back activity and dividend payments. Pursuant to a $15 billion share repurchase program approved in May 2013 by Merck’s Board of Directors, Merck entered into an accelerated share repurchase (“ASR”) agreement with Goldman, Sachs & Co. (“Goldman Sachs”). Under the ASR, Merck repurchased 105 million shares of common stock for $5 billion utilizing funding from an underwritten public debt offering. Also, in November 2013, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.44 per share from $0.43 per share.
Earnings per common share assuming dilution attributable to common shareholders (“EPS”) for 2013 were $1.47 compared with $2.00 in 2012. EPS in both years reflect a net unfavorable impact resulting from acquisition-related costs and restructuring costs, and certain other items. Non-GAAP EPS, which excludes these items, were $3.49 in 2013 compared with $3.82 in 2012 (see “Non-GAAP Income and Non-GAAP EPS” below). The decline in Non-GAAP EPS in 2013 as compared with 2012 was due primarily to lower sales reflecting the loss of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other companies’ patents, potential legislation relating to patents, as well as regulatory initiatives may result in a more general weakening of intellectual property protection.
If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available and, in the case of certain products, particularly Singulair, lower equity income and higher foreign exchange losses, partially offset by lower operating expenses. EPSsuch a loss could result in 2013 benefited from lower average shares outstanding due to the ASR program discussed above.
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.a material non-cash impairment charge. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, and generic drug and consumer and animal health care manufacturers. The Company’sresults of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement products.
A chart listing the patent protection for certain of the Company’s marketed products, and U.S. patent protection for candidates under review and Phase 3 candidates is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”
As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.
The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales for that product, as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of market exclusivity can have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects. For example, pursuant

to an agreement with a generic manufacturer, that manufacturer launched in the United States a generic version of Zetia in December 2016. In addition, the Company will lose U.S. patent protection for Vytorin in April 2017. The Company expects a significant and rapid loss of sales of Zetia and Vytorin in the United States in 2017.
Key products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material and negative impact on results of operations and cash flows.
The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as Januvia, Janumet, Keytruda, Gardasil/Gardasil 9, Isentress and Zepatier. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant adverse impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-approval trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. Such events could have a material adverse effect on the sales of any such products.
The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that have lost patent protection.
Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products each year. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products which it may develop through joint ventures and products which it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.
For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals, therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the regulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.
The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.

The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.
Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:
findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;
failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, and uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;
failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;
lack of economic feasibility due to manufacturing costs or other factors; and
preclusion from commercialization by the proprietary rights of others.
In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with acquisitions.
Failure to successfully develop and market new products in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.
The Company’s products, including products in development, cannot be marketed unless the Company obtains and maintains regulatory approval.
The Company’s activities, including research, preclinical testing, clinical trials and manufacturing and marketing its products, are subject to extensive regulation by numerous federal, state and local governmental authorities in the United States, including the FDA, and by foreign regulatory authorities, including in the EU. In the United States, the FDA is of particular importance to the Company, as it administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, cost reduction. The FDA and foreign regulatory authorities have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.
Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.
Developments following regulatory approval may adversely affect sales of the Company’s products.
Even after a product reaches market, certain developments following regulatory approval, including results in post-approval Phase 4 trials or other studies, may decrease demand for the Company’s products, including the following:
the re-review of products that are already marketed;
the recall or loss of marketing approval of products that are already marketed;


changing government standards or public expectations regarding safety, efficacy or labeling changes; and
greater scrutiny in advertising and promotion.
In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, following the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and Japan’s Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities.
The Company faces intense competition from lower cost-generic products.
In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures which encourages the use of generic and biosimilar competition asproducts. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products mature,can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial position and prospects.
The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.
The Company’s products face intense competition from competitors’ products. This competition may increase as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products enter the market. In such an event, the competitors’ products may be safer or more effective, more convenient to use or more effectively marketed and sold than the Company’s products. Alternatively, in the case of competitors,generic competition, including the generic availability of competitors’ branded products, they may be equally safe and new information from clinical trialseffective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of marketed products or post-marketing surveillance.operations, financial position and prospects. In addition, patent positions are increasingly being challenged by competitors,if products that were measured at fair value and the outcome can be highly uncertain. An adverse resultcapitalized in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could resultconnection with acquisitions experience difficulties in the recognition of anmarket that negatively impact product cash flows, the Company may recognize material non-cash impairment chargecharges with respect to intangible assets associated with certainthe value of those 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

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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 or reduced sales for the Company’s products in that therapeutic category.
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 EnvironmentThe Company faces pricing pressure with respect to its products.
Global efforts toward healthThe Company faces increasing pricing pressure globally and, particularly in mature markets, from managed care cost containment continue to exert pressure on product pricingorganizations, government agencies and market access.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, (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 ACA, and (iii) state activities aimed at increasing price transparency. 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 U.S., larger customers may, in the future, ask for and receive higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the managed care organization.
In order to provide information about the Company’s pricing practices, the Company recently posted  on its website its first Pricing Action Transparency Report for the United States for the years 2010 - 2016. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010.  The report shows that the Company’s average annual net price increases (after taking sales deductions such as rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits since 2010.  Additionally, the weighted average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of the ACA. In 2016, the Company’s gross U.S. sales were reduced by 40.9% as a result of rebates, discounts and returns.
Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in funding health care and, in that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with respect to its products.
The Company expects pricing pressures to increase in the future.
The health care industry in the United States will continue to be subject to increasing regulation and political action.
The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by Congress 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 hospitals serving a disproportionate share of low income or uninsured patients.legislatures.
Against this backdrop,In 2010, the United States enacted major health care reform legislation in 2010, which began to be implemented in 2010.the form of the ACA. Various insurance market reforms have advanced and will continue through full implementationstate and federal insurance exchanges were launched in 2014. The law is expected to expand access to health care to about 32 million Americans by the end of the decade who did not previously have insurance coverage. 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% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). Approximately $280 million, $210 million and $150 million was recorded by Merck as a reduction to revenue in 2013, 2012 and 2011, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers are now required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $2.8 billion in 2013 and will be $3.0 billion in 2014.2016 and will increase to $4.0 billion in 2017. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid.
On January 21, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck, at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The Company recorded $151 million, $190 million and $162 million of costs within Marketing and administrative expenses in 2013, 2012 and 2011, respectively, forwill evaluate the annual health care reform fee. The fullfinancial impact of U.S. health care reform cannot be predicted at this time.these two elements when they become effective.

The Company also faces increasingcannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have on the Company’s results of operations, financial condition or business.
Changes in laws and regulations could materially adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, pressure globally from managed care organizations, government agenciessales, litigation and programs thatintellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.
In particular, there is significant uncertainty about the future of the ACA and healthcare laws in general in the United States. The Company is participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of operations, financial condition or business.
The uncertainty in global economic conditions together with austerity measures being taken by certain governments could negatively affect the Company’s operating results.
The uncertainty in global economic conditions may result in a further slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups, federal and state exchanges, 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 of 2010. 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.a material adverse effect on the Company’s business, cash flow, results of operations, financial position and prospects.
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. These types of revenue generating or cost saving proposals include additional 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.
EffortsGlobal efforts toward health care cost containment remain intense in several European countries. Many countries have continuedcontinue to announceexert pressure on product pricing and execute austerity measures, which include the implementation ofmarket access. In many international markets, government-mandated pricing actions to

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reducehave reduced prices of generic and patented drugs and mandatory switches to generic drugs. While the Company is taking steps to mitigate the impact in these countries, theIn addition, other austerity measures continued to negatively affectaffected the Company’s revenue performance in 2013 and the2016. The Company anticipates thethese pricing actions and other austerity measures will continue to negatively affect revenue performance in 2014. 2017.
If credit and economic conditions worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.
The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material negative impact on the Company’s results of operations.
The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:
changes in medical reimbursement policies and programs and pricing restrictions in key markets;
multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;
trade protection measures and import or export licensing requirements;
foreign exchange fluctuations;
diminished protection of intellectual property in some countries; and
possible nationalization and expropriation.
In addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a majoritysignificant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.

Failure to attract and retain highly qualified personnel could affect its ability to successfully develop and commercialize products.
The Company’s success is largely dependent on its continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical research and development, governmental regulation and commercialization. Competition for qualified personnel in the pharmaceutical industry is intense. The Company cannot be sure that it will be able to attract and retain quality personnel or that the costs of doing so will not materially increase.
In the past, the Company has experienced difficulties and delays in manufacturing of certain of its products.
Merck has, in the past, experienced difficulties in manufacturing certain of its vaccines and other products. The Company may, in the future, experience difficulties and delays inherent in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in product manufacturing; (ii) construction delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. Manufacturing difficulties can result in product shortages, leading to lost sales and reputational harm to the Company.
The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its sales in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in these markets will succeed. Some countries attemptwithin emerging markets may be especially vulnerable to contain drug costs by engaging in reference pricing in which authorities examine pre-determinedperiods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets for published pricesstrategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, includingthese countries have currencies that fluctuate substantially and if such currencies devalue and the Company’s. Guidelines for examining reference pricing are usually set in local markets and canCompany cannot offset the devaluations, the Company’s financial performance within such countries could be changed pursuant to local regulations.adversely affected.
In addition, in Japan,China, commercial and economic conditions may adversely affect the pharmaceutical industry is subjectCompany’s growth prospects in that market. While the Company continues to government-mandated biennial price reductions of pharmaceutical products and certain vaccines. Furthermore, the government can order repricings for classes of drugs if it determinesbelieve that it is appropriate under applicable rules.
Certain markets outsideChina represents an important growth opportunity, these events, coupled with heightened scrutiny of the United States have also implemented cost management strategies, such as health technology assessments, which require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement.
The Company’s focus on and share of revenue from emerging markets has increased. Governments in many emerging markets are also focused on constraining health care costsindustry, may continue to have an impact on product pricing and have enacted price controls and related measures, such as compulsory licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access.access generally. The Company anticipates that pricing pressures and market access challenges will continuethe reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in 2014China may continue.
For all these reasons, sales within emerging markets carry significant risks. However, a failure to varying degrees inmaintain the emerging markets.
Beyond pricing and market access challenges, other conditionsCompany’s presence in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
The Company is exposed to market countries canrisk from fluctuations in currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into acquisition, licensing, borrowings or other financial transactions that may give rise to currency and interest rate exposure.
Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates and interest rates could negatively affect the Company’s effortsresults of operations, financial position and cash flows as occurred with respect to continueVenezuela in 2015 and 2016.
In order to growmitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.

The Company is subject to evolving and complex tax laws, which may result in these markets, including potential political instability, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developmentsadditional liabilities that may adversely impactaffect results of operations.
The Company is subject to evolving and complex tax laws in the business environmentjurisdictions in which it operates. Significant judgment is required for determining the Company. Further,Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
In addition, the Company may engage third-party agents to assistbe affected by changes in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.
In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care,tax laws, 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 respondtax rate changes, changes to the evolving health care environmentlaws related to the remittance of foreign earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and market forces.revised tax law interpretations in domestic and foreign jurisdictions.

Pharmaceutical products can develop unexpected safety or efficacy concerns.
Government Regulation
The pharmaceutical industry is subjectUnexpected safety or efficacy concerns can arise with respect to regulation by regional, country, state and local agencies around the world. Governmental regulation and legislation tendmarketed products, whether or not scientifically justified, leading to focus on standards and processes for determining drug safety and effectiveness,product recalls, withdrawals, or declining sales, as well as conditionsproduct liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.
Reliance on third party relationships and outsourcing arrangements could adversely affect the Company’s business.
The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third party service providers, for sale or reimbursement, especially relatedkey aspects of its business including development, manufacture and commercialization of its products and support for its information technology systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the pricingCompany or the development of products.
Of particular importance isfactors that materially disrupt the FDA inrelationships between the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling,Company and marketing of prescription pharmaceuticals. In many cases, the FDA requirements and practicesthese third parties could 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

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Table of Contents

procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have anya material adverse effect on the Company’s business.
The Company believesis increasingly dependent on sophisticated software applications and computing infrastructure.
The Company is increasingly dependent on sophisticated software applications and computing infrastructure to conduct critical operations. Disruption, degradation, or manipulation of these applications and systems through intentional or accidental means could impact key business processes. Cyber-attacks against the Company’s applications and systems could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Misuse of these applications and systems could result in the disclosure of sensitive personal information or the theft of trade secrets and other confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency of its business processes; the use of which can create new risks. Although the aggregate impact on the Company’s operations and financial condition has not been material to date, the Company has been the target of events of this nature and expects them to continue. The Company monitors its data, information technology and personnel usage of Company systems to reduce these risks and continues to do so on an ongoing basis for any current or potential threats. There can be no assurance that itthe Company’s efforts to protect its data and systems will continueprevent service interruption or the loss of critical or sensitive information from the Company’s or the Company’s third party providers’ databases or systems that could result in financial, legal, business or reputational harm to the Company.
Negative events in the animal health industry could have a negative impact on future results of operations.
Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as Bovine Spongiform Encephalopathy or mad cow disease, could lead to their widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely impact the Company’s results of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt production of vaccines at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to animal health include

epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.
Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.
The successful development, testing, manufacturing and commercialization of biologics, particularly human and animal health vaccines, is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics, including:
There may be limited access to, and supply of, normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.
The development, manufacturing and marketing of biologics are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both preclinical and clinical trial data and extensive data regarding the manufacturing procedures, is required for human vaccine candidates, and FDA approval is required for the release of each manufactured commercial lot.
Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.
Biologics are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
The use of biologically derived ingredients can lead to allegations of harm, including infections or allergic reactions, or closure of product facilities due to possible contamination. Any of these events could result in substantial costs.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. With respect to product liability, the Company self-insures substantially all of its operations,risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certain product liabilities effective August 1, 2004, including launching new drugs, in this regulatory environment.liability for legacy Merck products first sold after that date. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.
Social media platforms present risks and challenges.
The inappropriate and/or unauthorized use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company on

any social networking web site could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely secure and protect information. Identifying new points of entry as social media continues to expand also presents new challenges.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential, and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:
•Competition from generic and/or biosimilar products as the Company’s products lose patent protection.
•Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.
•The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.
•Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.
•Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.
•Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.
•Significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage.
•Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.
•Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.

•Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.
•Changes in tax laws including changes related to the taxation of foreign earnings.
•Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.
•Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
The Company’s corporate headquarters is located in Kenilworth, New Jersey. The Company’s U.S. commercial operations are headquartered in Upper Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania and Kenilworth, New Jersey. The Company’s vaccines business is conducted through divisional headquarters located in West Point, Pennsylvania. Merck’s Animal Health global headquarters is located in Madison, New Jersey. Principal U.S. research facilities are located in Rahway and Kenilworth, New Jersey, West Point, Pennsylvania, Palo Alto, California, Boston, Massachusetts, and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in Switzerland and China. Merck’s manufacturing operations are headquartered in Whitehouse Station, New Jersey. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.
Capital expenditures were $1.6 billion in 2016, $1.3 billion in 2015 and $1.3 billion in 2014. In the United States, these amounted to $1.0 billion in 2016, $879 million in 2015 and $873 million in 2014. Abroad, such expenditures amounted to $594 million in 2016, $404 million in 2015 and $444 million in 2014.
The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company believes that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.
Item 3.Legal Proceedings.
The information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities”.
Item 4.Mine Safety Disclosures.
Not Applicable.

Executive Officers of the Registrant (ages as of February 1, 2017)
All officers listed above serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and the Board.
NameAgeOffices and Business Experience
Kenneth C. Frazier62Chairman, President and Chief Executive Officer (since December 2011); President and Chief Executive Officer (January 2011-December 2011), President (May 2010-January 2011)
Adele D. Ambrose60Senior Vice President and Chief Communications Officer (since November 2009)
Sanat Chattopadhyay57Executive Vice President and President, Merck Manufacturing Division (since March 2016); Senior Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)
Robert M. Davis50Executive Vice President, Global Services and Chief Financial Officer (since April 2016); Executive Vice President and Chief Financial Officer (April 2014-April 2016); Corporate Vice President and President, Medical Products, Baxter International, Inc. (2010-March 2014)
Richard R. DeLuca, Jr.54Executive Vice President and President, Merck Animal Health (since September 2011)
Julie L. Gerberding61Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health (since July 2016); Executive Vice President for Strategic Communications, Global Public Policy and Population Health (January 2015-July 2016); President, Merck Vaccines (January 2010-January 2015)
Mirian M. Graddick-Weir62Executive Vice President, Human Resources (since November 2009)
Michael J. Holston54Executive Vice President and General Counsel (since July 2015); Executive Vice President and Chief Ethics and Compliance Officer (June 2012-July 2015); Executive Vice President, General Counsel and Board Secretary, Hewlett-Packard Company (2007-December 2011)
Rita A. Karachun53Senior Vice President Finance - Global Controller (since March 2014); Assistant Controller (November 2009-March 2014)
Roger M. Perlmutter, M.D., Ph.D.64Executive Vice President and President, Merck Research Laboratories (since April 2013); Executive Vice President, Research and Development, Amgen Inc. (2001-February 2012)
Adam H. Schechter52Executive Vice President and President, Global Human Health (since May 2010)

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 and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, the Company has many far-reaching philanthropic programs. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicine and vaccines. In 2011, Merck announced that it would launchlaunched “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Through this initiative, Merck is leveraging its scientific and business expertise to help make proven solutions more widely available, develop new technologies and improve public and policymaker awareness of these issues.
Merck has also in the past provided funds to the Merck Foundation, an independent organization, which has partnered with a variety of organizations dedicated to improving global health. One of these partnerships is The African Comprehensive HIV/AIDS Partnership in Botswana, a collaboration with the government of Botswana 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 significant number of privacy and data protection laws and regulations globally.globally, many of which place restrictions on the Company’s ability to transfer, access and use personal data across its business. 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 enacteda new EU General Data Protection Regulation, which will become effective in 2018 and impose penalties up to 4% of global revenue, additional laws and regulations enacted in the United States, Europe, Asia and Latin America, and increased enforcement and litigation activity in the United States and other developed markets.markets, and increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global privacy program to manage these evolving risks which has been certified as compliant with and approved by the Asia Pacific Economic Cooperation Cross-Border Privacy Rules System, the EU-U.S. Privacy Shield Program, and the Binding Corporate Rules in the EU.
Operating Results
SalesDistribution
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.
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
Worldwide sales totaled $44.0 billionPatent protection is considered, in 2013,the aggregate, to be of material importance to 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 includes a declinePediatric Exclusivity Provision that may provide an additional six months of 7% compared with $47.3 billion in 2012. The sales decline was driven primarily by lower sales of Singulair. The patents that provided U.S. market exclusivity and 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. Current U.S. patent law provides additional patent term for periods when the patented product was under regulatory review by the FDA. The EU also provides an additional six months of pediatric market exclusivity attached to a product’s Supplementary Protection Certificate (SPC). Japan provides the additional term for pediatric studies attached to market exclusivity unrelated to patent rights.

Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key patent protection in the United States, the EU and Japan (including the potential for patent term extensions (PTE) and SPCs where indicated) for the following marketed products:
ProductYear of Expiration (U.S.)
Year of Expiration (EU)(1)
Year of Expiration (Japan)
Invanz2017 (composition)2017N/A
ArcoxiaNot Marketed2017Not Marketed
Cancidas2017 (formulation)20172019
ZostavaxExpired2018 (use)N/A
Dulera
2017 (formulation)/
2020 (combination)
N/AN/A
Zetia(2)
201720182019
Vytorin201720192019
Asmanex2018 (formulation)2018 (formulation)2020 (formulation)
NuvaRing(3)
2018 (delivery system)2018 (delivery system)N/A
Emend for Injection
2019(4)
2020(4)
2020
Follistim AQ2019 (formulation)2019 (formulation)2019 (formulation)
Noxafil20192019N/A
RotaTeq2019ExpiredExpired
Recombivax2020 (method of making)ExpiredExpired
Januvia
2022(4)
2022(4)
2025-2026(5)
Janumet
2022(4)
2023N/A
Janumet XR
2022(4)
N/AN/A
Isentress
2023(4)
2022(4)
2022
Simponi
N/A(6)
2024
N/A(6)
Bridion
2026(4) (with pending PTE)
20232024
Nexplanon2027 (device)2025 (device)Not Marketed
Bravecto2027 (with pending PTE)2025 (patent), 2029 (SPCs)2029
Gardasil2028
2021(4)
2017
Gardasil 9
2028
2025 (patent), 2030(4) (SPCs)
N/A
Keytruda2028
2028 (patent), 2030(4) (SPCs)
2032 (with pending PTE)
Zerbaxa
2028(4) (with pending PTE)
2023 (patent), 2028(4) (SPCs)
N/A
Sivextro
2028(4)
2024 (patent), 2029(4) (SPCs)
N/A
Zinplava2028 (with pending PTE)
2025(7)
N/A
Belsomra
2029(4)
N/A2031
Zepatier
2031(4)
2030 (patent), 2031(4) (SPCs)
2030
N/A:Currently no marketing approval.
Note:Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.
(1)
The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the UK (Major EU Markets). If an SPC has been granted in some but not all Major EU Markets, both the patent expiry date and the SPC expiry date are listed.
(2)
By agreement, a generic manufacturer launched a generic version of Zetia in the United States in December 2016.
(3)
In August 2016, a district court decision found invalid the Company’s patent claiming NuvaRing’s delivery system. That decision is currently under appeal.
(4)
Eligible for 6 months Pediatric Exclusivity.
(5)
The PTE system in Japan allows for a patent to be extended more than once provided the later approval is directed to a different indication from that of the previous approval. This may result in multiple PTE approvals for a given patent, each with its own expiration date.
(6)
The Company has no marketing rights in the U.S. and Japan.
(7)
SPC applications to be filed by July 2017. Expected expiry 2030. Eligible for pediatric exclusivity.
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.

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 an 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 in the United States by the FDA. Additional patent term may be provided for these pipeline candidates based on Patent Term Restoration and Pediatric Exclusivity.
Under Review (in the U.S.)
Currently Anticipated
Year of Expiration (in the U.S.)
V419 (pediatric hexavalent combination vaccine)2020 (method of making)
The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development:
Phase 3 Drug Candidate
Currently Anticipated
Year of Expiration (in the U.S.)
V920 (ebola vaccine)2023
MK-8228 (letermovir)2024
MK-0859 (anacetrapib)2027
MK-7655A (relebactam + imipenem/cilastatin)2030
MK-8931 (verubecestat)2030
MK-1439 (doravirine)2031
MK-8835 (ertuglifozin)2030
MK-8835A (ertuglifozin + sitagliptin)2030
MK-8835B (ertuglifozin + metformin)2030
MK-1242 (vericiguat)2031
Unless otherwise noted, the patents in the above charts are compound patents. Each patent is 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. In addition, 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. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.
For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 10. “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 2016 on patent and know-how licenses and other rights amounted to $222 million. Merck also incurred royalty expenses amounting to $1.1 billion in 2016 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 12,300 people are employed in the Company’s research activities. Research and development expenses were $10.1 billion in 2016, $6.7 billion in 2015 and $7.2 billion in 2014 (which included restructuring costs and acquisition and divestiture-related costs in all years). The Company prioritizes its research and development efforts and focuses on candidates that it believes represent breakthrough science that will make a difference for patients and payers.

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 candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a focus on supplementing 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 access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company continues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
The Company’s clinical pipeline includes candidates in multiple disease areas, including atherosclerosis, cancer, cardiovascular diseases, diabetes, infectious diseases, inflammatory/autoimmune diseases, neurodegenerative diseases, and respiratory diseases.
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 New Drug Application (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 biologic 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 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase 2 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 effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 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 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies.
In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, 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. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, the FDA will generally act upon the application within those timelines, unless a major Europeanamendment 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 (CRL) 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 CRL, 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.
The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review.
In addition, under the Generating Antibiotic Incentives Now Act, the FDA may grant Qualified Infectious Disease Product (QIDP) status to antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority Review of the NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and Cosmetic Act.
The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new chemical compounds and products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (MAA) with the EMA. After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.
Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the Pharmaceuticals and Medical Devices Agency in Japan, Health Canada, Agência Nacional de Vigilância Sanatária in Brazil, Korea Food and Drug Administration in South Korea, Therapeutic Goods Administration in Australia and China Food and Drug Administration. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.

Research and Development Update
The Company currently has several candidates under regulatory review in the United States.
Keytruda is an FDA-approved anti-PD-1 (programmed death receptor-1) therapy in clinical development for expanded indications in different cancer types. Keytruda is currently approved for the treatment of NSCLC, melanoma, advanced melanoma, and head and neck cancer.
In February 2017, the FDA accepted for review two supplemental BLAs (sBLA) for SingulairKeytruda expired in August 2012patients with locally advanced or metastatic urothelial cancer, including most bladder cancers. The application for first-line use was granted Priority Review for the treatment of these patients who are ineligible for cisplatin-containing therapy. The application for second-line use was granted Priority Review for these patients with disease progression on or after platinum-containing chemotherapy. The PDUFA action date for both applications is June 14, 2017. The FDA previously granted Breakthrough Therapy designation to Keytruda for the second-line treatment of patients with locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy.
In January 2017, the FDA accepted for review an sBLA for Keytruda plus chemotherapy (pemetrexed plus carboplatin) for the first-line treatment of patients with metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations. This is the first application for regulatory approval of Keytruda in combination with another treatment. The FDA granted Priority Review with a PDUFA action date of May 10, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program.
In December 2016, the FDA accepted for review an sBLA for Keytruda for the treatment of patients with refractory classical Hodgkin lymphoma or for patients who have relapsed after three or more prior lines of therapy. The FDA granted Priority Review with a PDUFA action date of March 15, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program.
In November 2016, the FDA accepted for review an sBLA for Keytruda, for the treatment of previously treated patients with advanced microsatellite instability-high (MSI-H) cancer. The FDA granted Priority Review with a PDUFA action date of March 8, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program. The FDA recently granted Breakthrough Therapy designation to Keytruda for unresectable or metastatic MSI-H non-colorectal cancer, and previously granted it for the treatment of patients with unresectable or metastatic MSI-H colorectal cancer.
Additionally, Keytruda has also received Breakthrough Therapy designation from the FDA for the treatment of patients with primary mediastinal B-cell lymphoma that is refractory to or has relapsed after two prior lines of therapy.
The Keytruda clinical development program consists of more than 400 clinical trials, including more than 200 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal and triple-negative breast, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
MK-1293 is an investigational follow-on biologic insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes under review by the FDA. MK-1293 was approved in the EU in January 2017. MK-1293 is being developed in collaboration with and partially funded by Samsung Bioepis.
V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a partnership between Merck and Sanofi. This vaccine is designed to help protect against six important diseases - diphtheria, tetanus, pertussis (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b (Hib), and hepatitis B. On November 2, 2015, the FDA issued a CRL with respect to the BLA for V419. Both companies are reviewing the CRL and plan to have further communication with the FDA. In February 2013, respectively,2016, the EC granted marketing authorization for V419 for prophylaxis against diphtheria, tetanus, pertussis, hepatitis B, poliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 is being marketed as Vaxelis in the EU.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above.

MK-8931, verubecestat, is an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1) for the treatment of Alzheimer’s disease. In February 2017, Merck announced that its external Data Monitoring Committee (eDMC) recommended termination of the Phase 2/3 EPOCH study of verubecestat in mild-to-moderate Alzheimer’s disease based on the low probability of success of this study. The same eDMC recommended that a separate Phase 3 study, APECS, evaluating verubecestat for amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease, continue as planned. Estimated primary completion date for the APECS study, which is fully enrolled, is February 2019.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (CETP) in development for raising HDL-C and reducing LDL-C. Anacetrapib is being evaluated in a 30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular disease. In November 2015, Merck announced that the Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck remains blinded to the actual results of this analysis and to other REVEAL safety and efficacy data. Under the study, the last patient’s last visit occurred in January 2017. The Company anticipates receiving the top-line results from the study mid-year 2017.
MK-7655A is a combination of relebactam, an investigational beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a QIDP with designated Fast Track status for the treatment of hospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and complicated urinary tract infections.
MK-8228, letermovir, is an investigational oral once-daily or an intravenous infusion antiviral candidate for the prevention of clinically-significant cytomegalovirus (CMV) infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track designation. In October 2016, Merck announced that the pivotal Phase 3 clinical study of letermovir met its primary endpoint. The global, multicenter, randomized, placebo-controlled study evaluated the efficacy and safety of letermovir in adult (18 years and older) CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant. Merck plans to submit regulatory applications for the approval of letermovir in the United States and EU in 2017.
MK-8835, ertugliflozin, is an investigational oral SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes in collaboration with Pfizer Inc. (Pfizer). In September 2016, Merck and Pfizer announced that a Phase 3 study (VERTIS SITA2) of ertugliflozin met its primary endpoint. Both 5 mg and 15 mg daily doses of ertugliflozin showed significantly greater reductions in A1C (an average measure of blood glucose over the past two to three months) when added to patients on a background of sitagliptin and metformin. Ertugliflozin is also being studied in combination with Januvia (sitagliptin) and metformin. In December 2016, Merck submitted NDAs to the FDA for ertugliflozin and the two fixed-dose combinations: MK-8835A, ertugliflozin plus Januvia, and MK-8835B, ertugliflozin plus metformin. The Company experiencedanticipates a response from the FDA in the first quarter of 2017. Ertugliflozin and the two fixed-dose combinations are currently under review in the EU.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that

V920 offers substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-randomized clusters. Results from other ongoing studies are anticipated in the second half of 2017.
MK-1242, vericiguat, is an investigational treatment for heart failure being studied in a Phase 3 clinical trial in patients suffering from chronic heart failure. The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer AG.
V212 is an inactivated varicella zoster virus (VZV) vaccine in development for the prevention of herpes zoster. The Company completed the Phase 3 trial in autologous hematopoietic cell transplant patients and is conducting another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017.
MK-1439, doravirine, is an investigational non-nucleoside reverse transcriptase inhibitor being developed by Merck for the treatment of HIV-1 infection. In February 2017, the Company received positive results from a first Phase 3 study showing that doravirine was non-inferior to an alternative regimen in achieving and maintaining HIV-1 suppression in infected adults during 48 weeks of treatment.
In 2016, the Company also divested or discontinued certain drug candidates.
Merck announced that it is discontinuing the development of odanacatib, an investigational cathepsin K inhibitor for osteoporosis, and will not seek regulatory approval for its use. Merck previously reported a numeric imbalance in adjudicated stroke events in the pivotal Phase 3 fracture outcomes study in postmenopausal women. The Company has decided to discontinue development after an independent adjudication and analysis of major adverse cardiovascular events confirmed an increased risk of stroke.
The Company determined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that included MK-8237, an investigational allergy immunotherapy tablet for house dust mite allergy. Merck has given ALK-Abelló six months’ notice that it is terminating the agreement and therefore this compound will be returned to ALK-Abelló. This decision was not due to efficacy or safety concerns.
The Company also decided, for business reasons, to discontinue the clinical development of MK-8342B, referred to as the Next Generation Ring, an investigational combination (etonogestrel and 17ß-estradiol) vaginal ring for contraception and the treatment of dysmenorrhea in women seeking contraception. This decision was not due to efficacy or safety concerns.
Merck announced that, for business reasons, it will not proceed with submitting marketing applications for omarigliptin, an investigational, once-weekly DPP-4 inhibitor, in the United States or Europe. This decision did not result from concerns about the efficacy or safety of omarigliptin.

The chart below reflects the Company’s research pipeline as of February 24, 2017. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 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. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to Keytruda) and additional claims, line extensions or formulations for in-line products are not shown.
Phase 2Phase 3 (Phase 3 entry date)Under Review
Asthma
MK-1029
Cancer
MK-3475 Keytruda
PMBCL (Primary Mediastinal
Large B-Cell Lymphoma)
Advanced Solid Tumors
Nasopharyngeal
Ovarian
Prostate
MK-2206
Cough, including cough with IPF
MK-7264
Diabetes Mellitus
MK-8521
Hepatitis C
MK-3682B (MK-3682 (uprifosbuvir)/MK-5172 (grazoprevir)/MK-8408 (ruzasvir))
Pneumoconjugate Vaccine
V114
Alzheimer’s Disease
MK-8931 (verubecestat) (December 2013)
Atherosclerosis
MK-0859 (anacetrapib) (May 2008)
Bacterial Infection
MK-7655A (relebactam+imipenem/cilastatin)
(October 2015)
Cancer
MK-3475 Keytruda
Bladder (October 2014) (EU)
Breast (October 2015)
Colorectal (November 2015)
Esophageal (December 2015)
Gastric (May 2015)
Head and Neck (November 2014) (EU)
Hepatocellular (May 2016)
Hodgkin Lymphoma (July 2016) (EU)
Multiple Myeloma (December 2015)
Renal (October 2016)
CMV Prophylaxis in Transplant Patients
MK-8228 (letermovir) (June 2014)
Diabetes Mellitus
MK-8835 (ertugliflozin) (November 2013)
(U.S.)(1)
MK-8835A (ertugliflozin+sitagliptin)
(September 2015) (U.S.)(1)
MK-8835B (ertugliflozin+metformin)
(August 2015) (U.S.)(1)
MK-0431J (sitagliptin+ipragliflozin)
(October 2015) (Japan)(1)
Ebola Vaccine
V920 (March 2015)
Heart Failure
MK-1242 (vericiguat) (September 2016)(1)
Herpes Zoster
V212 (inactivated VZV vaccine) (December 2010)
HIV
MK-1439 (doravirine) (December 2014)

New Molecular Entities/Vaccines
Allergy
MK-8237, House Dust Mite (U.S.)(2)
Diabetes Mellitus
MK-1293 (U.S.)(1)
MK-8835 (ertugliflozin) (EU)(1)
MK-8835A (ertugliflozin+sitagliptin) (EU)(1)
MK-8835B (ertugliflozin+metformin) (EU)(1)
Pediatric Hexavalent Combination Vaccine
V419 (U.S.)(3)


Certain Supplemental Filings
Cancer
Keytruda
• Previously Treated Microsatellite Instability-High Cancer (U.S.)
• Relapsed or Refractory Classical Hodgkin Lymphoma (U.S.)
• Combination with Chemotherapy in first-line non-squamous Non-Small-Cell Lung Cancer (U.S.)
• First Line Cis-ineligible Bladder Cancer (U.S.)
• Second Line Metastatic Bladder Cancer (U.S.)

Footnotes:
(1) Being developed in a collaboration.
(2)  MK-8237 was being developed as part of a North America partnership with ALK-Abelló. Merck has given ALK-Abelló six months’ notice that it is terminating the agreement and, therefore, this compound will be returned to ALK-Abelló.
(3)V419 is an investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, that is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi. On November 2, 2015, the FDA issued a CRL with respect to V419. Both companies are reviewing the CRL and plan to have further communication with the FDA.

Employees
As of December 31, 2016, the Company had approximately 68,000 employees worldwide, with approximately 26,500 employed in the United States, including Puerto Rico. Approximately 29% of worldwide employees of the Company are represented by various collective bargaining groups.
Restructuring Activities
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations. Since inception of the programs through December 31, 2016, Merck has eliminated approximately 40,900 positions comprised of

employee separations, as well as the elimination of contractors and vacant positions. The Company expects to substantially complete the remaining actions under these programs by the end of 2017.
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 $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and, in management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. Although it is not possible to predict with certainty the outcome of these 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 $64 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 as a percentage of total Company sales were 54% of sales in 2016, 56% of sales in 2015 and 60% of sales in 2014.
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 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.
Financial information about geographic areas of the Company’s business is provided 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 U.S. Securities and Exchange Commission (SEC). In addition, the Company will provide without charge a copy of its Annual Report on Form 10-K, including financial statements and schedules, upon the written request of any shareholder to Merck Shareholder Services, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, NJ 07033 U.S.A.
The Company’s corporate governance guidelines and the charters of the Board of Directors’ four 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.

Item 1A.Risk Factors.
Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.
The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business would be adversely affected.
Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of human health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.
Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or claims by third parties of infringement against the Company. The Company defends its patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file Abbreviated NDAs with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned or licensed by the Company. The Company normally responds by defending its patent, including by filing lawsuits alleging patent infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other companies’ patents, potential legislation relating to patents, as well as regulatory initiatives may result in a more general weakening of intellectual property protection.
If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available and, in the case of certain products, such a loss could result in a material non-cash impairment charge. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has successfully launched commercially successful replacement products.
A chart listing the patent protection for certain of the Company’s marketed products, and U.S. patent protection for candidates under review and Phase 3 candidates is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”
As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid decline in Singulairloss of sales infrom those markets thereafter. Foreign exchange unfavorably affected globalproducts.
The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales performance by 2% in 2013. The revenue decline in 2013 also reflectsfor that product, as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of Maxalt, Cozaar market exclusivity can have a material adverse effect on the Company’s business, cash flow, results of operations, financial position and Hyzaar, treatments for hypertension, Temodar, Clarinex, a non-sedating antihistamine, PegIntron, a treatment for chronic hepatitis C, Propecia, Fosamax, a treatment for osteoporosis, and Vytorin, a cholesterol modifying medicine. These declines were partially offset by growth in Gardasil, a vaccine to help prevent certain diseases caused by four types of HPV, Remicade and Simponi, treatments for inflammatory diseases, Janumet, a treatment for type 2 diabetes, Isentress, a treatment for HIV-1 infection, Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, and Zostavax, a vaccine to help prevent shingles (herpes zoster).prospects. For example, pursuant

Salesto an agreement with a generic manufacturer, that manufacturer launched in the United States were $18.2 billiona generic version of Zetia in 2013,December 2016. In addition, the Company will lose U.S. patent protection for Vytorin in April 2017. The Company expects a declinesignificant and rapid loss of 11% compared with $20.4 billion in 2012. The sales decrease was driven primarily by lower sales of SingulairZetia and Vytorin in the United States in 2017.
Key products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material and negative impact on results of operations and cash flows.
The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as Januvia,Janumet, Keytruda, Gardasil/Gardasil 9, Isentress and Zepatier. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant adverse impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-approval trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. Such events could have a material adverse effect on the sales of any such products.
The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that have lost patent protection.
Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products each year. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products which it may develop through joint ventures and products which it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.
For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals, therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the regulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.
The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.

The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.
Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:
findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;
failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, and uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;
failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;
lack of economic feasibility due to manufacturing costs or other factors; and
preclusion from commercialization by the proprietary rights of others.
In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with acquisitions.
Failure to successfully develop and market new products in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial position and prospects.
The Company’s products, including products in development, cannot be marketed unless the Company obtains and maintains regulatory approval.
The Company’s activities, including research, preclinical testing, clinical trials and manufacturing and marketing its products, are subject to extensive regulation by numerous federal, state and local governmental authorities in the United States, including the FDA, and by foreign regulatory authorities, including in the EU. In the United States, the FDA is of particular importance to the Company, as it administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, cost reduction. The FDA and foreign regulatory authorities have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.
Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the new products in that jurisdiction until approval is obtained, if ever. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.
Developments following regulatory approval may adversely affect sales of the Company’s products.
Even after a product reaches market, certain developments following regulatory approval, including results in post-approval Phase 4 trials or other studies, may decrease demand for the Company’s products, including the following:
the re-review of products that are already marketed;
the recall or loss of marketing approval of products that are already marketed;


changing government standards or public expectations regarding safety, efficacy or labeling changes; and
greater scrutiny in advertising and promotion.
In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.
In addition, following the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA and Japan’s Pharmaceutical and Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications and are re-reviewing select products that are already marketed, adding further to the uncertainties in the regulatory processes. There is also greater regulatory scrutiny, especially in the United States, on advertising and promotion and, in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities.
The Company faces intense competition from lower cost-generic products.
In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures which encourages the use of generic and biosimilar products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial position and prospects.
The Company faces intense competition from competitors’ products which, in addition to other factors, could in certain circumstances lead to non-cash impairment charges.
The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such an event, the competitors’ products may be safer or more effective, more convenient to use or more effectively marketed and sold than the Company’s products. Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial position and prospects. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.

The Company faces pricing pressure with respect to its products.
The Company faces increasing pricing pressure globally and, particularly in mature markets, 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, (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 ACA, and (iii) state activities aimed at increasing price transparency. Changes to the health care system enacted as part of health care reform in the United States, as well as Maxalt, Temodar, Victrelisincreased 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 U.S., an oral medicinelarger customers may, in the future, ask for and receive higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the managed care organization.
In order to provide information about the Company’s pricing practices, the Company recently posted  on its website its first Pricing Action Transparency Report for the treatmentUnited States for the years 2010 - 2016. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010.  The report shows that the Company’s average annual net price increases (after taking sales deductions such as rebates, discounts and returns into account) across the U.S. human health portfolio have been in the low to mid-single digits since 2010.  Additionally, the weighted average annual discount rate has been steadily increasing over time, reflecting the competitive market for branded medicines and the impact of chronic hepatitis C virus, and Clarinex, partially offset by higher sales of Gardasil, Zetia, a cholesterol absorption inhibitor, and Dulera Inhalation Aerosol.
Internationalthe ACA. In 2016, the Company’s gross U.S. sales were $25.8 billionreduced by 40.9% as a result of rebates, discounts and returns.
Outside the United States, numerous major markets, including the EU and Japan, have pervasive government involvement in 2013, a declinefunding health care and, in that regard, fix the pricing and reimbursement of 4% comparedpharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with $26.9 billion in 2012. Foreign exchange unfavorably affected international sales performance by 4% in 2013. respect to its products.
The decline was driven primarily by lower salesCompany expects pricing pressures to increase in the Pharmaceutical segment, reflecting declines in Japan, largely attributable to the unfavorable effect of foreign exchange, and Europe that were partially offset by growthfuture.
The health care industry in the emerging markets. Sales in Japan declined 21% in 2013,United States will continue to $3.9 billion, of which 17% was duebe subject to increasing regulation and political action.
The Company believes that the unfavorable effect of foreign exchange. The sales decline

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reflects the ongoing impacts of the loss of the market exclusivity for several products, including Cozaar and Hyzaar,health care industry will continue to be subject to increasing regulation as well as lower salespolitical and legal action, as future proposals to reform the health care system are considered by Congress and state legislatures.
In 2010, the United States enacted major health care reform legislation in the form of Gardasilthe ACA. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. 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%, reflectingexpanded the Japanese government’s decisionrebate to suspend proactive recommendationMedicaid managed care utilization, and increased the types of HPV vaccines, and declines in PegIntron and Rebetol, productsentities eligible for the treatmentfederal 340B drug discount program.
The law also requires pharmaceutical manufacturers to pay a 50% point of chronic hepatitis C.service 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 non-tax deductible health care reform fee. The total annual industry fee was $3.0 billion in 2016 and will increase to $4.0 billion in 2017. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid.
On January 21, 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck, at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These declines were partially offsetinclude a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2020. The Company will evaluate the financial impact of these two elements when they become effective.

The Company cannot predict the likelihood of future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have on the Company’s results of operations, financial condition or business.
Changes in laws and regulations could materially adversely affect the Company’s business.
All aspects of the Company’s business, including research and development, manufacturing, marketing, pricing, sales, litigation and intellectual property rights, are subject to extensive legislation and regulation. Changes in applicable federal and state laws and agency regulations could have a material adverse effect on the Company’s business.
In particular, there is significant uncertainty about the future of the ACA and healthcare laws in general in the United States. The Company is participating in the debate and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s results of operations, financial condition or business.
The uncertainty in global economic conditions together with austerity measures being taken by volume growthcertain governments could negatively affect the Company’s operating results.
The uncertainty in Januvia,global economic conditions may result in a treatment for type 2 diabetes, Nasonex, an inhaled nasal corticosteroidfurther slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the treatmentCompany’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of nasal allergy symptoms, Zetia,operations, financial position and RotaTeq,a vaccine to help protect against rotavirus gastroenteritis in infants and children. Sales in Europe declined 1% in 2013, to $9.6 billion, including a 2% favorable effect from foreign exchange driven by ongoing generic erosion and fiscal austerity measures in this region, partially offset by growth in Remicade, Simponi, Janumet, Januvia and Isentress. Sales in the emerging markets grew 3% in 2013, to $7.8 billion, including a 4% unfavorable effect from foreign exchange reflecting higher sales of vaccine, hospital, hepatitis and immunology products, partially offset by lower sales of Singulair and diversified brands. Total international sales represented 59% and 57% of total sales in 2013 and 2012, respectively.prospects.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide.access. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2013.2016. The Company anticipates these pricing actions including the biennial price reductions in Japan, and other austerity measures will continue to negatively affect revenue performance in 2014.2017.
If credit and economic conditions worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.
The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material negative impact on the Company’s results of operations.
The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:
changes in medical reimbursement policies and programs and pricing restrictions in key markets;
multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;
trade protection measures and import or export licensing requirements;
foreign exchange fluctuations;
diminished protection of intellectual property in some countries; and
possible nationalization and expropriation.
In October 2013,addition, there may be changes to the Company’s business and political position if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.

Failure to attract and retain highly qualified personnel could affect its ability to successfully develop and commercialize products.
The Company’s success is largely dependent on its continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical research and development, governmental regulation and commercialization. Competition for qualified personnel in the pharmaceutical industry is intense. The Company cannot be sure that it will be able to attract and retain quality personnel or that the costs of doing so will not materially increase.
In the past, the Company soldhas experienced difficulties and delays in manufacturing of certain of its active pharmaceutical ingredient (“API”)products.
Merck has, in the past, experienced difficulties in manufacturing businesscertain of its vaccines and effective December 31, 2013, certain relatedother products. The Company may, in the future, experience difficulties and delays inherent in manufacturing its products, within Diversified Brands. In November 2013, Merck soldsuch as (i) failure of the U.S. rightsCompany or any of its vendors or suppliers to certain ophthalmic productscomply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in January 2014 sold the U.S. rights to Saphris. The aggregate annual sales associated with these divested assets were approximately $625 million. The annual sales associated with the divested products were approximately $425 million of which approximately $385 millionproduct manufacturing; (ii) construction delays related to the Pharmaceutical segmentconstruction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and $40 million(iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. Manufacturing difficulties can result in product shortages, leading to lost sales and reputational harm to the Company.
The Company may not be able to realize the expected benefits of its investments in emerging markets.
The Company has been taking steps to increase its sales in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in these markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.
In addition, in China, commercial and economic conditions may adversely affect the Company’s growth prospects in that market. While the Company continues to believe that China represents an important growth opportunity, these events, coupled with heightened scrutiny of the health care industry, may continue to have an impact on product pricing and market access generally. The Company anticipates that the reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in China may continue.
For all these reasons, sales within emerging markets carry significant risks. However, a failure to maintain the Company’s presence in emerging markets could have a material adverse effect on the business, financial condition or results of the Company’s operations.
The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into acquisition, licensing, borrowings or other financial transactions that may give rise to currency and interest rate exposure.
Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates and interest rates could negatively affect the Company’s results of operations, financial position and cash flows as occurred with respect to Venezuela in 2015 and 2016.
In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.

The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.
The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
In addition, the Company may be affected by changes in tax laws, including tax rate changes, changes to the laws related to the remittance of foreign earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.
Pharmaceutical products can develop unexpected safety or efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.
Reliance on third party relationships and outsourcing arrangements could adversely affect the Company’s business.
The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third party service providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its information technology systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.
The Company is increasingly dependent on sophisticated software applications and computing infrastructure.
The Company is increasingly dependent on sophisticated software applications and computing infrastructure to conduct critical operations. Disruption, degradation, or manipulation of these applications and systems through intentional or accidental means could impact key business processes. Cyber-attacks against the Company’s applications and systems could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Misuse of these applications and systems could result in the disclosure of sensitive personal information or the theft of trade secrets and other confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency of its business processes; the use of which can create new risks. Although the aggregate impact on the Company’s operations and financial condition has not been material to date, the Company has been the target of events of this nature and expects them to continue. The Company monitors its data, information technology and personnel usage of Company systems to reduce these risks and continues to do so on an ongoing basis for any current or potential threats. There can be no assurance that the Company’s efforts to protect its data and systems will prevent service interruption or the loss of critical or sensitive information from the Company’s or the Company’s third party providers’ databases or systems that could result in financial, legal, business or reputational harm to the Company.
Negative events in the animal health industry could have a negative impact on future results of operations.
Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as Bovine Spongiform Encephalopathy or mad cow disease, could lead to their widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely impact the Company’s results of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt production of vaccines at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to animal health include

epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.
Biologics carry unique risks and uncertainties, which could have a negative impact on future results of operations.
The successful development, testing, manufacturing and commercialization of biologics, particularly human and animal health vaccines, is a long, expensive and uncertain process. There are unique risks and uncertainties with biologics, including:
There may be limited access to, and supply of, normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.
The development, manufacturing and marketing of biologics are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both preclinical and clinical trial data and extensive data regarding the manufacturing procedures, is required for human vaccine candidates, and FDA approval is required for the release of each manufactured commercial lot.
Manufacturing biologics, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.
Biologics are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
The use of biologically derived ingredients can lead to allegations of harm, including infections or allergic reactions, or closure of product facilities due to possible contamination. Any of these events could result in substantial costs.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available while the cost has increased significantly. With respect to product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certain product liabilities effective August 1, 2004, including liability for legacy Merck products first sold after that date. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.
Social media platforms present risks and challenges.
The inappropriate and/or unauthorized use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company on

any social networking web site could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely secure and protect information. Identifying new points of entry as social media continues to expand also presents new challenges.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential, and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:
•Competition from generic and/or biosimilar products as the Company’s products lose patent protection.
•Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.
•The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.
•Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.
•Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.
•Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.
•Significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage.
•Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.
•Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.

•Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.
•Changes in tax laws including changes related to the taxation of foreign earnings.
•Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.
•Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
The Company’s corporate headquarters is located in Kenilworth, New Jersey. The Company’s U.S. commercial operations are headquartered in Upper Gwynedd, Pennsylvania. The Company’s U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd, Pennsylvania and Kenilworth, New Jersey. The Company’s vaccines business is conducted through divisional headquarters located in West Point, Pennsylvania. Merck’s Animal Health global headquarters is located in Madison, New Jersey. Principal U.S. research facilities are located in Rahway and Kenilworth, New Jersey, West Point, Pennsylvania, Palo Alto, California, Boston, Massachusetts, and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in Switzerland and China. Merck’s manufacturing operations are headquartered in Whitehouse Station, New Jersey. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.
Capital expenditures were $1.6 billion in 2016, $1.3 billion in 2015 and $1.3 billion in 2014. In the United States, these amounted to $1.0 billion in 2016, $879 million in 2015 and $873 million in 2014. Abroad, such expenditures amounted to $594 million in 2016, $404 million in 2015 and $444 million in 2014.
The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company believes that its properties are in good operating condition and that its machinery and equipment have been well maintained. Plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.
Item 3.Legal Proceedings.
The information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities”.
Item 4.Mine Safety Disclosures.
Not Applicable.

Executive Officers of the Registrant (ages as of February 1, 2017)
All officers listed above serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and the Board.
NameAgeOffices and Business Experience
Kenneth C. Frazier62Chairman, President and Chief Executive Officer (since December 2011); President and Chief Executive Officer (January 2011-December 2011), President (May 2010-January 2011)
Adele D. Ambrose60Senior Vice President and Chief Communications Officer (since November 2009)
Sanat Chattopadhyay57Executive Vice President and President, Merck Manufacturing Division (since March 2016); Senior Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)
Robert M. Davis50Executive Vice President, Global Services and Chief Financial Officer (since April 2016); Executive Vice President and Chief Financial Officer (April 2014-April 2016); Corporate Vice President and President, Medical Products, Baxter International, Inc. (2010-March 2014)
Richard R. DeLuca, Jr.54Executive Vice President and President, Merck Animal Health (since September 2011)
Julie L. Gerberding61Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health (since July 2016); Executive Vice President for Strategic Communications, Global Public Policy and Population Health (January 2015-July 2016); President, Merck Vaccines (January 2010-January 2015)
Mirian M. Graddick-Weir62Executive Vice President, Human Resources (since November 2009)
Michael J. Holston54Executive Vice President and General Counsel (since July 2015); Executive Vice President and Chief Ethics and Compliance Officer (June 2012-July 2015); Executive Vice President, General Counsel and Board Secretary, Hewlett-Packard Company (2007-December 2011)
Rita A. Karachun53Senior Vice President Finance - Global Controller (since March 2014); Assistant Controller (November 2009-March 2014)
Roger M. Perlmutter, M.D., Ph.D.64Executive Vice President and President, Merck Research Laboratories (since April 2013); Executive Vice President, Research and Development, Amgen Inc. (2001-February 2012)
Adam H. Schechter52Executive Vice President and President, Global Human Health (since May 2010)

PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal market for trading of the Company’s Common Stock is the New York Stock Exchange (NYSE) under the symbol MRK. The Common Stock market price information set forth in the table below is based on historical NYSE market prices.
The following table also sets forth, for the calendar periods indicated, the dividend per share information.
 Cash Dividends Paid per Common Share         
  Year
 4th Q
 3rd Q
 2nd Q
 1st Q
 2016$1.84
 $0.46
 $0.46
 $0.46
 $0.46
 2015$1.80
 $0.45
 $0.45
 $0.45
 $0.45
 Common Stock Market Prices
 
 2016  4th Q
 3rd Q
 2nd Q
 1st Q
 High  $65.46
 $64.00
 $57.87
 $53.60
 Low  $58.29
 $57.18
 $52.44
 $47.97
 2015         
 High  $55.77
 $60.07
 $61.70
 $63.62
 Low  $48.35
 $45.69
 $56.22
 $55.64

As of January 31, 2017, there were approximately 128,600 shareholders of record.

Issuer purchases of equity securities for the three months ended December 31, 2016 were as follows:
Issuer Purchases of Equity Securities
      ($ in millions)
Period 
Total Number
of Shares
Purchased(1)
 
Average Price
Paid Per
Share
 
Approximate Dollar Value of Shares
That May Yet Be Purchased
Under the Plans or Programs(1)
October 1 — October 31 5,451,200 $62.17 $5,732
November 1 — November 30 5,447,800 $61.39 $5,397
December 1 — December 31 5,618,000 $60.96 $5,055
Total 16,517,000 $61.50 $5,055

(1)
All shares purchased during the period were made as part of a plan approved by the Board of Directors in March 2015 to purchase up to $10 billion in Merck shares. Shares are approximated.

Performance Graph
The following graph assumes a $100 investment on December 31, 2011, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of the major U.S.-based pharmaceutical companies, which are: AbbVie Inc., Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, and Pfizer Inc.
Comparison of Five-Year Cumulative Total Return
Merck & Co., Inc., Composite Peer Group and S&P 500 Index
 
End of
Period Value
 
2016/2011
CAGR**
MERCK$186 13%
PEER GRP.**208 16%
S&P 500198 15%

 201120122013201420152016
MERCK100.00113.09143.42167.76161.33185.64
PEER GRP.100.00115.52160.92188.77197.89208.45
S&P 500100.00115.99153.55174.55176.95198.10

*Compound Annual Growth Rate
**Peer group average was calculated on a market cap weighted basis. In addition, AbbVie Inc. replaced Abbott Laboratories in the peer group beginning 2013 following the spin off from Abbott Laboratories.

This Performance Graph will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. In addition, the Performance Graph will not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Regulation S-K, or to the liabilities of section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.

Item 6.Selected Financial Data.                        
The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report.
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
 
2016 (1)
 
2015 (2)
 
2014 (3)
 2013 
2012(4)
Results for Year:         
Sales$39,807
 $39,498
 $42,237
 $44,033
 $47,267
Materials and production13,891
 14,934
 16,768
 16,954
 16,446
Marketing and administrative9,762
 10,313
 11,606
 11,911
 12,776
Research and development10,124
 6,704
 7,180
 7,503
 8,168
Restructuring costs651
 619
 1,013
 1,709
 664
Other (income) expense, net720
 1,527
 (11,613) 411
 474
Income before taxes4,659
 5,401
 17,283
 5,545
 8,739
Taxes on income718
 942
 5,349
 1,028
 2,440
Net income3,941
 4,459
 11,934
 4,517
 6,299
Less: Net income attributable to noncontrolling interests21
 17
 14
 113
 131
Net income attributable to Merck & Co., Inc.3,920
 4,442
 11,920
 4,404
 6,168
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$1.42
 $1.58
 $4.12
 $1.49
 $2.03
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$1.41
 $1.56
 $4.07
 $1.47
 $2.00
Cash dividends declared5,135
 5,115
 5,156
 5,132
 5,173
Cash dividends declared per common share$1.85
 $1.81
 $1.77
 $1.73
 $1.69
Capital expenditures1,614
 1,283
 1,317
 1,548
 1,954
Depreciation1,611
 1,593
 2,471
 2,225
 1,999
Average common shares outstanding (millions)2,766
 2,816
 2,894
 2,963
 3,041
Average common shares outstanding assuming dilution (millions)2,787
 2,841
 2,928
 2,996
 3,076
Year-End Position:         
Working capital (5)
$13,410
 $10,550
 $14,198
 $17,461
 $15,922
Property, plant and equipment, net12,026
 12,507
 13,136
 14,973
 16,030
Total assets (5)
95,377
 101,677
 98,096
 105,370
 105,876
Long-term debt (5)
24,274
 23,829
 18,629
 20,472
 16,212
Total equity40,308
 44,767
 48,791
 52,326
 55,463
Year-End Statistics:         
Number of stockholders of record129,500
 135,500
 142,000
 149,400
 157,400
Number of employees68,000
 68,000
 70,000
 77,000
 83,000
(1)
Amounts for 2016 include a charge related to the settlement of worldwide patent litigation related to Keytruda.
(2)
Amounts for 2015 include a net charge related to the settlement of Vioxx shareholder class action litigation, foreign exchange losses related to Venezuela, gains on the dispositions of businesses and other assets and the favorable benefit of certain tax items.
(3)
Amounts for 2014 reflect the divestiture of Merck’s Consumer Care business on October 1, 2014, including a gain on the sale, as well as a gain recognized on an option exercise by AstraZeneca, gains on the dispositions of other businesses and assets, and a loss on extinguishment of debt.
(4)
Amounts for 2012 include a net charge recorded in connection with the settlement of certain shareholder litigation.
(5)
Amounts have been restated to give effect to the adoption of accounting guidance issued by the Financial Accounting Standards Board. See Note 2 to Item 8(a). “Financial Statements.”



Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Description of Merck’s 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 and animal health products. The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable 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. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD (SPMSD) joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets that were previously part of the joint venture.
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. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014. On October 1, 2014, the Company divested its Consumer Care segment.segment that developed, manufactured and marketed over-the-counter, foot care and sun care products.
Overview
During 2016, Merck continued to execute its innovation strategy and the Company’s sustained investment in research yielded a number of recent approvals and regulatory milestones across various therapeutic areas. The annual sales associatedCompany received several approvals in 2016 that include expanded indications for Keytruda, the Company’s anti-PD-1 (programmed death receptor-1) therapy, which was approved by the U.S. Food and Drug Administration (FDA) for the first-line treatment of metastatic non-small-cell lung cancer (NSCLC), as well as for the treatment of head and neck cancer. Additionally, in 2016, both the FDA and the European Commission (EC) approved Zepatier, a once-daily, single tablet combination therapy for the treatment of chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with the divested API manufacturing business were approximately $200 million and related to non-segment revenues.ribavirin in certain patient populations.
Worldwide sales were $47.3$39.8 billion in 2012, a decline2016, an increase of 2%1% compared with $48.02015, including a 2% unfavorable effect from foreign exchange. Sales growth was driven by oncology, HCV, vaccine, and hospital acute care products, reflecting in part the ongoing launches of Keytruda, Zepatier and Bridion, as well as positive performance from Merck’s Animal Health business. Growth in these areas was largely offset by the effects of generic and biosimilar competition that resulted in declines for products such as Remicade and Nasonex.
Business development remains an important component of the Company’s overall strategy as Merck seeks to identify the best external innovation to augment its portfolio and pipeline, with a particular focus on early-to-mid-stage pipeline assets. Merck looks for growth opportunities that meet the Company’s strategic criteria. While looking for the best scientific opportunities, Merck remains financially disciplined, pursuing those business opportunities that the Company believes can contribute to long-term growth and sustainable value for shareholders.
In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. In July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the P2X3 receptor for the treatment of common, poorly-managed, neurogenic conditions, such as chronic cough. In addition, in 2016, Merck entered into a strategic collaboration and license agreement with Moderna Therapeutics (Moderna) to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines.

Merck continues to support its in-line portfolio, as well as ongoing and upcoming product launches. Keytruda is launching around the world in multiple indications. In 2016, Merck achieved multiple additional regulatory milestones for Keytruda including approval from the FDA for the first-line treatment of patients with NSCLC whose tumors have high PD-L1 expression (tumor proportion score [TPS] of 50% or more) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations and also for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma with disease progression on or after platinum-containing chemotherapy. Additionally, in 2016, the EC approved Keytruda for the treatment of locally advanced or metastatic NSCLC in patients whose tumors express PD-L1 and who have received at least one prior chemotherapy regimen. In January 2017, the EC approved Keytruda for the first-line treatment of metastatic NSCLC in adults whose tumors have high PD-L1 expression (TPS of 50% or more) with no EGFR or ALK positive tumor mutations. Additionally, the Company is continuing its launch of Zepatier in the United States and in emerging markets and is now launching in the European Union (EU) and in Japan.
Merck is focusing its research efforts on the therapeutic areas that it believes can have the most impact on human health, such as oncology, diabetes, cardiometabolic disease, resistant microbial infection and Alzheimer’s disease. In addition to the recent regulatory approvals discussed above, the Company has continued to advance other programs in its late-stage pipeline with several regulatory submissions. Merck has five supplemental biologics license applications (sBLA) under Priority Review with the FDA for Keytruda including: for use in combination with chemotherapy for the first-line treatment of patients with metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations; for the treatment of patients with classical Hodgkin lymphoma; for the treatment of previously treated patients with advanced microsatellite instability-high cancer; for the first-line treatment of patients with locally advanced or metastatic urothelial cancer, including most bladder cancers; and for the second-line treatment of patients with locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy. Merck is driving a broad immuno-oncology development program and investing in the long-term potential for Keytruda to become foundational in the treatment of a range of cancers. The Keytruda clinical development program includes more than 400 clinical trials in more than 30 tumor types; over 200 of these trials combine Keytruda with other cancer treatments. MK-1293, an insulin glargine candidate for the treatment of patients with type 1 and type 2 diabetes being developed in a collaboration, is also under review with the FDA.
In addition to Phase 3 programs for Keytruda in the therapeutic areas of breast, colorectal, esophageal, gastric, hepatocellular, multiple myeloma, and renal cancers, the Company also has candidates in Phase 3 clinical development in several other therapeutic areas (see “Research and Development” below).
During the past year, the Company continued its focus on productivity improvements, looking for opportunities to reallocate resources across the portfolio to grow its strongest brands and to support the most promising assets in its pipeline. Marketing and administrative expenses declined in 2016 as compared with 2015 reflecting in part this continued focus by the Company on prioritizing its resources to the highest growth areas. Research and development expenses in 2016 reflect increased clinical development spending as the Company continues to invest in the pipeline.
In November 2016, Merck’s Board of Directors raised the Company’s quarterly dividend to $0.47 per share from $0.46 per share. During 2016, the Company returned $8.6 billion to shareholders through dividends and share repurchases.
In January 2017, Merck entered into a settlement and license agreement to resolve worldwide patent infringement litigation related to Keytruda. In connection with the settlement, Merck recorded a pretax charge of $625 million in the fourth quarter of 2016 (see Note 10 to the consolidated financial statements).
Earnings per common share assuming dilution attributable to common shareholders (EPS) for 2016 were $1.41 compared with $1.56 in 2015. EPS in both years reflect the impact of acquisition and divestiture-related costs, including a charge in 2016 related to the uprifosbuvir clinical development program, as well as restructuring costs and certain other items. Non-GAAP EPS, which excludes these items, were $3.78 in 2016 and $3.59 in 2015 (see “Non-GAAP Income and Non-GAAP EPS” below).


Operating Results
Sales
Worldwide sales were $39.8 billion in 2011.2016, an increase of 1% compared with 2015. Foreign exchange unfavorably affected global sales performance by 3%. The2% in 2016, which includes a lower benefit from revenue hedging activities as compared with 2015. Revenue growth primarily reflects higher sales decrease was driven primarily byin the oncology franchise largely from SingulairKeytruda, which lost market exclusivitythe launch of the HCV treatment Zepatier, and growth in vaccine products, including Gardasil/Gardasil 9, Varivax and Pneumovax 23. Also contributing to sales growth in 2016 were higher sales of hospital acute care products including Bridion and Noxafil, growth within the diabetes franchise of Januvia and Janumet, as well as higher sales of Animal Health products, particularly Bravecto. These increases were partially offset by sales declines attributable to the ongoing effects of generic and biosimilar competition for certain products, including Remicade and Nasonex, along with other products within Diversified Brands. Declines in Isentress, PegIntron and Dulera Inhalation Aerosol also partially offset revenue growth in 2016. Sales performance in 2016 reflects a decline of approximately $625 million due to reduced operations by the Company in Venezuela as a result of evolving economic conditions and volatility in that country.
Sales in the United States were $18.5 billion in August 2012 resulting2016, an increase of 5% compared with $17.5 billion in a significant and rapid decline2015. Within the Pharmaceutical segment, sales in U.S.the United States grew 5% in 2016 driven primarily by the launches of SingulairZepatier sales. Theand Bridion, along with higher sales decline was also drivenof Keytruda and Gardasil/Gardasil 9, partially offset by lower sales of RemicadeNasonex, Cubicin, Dulera Inhalation Aerosol, and Isentress.
International sales were $21.3 billion in 2016, a decline of 3% compared with $22.0 billion in 2015. Foreign exchange unfavorably affected international sales performance by 4% in 2016. International sales within the Pharmaceutical segment declined 3% in 2016, including a 3% unfavorable effect from foreign exchange, largely asreflecting declines in certain emerging markets, offset by an increase in Japan. Sales in emerging markets were $6.7 billion in 2016, a resultdecline of 9% including a 6% unfavorable effect from foreign exchange, driven primarily by reduced operations in Venezuela, partially offset by growth in other markets. Sales in Japan grew 6% in 2016, to $2.8 billion, which includes a 10% favorable effect from foreign exchange. Excluding the arbitration settlement agreement reachedfavorable effect of foreign exchange, the sales decline in 2011 as discussed below. In addition, lowerJapan was largely driven by the loss of market exclusivity for Singulair combined with the ongoing generic erosion for products within Diversified Brands, partially offset by higher sales of Cozaar Belsomraand. Sales in Europe were $7.7 billion in 2016, essentially flat as compared with 2015, including a 2% unfavorable effect from foreign exchange. Excluding the unfavorable effect of foreign exchange, sales performance in Europe primarily reflects volume growth in HyzaarKeytruda, ClarinexCubicin, FosamaxSimponi, Adempas, VytorinLiptruzet, and the PrimaxinJanuvia, franchise, partially offset by ongoing biosimilar competition and generic erosion for certain products, particularly Remicade, and other pricing pressures in this region. Total international sales represented 54% and 56% of total sales in 2016 and 2015, respectively.
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, health care reform is contributing to an anti-bacterial product,increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company’s revenue performance in 2016. The Company anticipates these pricing actions and other austerity measures will continue to negatively affect revenue performance in 2017.

Avelox,Worldwide sales were $39.5 billion in 2015, a broad-spectrum fluoroquinolone antibiotic fordecline of 6% compared with 2014 including a 6% unfavorable effect from foreign exchange. The acquisition of Cubist Pharmaceuticals, Inc. (Cubist) in 2015, the treatmentdivestiture of certain respiratory and skin infections,Merck’s Consumer Care (MCC) business in 2014, as well as lower revenue fromproduct divestitures and the termination of the Company’s relationship with AstraZeneca LP (“AZLP”)(AZLP) also contributedin 2014, as discussed below, had a net unfavorable impact to the sales decline in 2012. These declines were largely offset by higher sales of approximately 3%. In addition, sales performance in 2015 reflects declines in JanuviaPegIntron, Gardasil, and Victrelis, ZostavaxRemicade,Pneumovax 23, Nasonex, and Vytorin. These declines were partially offset by volume growth in Keytruda, Januvia and Janumet, IsentressGardasil/Gardasil 9, Noxafil, ZetiaSimponi, andImplanon/Nexplanon, Invanz, Dulera Inhalation Aerosol, and Bridion, as well as byvolume growth in Animal Health products and higher third-party manufacturing sales.
In January 2015, the Company acquired Cubist, which contributed sales of $1.3 billion to Merck’s revenues in 2015. In 2014, the Company divested certain ophthalmic products in several international markets (most of which closed on July 1, 2014). In addition, on October 1, 2014, the Company divested its MCC business including the prescription rights to Claritin and Afrin. The sales decline in 2015 attributable to these divestitures was approximately $1.9 billion of which $1.5 billion related to the Consumer Care segment and $400 million related to the Pharmaceutical segment. Also, in 2014, the Company sold the U.S. marketing rights to Saphris, an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults, which resulted in revenue of $232 million. Additionally, the Company’s animal healthrelationship with AZLP terminated on June 30, 2014; therefore, effective July 1, 2014, the Company no longer records supply sales to AZLP. These supply sales were $463 million in 2014 through the termination date and consumer care products.were reflected in the Alliances segment.


41

Sales of the Company’s products were as follows:
2013 2012 2011
($ in millions)2016 2015 2014
Primary Care and Women’s Health          
Cardiovascular          
Zetia$2,658
 $2,567
 $2,428
$2,560
 $2,526
 $2,650
Vytorin1,643
 1,747
 1,882
1,141
 1,251
 1,516
Diabetes and Obesity     
Diabetes     
Januvia4,004
 4,086
 3,324
3,908
 3,863
 3,931
Janumet1,829
 1,659
 1,363
2,201
 2,151
 2,071
Respiratory     
Nasonex1,335
 1,268
 1,286
Singulair1,196
 3,853
 5,479
General Medicine and Women’s Health     
NuvaRing777
 732
 723
Implanon/Nexplanon606
 588
 502
Dulera324
 207
 96
436
 536
 460
Asmanex184
 185
 206
Women’s Health and Endocrine     
NuvaRing686
 623
 623
Fosamax560
 676
 855
Follistim AQ481
 468
 530
355
 383
 412
Implanon403
 348
 294
Cerazette208
 271
 268
Other     
Arcoxia484
 453
 431
Avelox140
 201
 322
Hospital and Specialty          
Hepatitis     
Zepatier555
 —
 —
HIV     
Isentress1,387
 1,511
 1,673
Hospital Acute Care     
Cubicin (1)
1,087
 1,127
 25
Noxafil595
 487
 402
Invanz561
 569
 529
Cancidas558
 573
 681
Bridion482
 353
 340
Primaxin297
 313
 329
Immunology          
Remicade2,271
 2,076
 2,667
1,268
 1,794
 2,372
Simponi500
 331
 264
766
 690
 689
Infectious Disease     
Isentress1,643
 1,515
 1,359
Cancidas660
 619
 640
PegIntron496
 653
 657
Invanz488
 445
 406
Victrelis428
 502
 140
Noxafil309
 258
 230
Oncology          
Keytruda1,402
 566
 55
Emend549
 535
 553
Temodar708
 917
 935
283
 312
 350
Emend507
 489
 419
Diversified Brands     
Respiratory     
Singulair915
 931
 1,092
Nasonex537
 858
 1,099
Other          
Cosopt/Trusopt416
 444
 477
Bridion288
 261
 201
Integrilin186
 211
 230
Diversified Brands     
Cozaar/Hyzaar1,006
 1,284
 1,663
511
 667
 806
Primaxin335
 384
 515
Arcoxia450
 471
 519
Fosamax284
 359
 470
Zocor301
 383
 456
186
 217
 258
Propecia283
 424
 447
Clarinex235
 393
 621
Remeron206
 232
 241
Claritin Rx204
 244
 314
Proscar183
 217
 223
Maxalt149
 638
 639
Vaccines (1)
     
Gardasil1,831
 1,631
 1,209
Vaccines (2)
     
Gardasil/Gardasil 9
2,173
 1,908
 1,738
ProQuad/M-M-R II/Varivax
1,306
 1,273
 1,202
1,640
 1,505
 1,394
Zostavax758
 651
 332
685
 749
 765
RotaTeq652
 610
 659
Pneumovax 23
653
 580
 498
641
 542
 746
RotaTeq636
 601
 651
Other pharmaceutical (2)
4,316
 4,333
 4,266
Other pharmaceutical (3)
4,703
 5,105
 6,233
Total Pharmaceutical segment sales37,437
 40,601
 41,289
35,151
 34,782
 36,042
Other segment sales (3)
6,325
 6,412
 6,428
Other segment sales (4)
3,862
 3,667
 5,758
Total segment sales43,762
 47,013
 47,717
39,013
 38,449
 41,800
Other (4)
271
 254
 330
Other (5)
794
 1,049
 437
$44,033
 $47,267
 $48,047
$39,807
 $39,498
 $42,237
(1)
Sales of Cubicin in 2015 represent sales subsequent to the Cubist acquisition date. Sales of Cubicin in 2014 reflect sales in Japan pursuant to a previously existing licensing agreement.
(2) 
These amounts do not reflect sales of vaccines sold in most major European markets through the Company’s joint venture, Sanofi Pasteur MSD,SPMSD, the results of which are reflected in Equityequity income from affiliates which is included in Other (income) expense, net. These amounts do, however, reflect supply sales to SPMSD. On December 31, 2016, Merck and Sanofi Pasteur MSD.terminated the SPMSD joint venture (see Note 8 to the consolidated financial statements).
(2)(3) 
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(3)(4)  
Represents the non-reportable segments of Animal Health, Healthcare Services and Alliances, as well as Consumer Care and Alliances.until its divestiture on October 1, 2014. The Alliances segment includes revenue from the Company’s relationship with AZLP.AZLP until termination on June 30, 2014.
(4)(5) 
Other revenues areis 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. As discussed above, on October 1, 2013, the Company divested a substantial portion of itsincluding revenue hedging activities, as well as third-party manufacturing sales. In addition, other revenuesOther in 2013 reflect $502016 and 2014 also includes approximately $170 million and $232 million, respectively, in connection with the sale of revenue for the out-license of a pipeline compound.marketing rights to certain products.

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Pharmaceutical Segment
Primary Care and Women’s Health
Cardiovascular
WorldwideCombined global sales of Zetia (also marketed(marketed in most countries outside the United States as Ezetrol outside the United States), a cholesterol absorption inhibitor, were $2.7 billion in 2013, an increase of 4% compared with 2012 including a 2% unfavorable effect from foreign exchange. The sales increase primarily reflects favorable pricing in the United States) and volume growth in Japan, partially offset by the unfavorable effect of foreign exchange particularly in Japan. Sales of Zetia increased 6% in 2012 to $2.6 billion, including a 2% unfavorable effect from foreign exchange. The sales increase reflects positive performance in the United States due to pricing, as well as volume growth in Japan, partially offset by volume declines in the United States.
Global sales of Vytorin (marketed(marketed outside the United States as Inegy), medicines for lowering LDL cholesterol, were $3.7 billion in 2016, a combination product containingdecline of 2% compared with 2015 including a 1% unfavorable effect from foreign exchange. In addition, in 2016, the active ingredientsCompany recorded sales of both$146 million for Zetia and ZocorAtozet, a statinmedicine for modifyinglowering LDL cholesterol, which the Company markets in certain countries outside of the United States. Global sales of the ezetimibe family (including Atozet) were $1.6$3.8 billion in 2013, a decline2016, growth of 6%1% compared with 2012, driven primarily2015, reflecting volume growth in Europe and higher pricing in the United States, largely offset by lower sales in Venezuela due to reduced operations in this country and lower volumes in the United States and Latin America, partially offset by volume growthreflecting in the Asia Pacific region. Worldwide salespart generic competition for Zetia. By agreement, a generic manufacturer launched a generic version of VytorinZetia declined 7% in 2012 to $1.7 billion, including a 3% unfavorable effect from foreign exchange. The sales decline reflects volume declines in the United States partially offset by pricing in the United States and volume growth in certain international markets.
In March 2013, the Data Safety Monitoring Board (the “DSMB”) of the IMPROVE-IT trial, a large cardiovascular outcomes study evaluating ezetimibe/simvastatin against simvastatin alone in patients presenting with acute coronary syndrome, completed its planned review of study data and recommended that the study continue. Merck remains blinded to the actual results of this analysis and to other IMPROVE-IT safety and efficacy data. IMPROVE-IT is an 18,000 patient event-driven trial and, based on the targeted number of 5,250 clinical endpointsDecember 2016 and the rate at which events are being reported,Company is experiencing a rapid decline in U.S. Zetia sales. The Company anticipates the trial is projected to conclude laterdecline will accelerate in 2014. Iffuture periods. The U.S. patent and exclusivity periods for Zetia and Vytorin otherwise expire in April 2017 and the results of the IMPROVE-IT trial fail to demonstrate an incremental benefit of ezetimibe/simvastatin on cardiovascular morbidityCompany anticipates declines in U.S. Zetia and mortality over and above that demonstrated for simvastatin,Vytorin sales thereafter. U.S. sales of Zetia and Vytorin could be materially adversely affectedwere $1.6 billion and if so,$473 million, respectively, in 2016. The Company has market exclusivity in major European markets for Ezetrol until April 2018 and for Inegy until April 2019. Combined worldwide sales of the ezetimibe family were $3.8 billion in 2015, a decline of 9% compared with 2014 including an 8% unfavorable effect from foreign exchange. The sales decline was driven primarily by lower volumes of Ezetrol in Canada where it lost market exclusivity in September 2014, as well as by lower volumes in the United States, partially offset by higher pricing in the United States.
Pursuant to a collaboration between Merck and Bayer AG (Bayer) (see Note 3 to the consolidated financial statements), Merck has lead commercial rights for Adempas, a novel cardiovascular drug for the treatment of pulmonary arterial hypertension, in countries outside the Americas while Bayer has lead rights in the Americas, including the United States. In 2016, Merck began promoting and distributing Adempas in Europe. Transition in other Merck territories will continue in 2017. Merck recorded sales for Adempas of $169 million in 2016, which includes sales in Merck’s marketing territories, as well as Merck’s share of profits from the sale of Adempas in Bayer’s marketing territories.
In September 2016, Merck sold the marketing rights for Zontivity in the United States and Canada to Aralez Pharmaceuticals Inc. for a $25 million upfront payment and royalties at graduated rates, plus potential future consideration dependent upon the achievement of certain aggregate annual sales-based milestones. Previously, in March 2016, following several business decisions that reduced sales expectations for Zontivity in the United States and Europe, the Company may take non-cash impairment charges with respectlowered its cash flow projections for Zontivity. The Company utilized market participant assumptions and considered several different scenarios to determine the carrying valuesfair value of the intangible asset related to ZetiaZontivity that, when compared with its related carrying value, resulted in an impairment charge of $252 million recorded in Materials and Vytorinproduction intangible assets, which were $4.7 billion and $2.6 billion, respectively, at December 31, 2013 and such charges could be material. costs in 2016.

Diabetes and Obesity
GlobalWorldwide combined sales of Januvia and Janumet, Merck’s dipeptidyl peptidase-4 (“DPP-4”) inhibitor for the treatment ofmedicines that help lower blood sugar levels in adults with type 2 diabetes, were $4.0$6.1 billion in 2013, a decline2016, an increase of 2% compared with 20122015. Sales growth was driven primarily by higher volumes in the United States, Europe and Canada, partially offset by pricing pressures in the United States and Europe, and lower sales in Venezuela due to the Company’s reduced operations in that country. Combined global sales of Januvia and Janumet were $6.0 billion in 2015, essentially flat as compared with 2014 including a 5%7% unfavorable effect from foreign exchange. Excluding the negative effect from foreign exchange, salesSales performance in 2013 compared with 2012 reflects volume growth in Japan, positive performance in Europehigher volumes and the emerging markets, partially offset by declines in the United States reflecting lowering demand. Worldwide sales of Januvia rose 23% to $4.1 billion in 2012 compared with 2011 reflecting volume growthpricing in the United States, as well as volume growth in internationalemerging markets particularly in Japan. Foreign exchange unfavorably affected sales performance by 2% in 2012. In 2014, the Company anticipates that all DPP-4 inhibitors, including Januvia, will be subject to repricing in Japan.
The Trial Evaluating Cardiovascular Outcomes after treatment with Sitagliptin (“TECOS”), an event-driven, cardiovascular outcomes study for sitagliptin, began in 2008 and has over 14,000 patients enrolled. TECOS will evaluate the impactEurope. Volume declines of sitagliptin when added to usual care compared to usual care withoutco-marketed sitagliptin in a large, high-risk type 2 diabetes population across multiple countries. TECOS is expectedJapan due to be completed laterthe timing of sales to the licensee partially offset growth in 2014.2015.
General Medicine and Women’s Health 
Worldwide sales of JanumetNuvaRing, Merck’s oral antihyperglycemic agent that combines sitagliptin (Januvia) with metformina vaginal contraceptive product, were $777 million in a single tablet, were $1.8 billion in 2013,2016, an increase of 10%6% compared with 2012, driven primarily by volume growth outside the United States. Global sales of Janumet2015, and were $1.7 billion$732 million in 2012,2015, an increase of 22%1% compared with 2011, reflecting volume growth in the United States, the emerging markets and Europe. Foreign exchange unfavorably affected sales performance by 4% in 2012.
Global sales of the combined diabetes franchise of Januvia/Janumet were $5.8 billion in 2013, an increase of 2% compared with 2012 including a 3% unfavorable effect from foreign exchange, and were $5.7 billion in 2012, an increase of 23% compared with 2011 including a 2% unfavorable effect from foreign exchange.


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Respiratory
Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, increased 5% to $1.3 billion in 2013 compared with 2012 driven primarily by increases in the United States, reflecting net favorable adjustments to indirect customer discounts, as well as by volume growth in Japan, partially offset by declines in Latin America, Canada and Europe.2014. Foreign exchange unfavorably affected global sales performance by 3%1% and 7% in 2013. By agreement, generic manufacturers were able to launch a generic version of Nasonex2016 and 2015, respectively. Sales growth in most European markets on January 1, 2014 and generic versions of Nasonex have since launchedboth years largely reflects higher pricing in several of these markets. Accordingly, the Company anticipates a rapid decline in Nasonex salesUnited States. Volume declines in Europe partially offset revenue growth in 2014. Sales of Nasonex in Europe were $207 million in 2013.2016. In 2009, Apotex Inc. and Apotex Corp. (collectively, “Apotex”) filed an application with the FDA seeking approval to sell its generic version of Nasonex. In June 2012,August 2016, the U.S. District Court for the District of New Jersey ruled against the Company in a patent infringement suit against Apotex holding that Apotex’s generic version of Nasonex does not infringe on the Company’s formulation patent. In June 2013,delivery system patent for NuvaRing is invalid. The Company is appealing this verdict to the U.S. Court of Appeals for the Federal Circuit issuedCircuit. However, given the U.S. District Court’s decision, there may be generic entrants into the U.S. market in advance of the April 2018 patent

expiration. If this should occur, the Company anticipates a decision affirmingsignificant decline in U.S. NuvaRing sales thereafter. U.S. sales of NuvaRing were $576 million in 2016. As a result of the unfavorable U.S. District Court decision, and the Company has exhausted all of its appeal options. If Apotex’s generic version becomes available, significant losses of U.S. Nasonex sales could occur andevaluated the Company may take a non-cash impairment charge with respect to the carrying value of the Nasonex intangible asset whichrelated to NuvaRing for impairment and concluded that it was $1.3 billionnot impaired. The intangible asset value for NuvaRing was $319 million at December 31, 2013. If the Nasonex intangible asset is determined to be impaired, the impairment charge could be material. U.S. sales of Nasonex were $681 million in 2013. Worldwide sales of Nasonex declined 1% in 2012 to $1.3 billion, including a 1% unfavorable impact from foreign exchange. Sales performance in 2012 compared with 2011 reflects price declines in Europe and lower volumes in the United States, largely offset by higher prices in the United States.2016.
Worldwide sales of Singulair,Implanon/Nexplanon a once-a-day oral medicine for the chronic treatment, single-rod subdermal contraceptive implants, grew to $606 million in 2016, an increase of asthma and for the relief of symptoms of allergic rhinitis, fell 69% to $1.2 billion in 20133% compared with 20122015 including a 3% unfavorable effect from foreign exchange. Sales growth reflects higher demand in the United States, partially offset by declines in certain emerging markets, particularly in Venezuela. Implanon/Nexplanon sales rose to $588 million in 2015, a 17% increase compared with 2014 including a 6% unfavorable effect from foreign exchange. The increase was driven primarily by lower saleshigher demand in the United States and Europe as a result of generic competition. The patent that provided U.S. market exclusivity for Singulair expired in August 2012 and the Company has lost nearly all sales of Singulair in the United States. In addition, the patents that provided market exclusivity for Singulair expired in a number of major European markets in February 2013 and the Company experienced a significant and rapid reduction in sales of Singulair in those markets following the patent expiries and expects the decline to continue. The patent that provides market exclusivity for Singulair in Japan will expire in 2016. Singulair sales in Japan were $523 million in 2013. Global sales of Singulair declined 30% to $3.9 billion in 2012 compared with 2011 driven primarily by lower sales in the United States. Revenue declines in Europe, Canada and Latin America also contributed to the Singulair sales decline in 2012.emerging markets.
Global sales of Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, were $324$436 million in 2013, $2072016, a decline of 19% compared with 2015 including a 1% unfavorable effect from foreign exchange. The decline was driven by lower sales in the United Sales reflecting competitive pricing pressures that were partially offset by higher demand. Worldwide sales of Dulera Inhalation Aerosol grew 16% in 2015 to $536 million in 2012 and $96 million in 2011 reflectingdriven primarily by higher demand in the United States.Dulera Inhalation Aerosol was approved by the FDA in June 2010. In January 2012, Merck received a CRL from the FDA on the Company’s supplemental New Drug Application for Dulera Inhalation Aerosol for the treatment of chronic obstructive pulmonary disease. The Company has determined not to conduct an additional clinical study and will no longer pursue an update to the application.

Women’s Health and Endocrine
Worldwide sales of NuvaRing, a vaginal contraceptive product, were $686 million in 2013, an increase of 10% compared with 2012, primarily reflecting volume growth and favorable pricing in the United States. Global sales of NuvaRing were $623 million in 2012, comparable with sales in 2011. Foreign exchange unfavorably affected sales performance by 3% in 2012. Excluding the unfavorable impact of foreign exchange, sales performance in 2012 reflects volume growth in the emerging markets and positive performance in Europe.
Worldwide sales of Fosamax (marketed as Fosamac in Japan) and Fosamax Plus D (marketed as Fosavance throughout the EU) for the treatment and, in the case of Fosamax, prevention of osteoporosis, declined 17% in 2013 to $560 million and decreased 21% in 2012 to $676 million driven by declines in most regions. These medicines have lost market exclusivity in the United States and in most major international markets. The Company expects the sales declines within the Fosamax product franchise to continue.
Global sales of Follistim AQ (marketed in most countries outside the United States as Puregon), a fertility treatment, grew 3% to $481were $355 million in 20132016, a decline of 7% compared with 2012 driven largely by positive performance in the United States. Sales of Follistim AQ declined 12% in 2012 to $468 million, including a 3% unfavorable effect from foreign

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exchange, driven largely by declines in Europe resulting from supply issues and pricing. Puregon lost market exclusivity in the EU in August 2009.
Worldwide sales of Implanon, a single-rod subdermal contraceptive implant, grew 16% to $403 million in 2013 compared with 2012 driven primarily by volume growth in the United States that was partially offset by declines in the emerging markets from pricing pressures. Implanon sales increased 18% in 2012 to $348 million,2015 including a 2% unfavorable effect from foreign exchange. The sales decline primarily reflects lower volumes in Europe due in part to supply issues and lower demand in certain emerging markets. Worldwide sales of Follistim AQ were $383 million in 2015, a decline of 7% compared with 2014, reflecting a 9% unfavorable effect from foreign exchange reflecting volume growth in the emerging markets andthat was offset by higher pricing in the United States.
In recent years,2016, the Company experienced difficulties manufacturingdetermined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that included both Grastek and Ragwitek allergy immunotherapy tablets for sublingual use. This decision was not due to efficacy or safety concerns for the tablets. Merck provided ALK-Abelló with six months’ notice that it is terminating the agreement and therefore these compounds will be returned to ALK-Abelló. In connection with this decision, the Company wrote-off $95 million of intangible assets related to these products (see Note 7 to the consolidated financial statements).

Hospital and Specialty
Hepatitis
Global sales of Zepatier were $555 million in 2016. Zepatier was approved by the FDA in January 2016 for the treatment of adult patients with chronic HCV GT1 or GT4 infection, with ribavirin in certain women’s health products.patient populations. Zepatier was approved by the EC in July 2016 and became available in European markets in late November 2016. Launches are expected to continue across the EU in 2017. The Company has resolved these issues, whichis also launching Zepatier in Japan and in emerging markets.
Worldwide sales of PegIntron, a treatment for chronic HCV, declined 65% in 2016 to $63 million and decreased 52% in 2015 to $182 million. The declines were not material todriven by lower volumes in nearly all regions as the Company’s resultsavailability of operations.

Othernewer therapeutic options resulted in continued loss of market share.
Other products included in Primary Care and Women’s Health include among others,Global sales of Asmanex TwisthalerVictrelis, an inhaled corticosteroidoral medicine for asthma;the treatment of chronic HCV, were $18 million in 2015, a decline of 89% compared with sales of $153 million in 2014, driven by lower volumes in Europe and emerging markets as the availability of newer therapeutic options resulted in continued loss of market share. Sale of CerazetteVictrelis were de minimis in 2016.
HIV
Worldwide sales of Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, were $1.4 billion in 2016, a decline of 8% compared with 2015 including a 2% unfavorable effect from foreign exchange. The sales decline was driven primarily by lower volumes in the United States, as well as lower demand and pricing in Europe due to competitive pressures, partially offset by a favorable adjustment to discount reserves in the United States and higher demand in certain emerging markets. Global sales of Isentress were $1.5 billion in 2015, a decline of 10% compared with 2014 including an 8% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States and lower demand and

pricing in Europe due to competitive pressures, partially offset by higher volumes in Latin America and higher pricing in the United States.
Hospital Acute Care
Global sales of Cubicin, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia when caused by designated susceptible organisms, were $1.1 billion in 2016, a progestin only oral contraceptive;decline of 4% compared with 2015. The U.S. composition patent for ArcoxiaCubicin expired in June 2016 and the Company is experiencing a significant decline in U.S. Cubicin sales and expects the decline to continue. The sales decline in the United States was partially offset by sales of Cubicin in certain international markets for which the Company acquired marketing rights in the fourth quarter of 2015 (including Europe, Latin America, Australia, New Zealand, China, South Africa and certain other Asia Pacific countries). The Company anticipates it will lose market exclusivity for Cubicin in Europe in 2017.
Worldwide sales of Noxafil, for the prevention of invasive fungal infections, grew 22% in 2016 to $595 million driven primarily by higher pricing in the United States, volume growth in Europe reflecting an ongoing positive impact from the approval of new formulations, and higher demand in emerging markets. Global sales of Noxafil rose 21% in 2015 to $487 million driven by pricing and higher demand in the United States, as well as volume growth in Europe reflecting a positive impact from the approval of new formulations. Foreign exchange unfavorably affected global sales performance by 3% in 2016 and 12% in 2015.
Global sales of Invanz, for the treatment of arthritiscertain infections, were $561 million in 2016, a decline of 1% compared with 2015 including a 2% unfavorable effect from foreign exchange. Sales performance in 2016 reflects volume growth in certain emerging markets and painhigher pricing in the United States, largely offset by a decline in Venezuela. Worldwide sales of Invanz were $569 million in 2015, an increase of 8% compared with 2014, reflecting higher sales in the United States and volume growth in emerging markets that was partially offset by a 9% unfavorable effect from foreign exchange. The Company will lose U.S. patent protection for AveloxInvanz in November 2017 and the Company anticipates a significant decline in U.S. Invanz sales thereafter. U.S. sales of Invanz were $329 million in 2016.
Global sales of Cancidas, an anti-fungal product sold primarily outside of the United States, were $558 million in 2016, a broad-spectrum fluroquinolone antibioticdecline of 3% compared with 2015, reflecting a 4% unfavorable effect from foreign exchange and pricing declines in Europe that were offset by higher volumes in certain emerging markets, particularly in China. Worldwide sales of Cancidas were $573 million in 2015, a decrease of 16% compared with 2014 reflecting a 12% unfavorable effect from foreign exchange and volume declines in certain emerging markets. The EU compound patent for Cancidas expires in April 2017 and the Company anticipates a decline in Cancidas sales in those European markets thereafter. Sales of Cancidas in Europe were $297 million in 2016.
Global sales of Bridion, for the treatmentreversal of certain respiratory and skin infections marketedtwo types of neuromuscular blocking agents used during surgery, were $482 million in 2016, growth of 37% compared with 2015 including a 2% favorable effect from foreign exchange. Sales growth reflects volume growth in most markets, including in the United States where it was approved by the FDA in December 2015, partially offset by a decline in Venezuela due to reduced operations by the Company in this country. Sales of Bridion increased 4% in 2015 to $353 million driven by volume growth in international markets. Foreign exchange unfavorably affected global sales performance by 19% in 2015.
In October 2016, Merck announced that the FDA approved Zinplava Injection 25 mg/mL. Zinplava is indicated to reduce recurrence of Clostridium difficile infection (CDI) in patients 18 years of age or older who are receiving antibacterial drug treatment of CDI and are at high risk for CDI recurrence. Zinplava became available in the United States.States in February 2017. Zinplava was approved by the EC in January 2017. The patent that provides U.S. market exclusivity forCompany anticipates AveloxZinplava expireswill be available in the EU in March 2014.2017.

Hospital and Specialty
Immunology
Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $2.3$1.3 billion in 2013, an increase2016, a decline of 9%29% compared with 2012 including2015, and were $1.8 billion in 2015, a 2% favorable effect from foreign exchange. Sales growth reflects volume growthdecline of 24% compared with 2014. Foreign exchange unfavorably affected sales performance by 1% in Europe, as well as Russia.2016 and by 14% in 2015. In September 2013, the EC approved an infliximab biosimilar. WhileFebruary 2015, the Company is experiencing generic competition in certain smaller European markets, the Company anticipates a more substantial decline inlost market exclusivity for Remicade sales following loss of market exclusivity in major European markets and no longer has market exclusivity in February 2015. Salesany of Remicade were $2.1 billionits marketing territories. The Company is experiencing pricing and volume declines in 2012, a decline of 22% compared with 2011 including a 6% unfavorable effect from foreign exchange. Prior to July 1, 2011, Remicade was marketed by the Company outside of the United States (except in Japan and certain other Asian markets). Asthese markets as a result of biosimilar competition and expects the agreement reached in April 2011declines to amend the agreement governing the distribution rights to continue.Remicade and Simponi, effective July 1, 2011, Merck relinquished marketing rights for these products in certain territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific. Merck retained exclusive marketing rights throughout Europe, Russia and Turkey (the “Retained Territories”). In the Retained Territories, Remicade sales declined 2% in 2012, which reflects an 8% unfavorable effect from foreign exchange and volume growth in Europe.

Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $500$766 million in 2013, $331 million in 2012 and $264 million in 2011 driven by continued launch activities. Simponi was approved by the European Commission (the “EC”) in October 2009. In September 2013, the EC approved Simponi for the treatment2016, an increase of adult patients with moderately to severely active ulcerative colitis who have had an inadequate response to conventional therapy or who are intolerant to or have medical contraindications for such therapies.

Infectious Disease
Worldwide sales of Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, grew 8% to $1.6 billion in 201311% compared with 2012 driven primarily by volume growth in the United States and Europe. Global sales of Isentress grew 11% in 2012 to $1.5 billion compared with 2011 driven primarily by volume growth in the United States, Latin America and the Asia Pacific region. Foreign exchange unfavorably affected global sales performance by 1% in 2013 and 4% in 2012.
Global sales of Cancidas, an anti-fungal product, increased 7% to $660 million in 2013 compared with 2012 reflecting growth in most emerging markets, as well as in Europe and Japan. Sales of Cancidas declined 3% in 2012 to $619 million, which reflects a 5% unfavorable effect from foreign exchange and growth in the emerging markets.
Worldwide sales of PegIntron, a treatment for chronic hepatitis C, declined 24% to $496 million in 2013 compared with 2012 reflecting declines in all regions. The Company believes the sales declines are attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available.

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Foreign exchange unfavorably affected global sales performance by 3% in 2013. Global sales of PegIntron declined 1% in 2012 to $653 million, including an unfavorable effect from foreign exchange of 4%. Excluding the unfavorable impact of foreign exchange, sales performance reflects volume growth and favorable pricing in the United States and volume growth in certain emerging markets.
Global sales of Victrelis, an oral medicine for the treatment of chronic hepatitis C, were $428 million in 2013, a decline of 15% compared with 20122015 including a 1%3% unfavorable effect from foreign exchange. Sales declinesgrowth was driven primarily by higher volumes in Europe reflecting in part an ongoing positive impact from the ulcerative colitis indication. Sales of Simponi were $690 million in 2015, essentially flat as compared with 2014, driven by higher demand in Europe, reflecting in part an ongoing positive impact from the ulcerative colitis indication, which was offset by a 19% unfavorable effect from foreign exchange.
Oncology
Sales of Keytruda, an anti-PD-1 therapy, were $1.4 billion in 2016, $566 million in 2015 and $55 million in 2014. The year-over-year increases primarily reflect higher sales in the United States, Europe and Canada were partially offsetin emerging markets as the Company continues to launch Keytruda.
In October 2016, Merck announced that the FDA approved Keytruda for the first-line treatment of patients with NSCLC whose tumors have high PD-L1 expression (TPS of 50% or more) as determined by growth acrossan FDA-approved test, with no EGFR or ALK genomic tumor aberrations. With this new indication, Keytruda is now the emerging markets. The Company believes the sales declinesonly anti-PD-1 therapy to be approved in the United States, Europefirst-line treatment setting for these patients. In addition, the FDA approved a labeling update to include data from KEYNOTE-010 in the second-line or greater treatment setting for patients with metastatic NSCLC whose tumors express PD-L1 (TPS of 1% or more) as determined by an FDA-approved test, with disease progression on or after platinum-containing chemotherapy. Patients with EGFR or ALK genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving Keytruda. In December 2016, Keytruda was approved in Japan for the treatment of certain patients with PD-L1-positive unresectable advanced/recurrent NSCLC in the first- and Canada are attributablesecond-line treatment settings. Additionally, in part to patientJanuary 2017, the EC approved Keytruda for the first-line treatment being delayed by health care providersof metastatic NSCLC in anticipationadults whose tumors have high PD-L1 expression (TPS of new therapeutic options becoming available. Sales50% or more) with no EGFR or ALK positive tumor mutations.
In August 2016, Merck announced that the FDA approved Keytruda for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma (HNSCC) with disease progression on or after platinum-containing chemotherapy.
VictrelisKeytruda were $502 million in 2012 compared with $140 million in 2011, driven by post-launch growthis now approved in the United States and internationally, particularly in Europe. Victrelis was approved by the FDA in May 2011 and by the EC in July 2011.
Sales of the Company’s products indicated for treatment of chronic hepatitis C including Victrelis and PegIntron discussed above, as well as Rebetol, continued to be adversely affected in 2013 by patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available. Sales of Rebetol, a product sold almost entirely in international markets, were particularly adversely affected by this trend given the markets where Rebetol is sold, as well as from generic competition. Worldwide sales of Rebetol declined 43% in 2013 to $74 million driven by declines in Japan and Europe. Cash flow revisions in the fourth quarter of 2013 indicated that the Rebetol intangible asset value was not recoverable on an undiscounted cash flows basis. Utilizing market participant assumptions, the Company concluded that its best estimate of the fair value of the intangible asset related to Rebetol was $94 million at December 31 2013, which resulted in an impairment charge of $156 million recorded within Materials and production costs. In the event that the availability of new treatment options adversely affects sales of products currently marketed by the CompanyEU for the treatment of chronic hepatitis C to a greater extent than anticipated bypreviously untreated metastatic NSCLC in patients whose tumors express high levels of PD-L1 and previously treated metastatic NSCLC in patients whose tumors express PD-L1, as well as for the Company, ortreatment of advanced melanoma. Keytruda is also approved in the event other circumstances arise that significantly reduce cash flow projectionsUnited States for these products,previously treated recurrent or metastatic HNSCC. The Company has launched Keytruda in over 50 markets globally.
Merck has five sBLAs under Priority Review with the FDA for Keytruda including: for use in combination with chemotherapy for the first-line treatment of patients with metastatic or advanced non-squamous NSCLC regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations; for the treatment of patients with classical Hodgkin lymphoma; for the treatment of previously treated patients with advanced microsatellite instability-high cancer; for the first-line treatment of patients with locally advanced or metastatic urothelial cancer, including most bladder cancers; and for the second-line treatment of patients with locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy. The Company may recordplans additional intangible asset impairment charges in the future and such charges could be material. The carrying value of the intangible assets related to these products was $1.3 billion in the aggregate at December 31, 2013.

Oncology
Sales of Temodar (marketed as Temodal outside the United States), a treatment for certain types of brain tumors, declined 23% to $708 million in 2013 compared with 2012. Foreign exchange unfavorably affected global sales performance by 3% in 2013. The sales decline was driven primarily by generic competitionregulatory filings in the United States and Europe. As previously disclosed, byother countries. The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below). In January 2017, Merck entered into a settlement and license agreement a generic manufacturer launched a generic version ofto resolve worldwide patent infringement litigation related to TemodarKeytruda in the United States in August 2013. The U.S. patent and exclusivity periods otherwise expired in February 2014. Temodar lost patent exclusivity in the EU in 2009. Accordingly, the Company is experiencing sales declines due(see Note 10 to the loss of exclusivity in these markets and the Company expects these declines to continue. Sales of Temodar decreased 2% in 2012 to $917 million, including a 2% unfavorable effect from foreign exchange. Sales declines in Europe from generic competition were offset by price increases in the United States.consolidated financial statements).
Global sales of Emend, for the prevention of chemotherapy-induced and post-operative nausea and vomiting, were $507$549 million in 2013,2016, an increase of 4%3% compared with 20122015 including a 1% unfavorable effect from foreign exchange, largely reflecting higher pricing in the United States, partially offset by volume growthdeclines in Japan. In February 2016, Merck announced that the FDA approved a supplemental new drug application for single-dose Emend for injection for the prevention of delayed nausea and vomiting in adults receiving initial and repeat courses of moderately emetogenic chemotherapy. Worldwide sales of Emend were $535 million in 2015, a decline of 3% reflecting a 6% unfavorable effect from foreign exchange that was partially offset by higher pricing in the United States and the emerging markets, partially offset by a decline in Japan. Sales of Emend were $489 million in 2012, an increase of 17% compared with 2011 including a 2% unfavorable effect from foreign exchange, reflecting volume growth in the United States and Japan.

Other
Worldwide sales of ophthalmic products Cosopt and Trusopt were $416 million in 2013, a decline of 6% compared with 2012, reflecting a 7% unfavorable effect from foreign exchange and lower sales in Europe and Canada due to generic competition, partially offset by volume growth in Japan. The patent for Cosopt expired in a number of major European markets in March 2013 and the Company is experiencing sales declines in those markets. The patents that provided market exclusivity for Cosopt and Trusopt in the United States and for Trusopt in a number of major European markets had previously expired. Sales of Cosopt and Trusopt were $444 million in 2012, a decline of 7% compared with 2011 including a 4% unfavorable effect from foreign exchange. The sales decline primarily reflects lower sales in Europe due to generic erosion and price reductions, mitigated in part by higher Cosopt sales in Japan.

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In November 2013, Merck sold the U.S. rights to ophthalmic products Cosopt, Cosopt PF and AzaSite to Akorn, Inc. The annual U.S. sales associated with these ophthalmic products were approximately $45 million.
Bridion (sugammadex sodium injection), for the reversal of certain muscle relaxants used during surgery, is approved and has been launched in many countries outside of the United States. Sales of Bridion were $288 million in 2013, an increase of 10% compared with 2012. The sales growth was driven by volume growth in Europe, the emerging markets and Japan, partially offset by a 13% unfavorable effect of foreign exchange primarily on sales in Japan. Sales of Bridion grew 30% in 2012 to $261 million driven primarily by higher sales in Japan and the emerging markets. In September 2013, the Company received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection (see “Research and Development” below).
Saphris (asenapine), an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults, was previously marketed by the Company in the United States. Merck’s sales of Saphris were $158 million in 2013, $166 million in 2012 and $120 million in 2011. Asenapine, sold under the brand name Sycrest, is also approved in the EU for the treatment of bipolar I disorder in adults. Under a commercialization agreement for Sycrest sublingual tablets (5 mg, 10 mg), H. Lundbeck A/S (“Lundbeck”) makes product supply payments in exchange for exclusive commercial rights to Sycrest in all markets outside the United States, China and Japan. During the second quarter of 2013, the Company reduced cash flow projections for Saphris/Sycrest as a result of reduced expectations in international markets and in the United States. These revisions to cash flows indicated that the Saphris/Sycrest intangible asset value was not recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions and considered several different scenarios to determine its best estimate of the fair value of the intangible asset related to Saphris/Sycrest that, when compared with its related carrying value, resulted in an impairment charge of $330 million reflected in Materials and production costs. In January 2014, Merck sold the U.S. rights to Saphris to Forest Laboratories, Inc. (“Forest”). Under the terms of the agreement, Forest will make upfront payments of approximately $230 million and will make additional payments to Merck based on defined sales milestones.
Other products contained in Hospital and Specialty include among others, Invanz, for the treatment of certain infections; Noxafil, for the prevention of certain invasive fungal infections; and Integrilin, a treatment for patients with acute coronary syndrome, which is sold by the Company in the United States and Canada.Europe.

Diversified Brands
Merck’s diversified brands include human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the Company’s offering in other markets around the world.
Respiratory
Worldwide sales of Singulair, a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, were $915 million in 2016, a decrease of 2% compared with 2015 including a 2% favorable effect from foreign exchange. Sales performance primarily reflects lower volumes in Japan. The patents that provided market exclusivity for Singulair in Japan expired in February and October of 2016.As a result, the Company is experiencing Singulair volume declines in Japan and expects the decline to continue. Singulair sales in Japan were $455 million in 2016. In years prior to 2016, the Company lost market exclusivity for Singulair in the United States and in most major international markets with the exception of Japan. The Company no longer has market exclusivity for Singulair in any major market. Global sales of Singulair were $931 million in 2015, a decline of 15% compared with 2014 including a 10% unfavorable effect from foreign exchange. The sales decline in 2015 was driven primarily by lower volumes in Japan and lower demand in Europe as a result of generic competition.
Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were $537 million in 2016, a decline of 37% compared with 2015, driven primarily by lower volumes in the United States resulting from generic competition. In March 2016, Apotex launched a generic version of Nasonex in the United States pursuant to a June 2012 U.S. District Court for the District of New Jersey ruling (upheld on appeal to the U.S. Court of Appeals for the Federal Circuit) holding that Apotex’s generic version of Nasonex does not infringe on the Company’s formulation patent. Accordingly, the Company is experiencing a substantial decline in U.S. Nasonex sales and expects the decline to continue. The decline in global Nasonex sales in 2016 was also driven by lower volumes and pricing in Europe from ongoing generic erosion and lower sales in Venezuela due to reduced operations by the Company in this country. Worldwide sales of Nasonex were $858 million in 2015, a decline of 22% compared with 2014 including a 6% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States reflecting competition from alternative generic treatment options, as well as from supply constraints. In addition, lower volumes and pricing in Europe from ongoing generic erosion also contributed to the Nasonex sales decline in 2015.
Other
Global sales of Cozaar and its companion agent Hyzaar (a combination of Cozaar and hydrochlorothiazide), treatments for hypertension, were $1.0 billion in 2013, a decline of 22% compared with 2012 including an 8% unfavorable effect from foreign exchange. The decline was driven largely by lower sales in Japan, Europe and Canada due to generic competition and the unfavorable effect of foreign exchange, particularly on sales in Japan. Sales of Cozaar/Hyzaar decreaseddeclined 23% in 20122016 to $1.3 billion driven$511 million and decreased 17% in 2015 to $667 million. Foreign exchange unfavorably affected global sales performance by declines3% and 9% in most regions.2016 and 2015, respectively. The patents that provided market exclusivity for Cozaar and Hyzaar in the United States and in a number ofmost major international markets have expired. Accordingly, the Company is experiencing significant declines in Cozaar and Hyzaar sales and the Company expects the declines to continue.
Worldwide sales of Propecia, a product for the treatment of male pattern hair loss, were $283 million in 2013, a decline of 33% compared with 2012 including a 6% unfavorable impact from foreign exchange. The decline was driven primarily by generic competition in the United States, as well as by lower sales in Japan due largely to the unfavorable effect of foreign exchange. The Company lost U.S. market exclusivity for Propecia in 2013 and multiple generics have entered the market. Accordingly, the Company is experiencing a significant decline in U.S. sales of Propecia and expects the decline to continue. Sales of Propecia declined 5% in 2012 to $424 million compared with 2011 driven by declines in Europe and the United States, partially offset by increases in the Asia Pacific region.
Global sales of Clarinex (marketed as Aerius in many countries outside the United States), a non-sedating antihistamine, declined 40% in 2013 to $235 million and decreased 37% in 2012 to $393 million driven by lower volumes in the United States and Europe as a result of generic competition. The Company anticipates that sales of Clarinex will continue to decline.

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Global sales of Maxalt, a product for the acute treatment of migraine, fell 77% in 2013 to $149 million as compared with 2012 driven primarily by lower volumes in the United States due to generic competition. The patent that provided U.S. market exclusivity for Maxalt expired in December 2012 and the Company experienced a significant and rapid decline in U.S. Maxalt sales thereafter. In addition, the patents that provided market exclusivity for Maxalt expired in a number of major European markets in August 2013 and the Company is experiencing sales declines in those markets as well. Sales of Maxalt were $638 million in 2012, comparable with sales in 2011, reflecting higher sales in the United States driven by favorable pricing, offset by volume declines in Europe and Canada due to generic erosion.
Other products contained in Diversified Brands include among others, Primaxin, an anti-bacterial product; Zocor, a statin for modifying cholesterol; prescription Claritin, a treatment for seasonal outdoor allergies and year-round indoor allergies; Remeron, an antidepressant; and Proscar, a urology product for the treatment of symptomatic benign prostate enlargement.

Vaccines
The following discussion of vaccines does not include sales of vaccines sold in most major European markets through Sanofi Pasteur MSD (“SPMSD”),SPMSD, the Company’s joint venture with Sanofi Pasteur (Sanofi), the results of which are reflected in Equityequity income from affiliates included in (seeOther (income) expense, net (see “Selected Joint Venture and Affiliate Information” below). Supply sales to SPMSD, however, are included. On December 31, 2016, Merck and Sanofi terminated SPMSD and ended their joint vaccines operations in Europe (see Note 8 to the consolidated financial statements). Beginning in 2017, Merck will record vaccine sales in the European markets that were previously part of the SPMSD joint venture.
Merck’s sales of Gardasil/Gardasil, a vaccine9, vaccines to help prevent certain cancers and diseases caused by fourcertain types of HPV, grew 12% to $1.8were $2.2 billion in 20132016, growth of 14% compared with 20122015. Sales growth was driven primarily by volume growthhigher volumes and pricing in the United States, reflecting continued uptakeas well as higher demand in both males and females, and volume growth in Latin America,certain emerging markets that was partially offset by lower volumesa decline in Japan. Salesgovernment tenders in 2013Brazil. In October 2016, the FDA approved a 2-dose vaccination regimen for Gardasil 9, for use in girls and 2012 included $37 millionboys 9 through 14 years of age, and $44 million, respectively, of purchases for the U.S. Centers for Disease Control and Prevention (“CDC”) Pediatric Vaccine Stockpile. On JunePrevention’s Advisory Committee on Immunization Practices voted to recommend the 2-dose vaccination regimen for certain 9 through 14 2013,year olds. The Company anticipates the Japanese Health Ministry issued2-dose vaccination regimen will have an advisory to suspend active promotion of HPV vaccines. Accordingly, the Company recorded almost nounfavorable effect on sales of Gardasil in Japan in9 during the second halfperiod of 2013.transition. Merck’s sales of Gardasil/Gardasil rose 35%9 were $1.9 billion in 2012 to $1.6 billion2015, an increase of 10% compared with 20112014 including a 1% unfavorable effect from foreign exchange. Sales growth

was driven primarily by growthhigher sales in the United States resulting from higher pricing and increased volumes reflecting continued uptake in males and higher governmentthe timing of public sector purchases, for the CDC Pediatric Vaccine Stockpile, as well as growthincreased government tenders in the emerging markets, particularly in Latin America and the Asia Pacific region, partially offset by declines in Latin America due to both price and volume. Gardasil 9, Merck’s 9-valent HPV vaccine, was approved by the FDA in Japan.December 2014 for use in females 9 through 26 years of age, and males 9 through 15 years of age. Gardasil 9 includes the greatest number of HPV types in any available HPV vaccine. In December 2015, the FDA approved an expanded age indication for Gardasil 9, to include use in males 16 through 26 years of age for the prevention of anal cancers, precancerous or dysplastic lesions and genital warts caused by certain HPV types. The Company is a party to certain third-party license agreements with respect to Gardasil/Gardasil9 (including a cross-license and settlement agreement with GlaxoSmithKline). As a result of these agreements, the Company pays royalties on worldwide Gardasil/Gardasil9 sales of 21%16% to 27%24% which vary by country and are included in Materials and production costs.
Merck’s sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were $314$495 million in 2013, $612016, $454 million in 20122015 and $34$395 million in 2011.2014. Sales of ProQuadgrowth in 20122016 as compared with 2015 was driven primarily by higher demand and 2011 were affected by supply constraints. ProQuad became available againpricing in the United States. Sales growth in 2015 as compared with 2014 primarily reflects higher sales in the United States for orderingreflecting increased volumes, which were driven in October 2012.part by measles outbreaks in the United States, as well as higher pricing.
Merck’s sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $684 million in 2013, $846 million in 2012 and $831 million in 2011. Merck’s sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, were $307$353 million in 2013,2016, $365 million in 20122015 and $337$326 million in 2011.2014. Sales performance in 2015 as compared with 2016 and 2014 was driven by higher demand resulting from measles outbreaks in the United States.
Merck’s sales of Varivax, a vaccine to help prevent chickenpox (varicella), were $792 million in 2016, $686 million in 2015 and M‑M‑R II declined$672 million in 2013 due2014. Sales growth in 2016 as compared with 2015 was driven primarily by higher sales in the United States reflecting the effects of public sector purchasing and higher pricing that were partially offset by lower demand. Volume growth in certain emerging markets reflecting the timing of government tenders also contributed to the availability of ProQuad discussed above.sales increase in 2016 as compared with 2015. Sales growth in 2015 as compared with 2014 reflects higher volumes in certain emerging markets and higher pricing in the United States, partially offset by lower volumes in the United States.
Merck’s sales of Zostavax, a vaccine to help prevent shingles (herpes zoster) in adults 50 years of age and older, were $758$685 million in 2013, $651 million in 2012 and $332 million in 2011. Sales growth in 2013 as2016, a decline of 9% compared with 20122015 including a 1% unfavorable effect from foreign exchange. The decline was driven primarily by lower volumes in the United States, partially offset by higher demandpricing in the United States and higher demand in certain emerging markets. Merck’s sales of Zostavax were $749 million in 2015, a decline of 2% compared with 2014 including a 2% unfavorable effect from foreign exchange. Sales performance in 2015 as compared with 2014 reflects lower volumes in the United States, partially offset by higher demand in Canada as well as by launches withinand higher pricing in the Asia Pacific region.United States. The Company is continuing to educate U.S. customers on the broad managed care coverage for Zostavax and the process for obtaining reimbursement. Merck is continuing to launch Zostavax outside of the United States. Sales of Zostavax in 2011 were affected by supply issues.
Merck’s sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, grew 13% in 2013 to $653 million compared with 2012 driven primarily by volume growth in the emerging markets, as well as volume and price increases in the United States. Merck’s sales of Pneumovax 23 increased 17% in 2012 to $580 million due primarily to growth in the United States as a result of price increases and higher volumes, partially offset by declines in Japan.
Merck’s sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, grew 6%were $652 million in 2013 to $636 million2016, an increase of 7% compared with 2012 reflecting2015, and were $610 million in 2015, a decline of 7% compared with 2014 including a 3% unfavorable effect from foreign exchange. Sales performance in both periods was driven primarily by the effects of public sector purchasing in the United States. Volume growth in certain emerging markets also contributed to sales growth in 2016.
Merck’s sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, were $641 million in 2016, an increase of 18% compared with 2015, driven primarily by higher volumes and pricing in the United States and volume growth

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higher demand in Japan.certain emerging markets. Merck’s sales of RotaTeqPneumovax declined 8%23 were $542 million in 2012 to $601 million reflecting favorable public sector inventory fluctuations in 2011, partially offset2015, a decrease of 27% compared with 2014, driven primarily by volume growthlower demand in the United States and sales declines in emerging marketsmarkets. Foreign exchange favorably affected sales performance by 1% in 2016 and Japanunfavorably affected sales performance by 2% in 2012.2015.
Other Segments
The Company’s other segments are the Animal Health, Consumer CareHealthcare Services and Alliances segments, which are not material for separate reporting. In JanuaryThe Alliances segment includes revenue from AZLP until the termination of the Company’s relationship with AZLP on June 30, 2014 (see “Selected Joint Venture and Affiliate Information” below).

Prior to its disposition on October 1, 2014, the Company announced that it was evaluating the respective roles of Merck’s Animal Health andalso had a Consumer Care businessessegment which had sales of $1.5 billion in the Company’s strategy for long-term value creation. The Company expects to complete the evaluation process and take action, if any, in 2014. The Company could reach different decisions about the two businesses.

Animal Health
Animal Health includes pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species. Animal Health sales are affected by competition and the frequent introduction of generic products. Worldwide sales of Animal Health products were $3.5 billion in 2016, $3.3 billion in 2015 and $3.5 billion in 2014. Global sales of Animal Health products were $3.4 billionincreased 4% in 2013, a decline of 1%2016 compared with 20122015 including a 2%4% unfavorable effect from foreign exchange. The sales declineSales growth primarily reflects lower sales of ruminantvolume growth across most species areas, particularly in products for companion animals, driven primarily Zilmax, partially offset by growth in companion animal and poultry products. In August 2013, Merck Animal Health voluntarily suspendedhigher sales of Zilmax, a feed supplement for beef cattle, in the United States and Canada. The suspension of ZilmaxBravecto, unfavorably affected Animal Healthas well as in poultry and swine products. Worldwide sales by 2% in 2013. Sales of Animal Health products were $3.4 billiondeclined 4% in 2012, an increase of 4%2015 compared with 20112014 including a 5% unfavorable effect from foreign exchange, driven by positive performance among ruminant, poultry, companion animal and swine products.

Consumer Care
Consumer Care products include over-the-counter, foot care and sun care products such as Claritin non-drowsy antihistamines; MiraLAX, for the relief of occasional constipation; Dr. Scholl’s foot care products; and Coppertone sun care products. Consumer Care product sales are affected by competition and consumer spending patterns. Global sales of Consumer Care products were $1.9 billion in 2013, a decline of 3% compared with 2012 including a 1%13% unfavorable effect from foreign exchange. The sales declineSales performance in 2013 resulted from the termination2015 reflects volume growth in China of certain Consumer Care distribution arrangements and a reversal of sales previously made to these distributors, together with associated termination costs. Excluding these items, Consumer Care global sales would have increasedcompanion animal products, driven primarily by 1% in 2013 compared with 2012, including a 1% unfavorable effect from foreign exchange, reflecting higher sales of women’s health products, partially offset by lower sales of foot care products. In 2013, the Company launched Oxytrol for Women, the first and only over-the-counter treatment for overactive bladder in women. Consumer care product sales grew 6% in 2012, including a 1% unfavorable effect from foreign exchange, to $2.0 billion reflecting higher sales of Dr. Scholl’s, Coppertone, MiraLAXBravecto, which began launching in Europe and Claritin, partially offset by lower sales of Marvelon, an oral contraceptive, which is an over-the-counter productthe United States in China.2014, as well as volume growth in swine and aqua products.
As discussed above, on December 31, 2013,In May 2016, the Company divested certain products to Aspen. Annual sales of these products reflected within Consumer Care were approximately $40 million.

Alliances
The alliances segment includes resultsreceived marketing approval from the Company’s relationship with AZLP. Revenue from AZLP, primarily relatingEuropean Medicines Agency (EMA) for Bravecto Spot-On Solution for cats and dogs, and in July 2016, the Company received approval in the United States to sales of Nexium and Prilosec, was $920 million in 2013, $915 million in 2012 and $1.2 billion in 2011. AstraZeneca hasmarket the product under the tradename Bravecto Topical.
In July 2016, Merck announced it had executed an optionagreement to buy Merck’sacquire a controlling interest in Vallée, a subsidiary, and through it, Merck’s interestleading privately held producer of animal health products in Nexium and Prilosec, exercisable in 2014, andBrazil (see Note 3 to the Company believes that it is likely that AstraZeneca will exercise that option (see “Selected Joint Venture and Affiliate Information” below)consolidated financial statements). If AstraZeneca exercises its option, the Company will no longer record equity income from AZLP and supply sales to AZLP will terminate. In addition, the Company will recognize a non-cash pretax gain of approximately $700 million.



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Costs, Expenses and Other
($ in millions)2013 Change 2012 Change 20112016 Change 2015 Change 2014
Materials and production$16,954
 3 % $16,446
 -3 % $16,871
$13,891
 -7 % $14,934
 -11 % $16,768
Marketing and administrative11,911
 -7 % 12,776
 -7 % 13,733
9,762
 -5 % 10,313
 -11 % 11,606
Research and development (1)
7,503
 -8 % 8,168
 -4 % 8,467
Research and development10,124
 51 % 6,704
 -7 % 7,180
Restructuring costs1,709
 *
 664
 -49 % 1,306
651
 5 % 619
 -39 % 1,013
Equity income from affiliates(404) -37 % (642) 5 % (610)
Other (income) expense, net815
 -27 % 1,116
 18 % 946
720
 -53 % 1,527
 *
 (11,613)
$38,488
 — % $38,528
 -5 % $40,713
$35,148
 3 % $34,097
 37 % $24,954
* 100% or greater.
(1)
Includes $279 million, $200 million and $587 million of IPR&D impairment charges in 2013, 2012 and 2011, respectively.

Materials and Production
Materials and production costs were $17.0$13.9 billion in 2013, $16.42016, $14.9 billion in 20122015 and $16.9$16.8 billion in 2011.2014. Costs include expenses for the amortization of intangible assets recorded in connection with mergers andbusiness acquisitions which totaled $3.7 billion in 2016, $4.7 billion in 20132015 and $4.9$4.2 billion in each of 2012 and 2011. Additionally, expenses in 2011 include $89 million of amortization of purchase accounting adjustments to Schering-Plough’s inventories recognized as a result of the Merger.2014. Costs in 20132016, 2015 and 20112014 also include intangible asset impairment charges of $486$347 million, $45 million and $118 million, respectively. The impairment charges in 2013$1.1 billion, respectively, related to changes in cash flow assumptions for currently markedmarketed products Saphris/Sycrestand Rebetolother intangibles (see “Pharmaceutical Segment” above)Note 7 to the consolidated financial statements). The Company may recognize additional non-cash impairment charges in the future related to product intangiblesintangible assets that were measured at fair value and capitalized in connection with mergers andbusiness acquisitions and such charges could be material. Additionally, costs in 2013In addition, expenses for 2015 include a $41$105 million intangible asset impairment charge relatedof amortization of purchase accounting adjustments to a licensing agreement.Cubist’s inventories. Also included in materials and production were costs are expenses associated with restructuring activities which amounted to $446$181 million, $188$361 million and $348$482 million in 2013, 20122016, 2015 and 2011,2014, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.
Gross margin was 61.5%65.1% in 20132016 compared with 65.2%62.2% in 20122015 and 64.9%60.3% in 2011.2014. The improvement in gross margin in 2016 as compared with 2015 was driven primarily by a lower net impact from the amortization of intangible assets and purchase accounting adjustments to inventories, as well as intangible asset impairment charges and restructuring costs as noted above, which reduced gross margin by 10.6 percentage points in 2016 compared with 13.2 percentage points in 2015. Lower inventory write-offs and the favorable effects of foreign exchange also contributed to the gross margin improvement in 2016 as compared with 2015. The gross margin improvement in 2015 as compared with 2014 was driven primarily by the favorable effects of foreign exchange and lower inventory write-offs, as well

as the net impact of acquisitions and divestitures. The amortization of intangible assets and purchase accounting adjustments to inventories, as well as the restructuring and intangible asset impairment charges noted above reduced gross margin by 12.8by13.6 percentage points in 2013, 10.7 percentage points in 2012 and 11.4 percentage points in 2011. Excluding these impacts, the gross margin decline in 2013 as compared with 2012 was driven in part by the loss of Singulair sales as result of patent expiries in the United States in August 2012 and in major European markets in February 2013. In addition, generic competition in the United States for Maxalt, Temodar, Clarinex and Propecia coupled with changes in product mix and continued pricing pressures in mature markets also negatively affected gross margin in 2013. The gross margin decline in 2012 as compared with 2011 reflects the significant decline in Singulair sales as a result of the loss of U.S. market exclusivity, partially offset by improvements resulting from other changes in product mix. The Company anticipates that gross margin will continue to be negatively affected by the ongoing impacts of recent patent expiries and additional patent expiries that will occur in 2014.

Marketing and Administrative
Marketing and administrative (M&A) expenses declined 7%were $9.8 billion in 2013 to $11.9 billion2016, a decline of 5% compared with 2015 driven largely by lower acquisition and decreased 7% in 2012 to $12.8 billion largely due todivestiture-related costs, the favorable effects of foreign exchange, lower administrative expenses, such as legal defense costs, as well as lower selling costs. Higher promotional spending largely related to product launches and sellinghigher restructuring costs resulting from restructuring activities, and alsopartially offset the decline. M&A expenses were $10.3 billion in 2015, a decline of 11% compared with 2014, largely reflecting the favorable effecteffects of foreign exchange. Expensesexchange, the 2014 divestiture of MCC, additional expenses in 2014 related to the health care reform fee as discussed below, lower restructuring costs, as well as lower selling costs, partially offset by higher promotional spending largely related to product launches, higher costs related to the January acquisition of Cubist, and higher acquisition and divestiture-related costs. M&A expenses include acquisition and divestiture-related costs of $78 million, $436 million and $234 million in 2016, 2015 and 2014, respectively, consisting of integration, transaction, and certain other costs related to business acquisitions, including severance costs which are not part of the Company’s formal restructuring programs, as well as transaction and certain other costs related to divestitures of businesses. Acquisition and divestiture-related costs in 2015 include costs related to the acquisition of Cubist (see Note 3 to the consolidated financial statements). M&A expenses for 2013, 20122016, 2015 and 20112014 also include restructuring costs of $145$95 million, $90$78 million and $119$200 million, respectively, related primarily to accelerated depreciation for facilities to be closed or divested. Separation costs associated with sales force reductions have been incurred and are reflected in Restructuring costs as discussed below. Expenses also include $94 million, $272 million
On July 28, 2014, the Internal Revenue Service (IRS) issued final regulations on the annual non-tax deductible health care reform fee imposed by the Patient Protection and $278 millionAffordable Care Act that is based on an allocation of acquisition-related costs in 2013, 2012 and 2011, respectively, consistinga company’s market share of incremental, third-party integration costs relatedprior year branded pharmaceutical sales to certain government programs. The final IRS regulations accelerated the recognition criteria for the fee obligation by one year to the Merger, including costs relatedyear in which the underlying sales used to legal entity and system integration. Acquisition-related costs for 2011 also consistallocate the fee occurred rather than the year in which the fee was paid. As a result of severance costs associated with the acquisitionthis change, Merck recorded an additional year of Inspire Pharmaceuticals, Inc., which are not partexpense of the Company’s formal restructuring programs.$193 million during 2014.


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Research and Development
Research and development (R&D) expenses were $7.5$10.1 billion in 2013, $8.22016 compared with $6.7 billion in 20122015. The increase was driven primarily by higher acquired in-process research and $8.5development (IPR&D) impairment charges, increased clinical development spending, higher restructuring and licensing costs, partially offset by a reduction in expenses associated with a decrease in the estimated fair value measurement of liabilities for contingent consideration, as well as by the favorable effects of foreign exchange. R&D expenses were $6.7 billion in 2011. Research2015, a decline of 7% compared with 2014, driven primarily by the favorable effects of foreign exchange, expenses recognized in 2014 to increase the estimated fair value of liabilities for contingent consideration, lower restructuring costs, a charge in 2014 related to a collaboration with Bayer AG (Bayer), and the 2014 divestiture of MCC, partially offset by the acquisition of Cubist, higher licensing costs and higher clinical development spending in 2015.
R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (“MRL”)(MRL), the Company’s research and development division that focuses on human health-related activities, which were approximately $4.2$4.3 billion in 2013 and $4.52016, $4.0 billion in each of 20122015 and 2011.$3.7 billion in 2014. Also included in research and developmentR&D expenses are costs incurred by other divisions in support of research and developmentR&D activities, including depreciation, production and general and administrative, as well as licensing activity, and certain costs from operating segments, including the Pharmaceutical and Animal Health and Consumer Care segments, which in the aggregate were $2.9$2.5 billion, $3.4$2.6 billion and $3.2$2.8 billion for 2013, 20122016, 2015 and 2011,2014, respectively. The decline in research and development costs in 2013 as compared with 2012 was due to targeted reductions and lower clinical development spend as a result of portfolio prioritization, as well as lower payments for licensing activity. Research and development expenses in 2013, 2012 and 2011 were favorably affected by cost savings resulting from restructuring activities.
Research and developmentR&D expenses also include in-process research and development (“IPR&D”)&D impairment charges of $279 million, $200$3.6 billion, $63 million and $587$49 million in 2013, 20122016, 2015 and 2011,2014, respectively (see “Research and Development” below). The Company may recognize additional non-cash impairment charges in the future forrelated to the cancellation or delay of other pipeline programs that were measured at fair value and capitalized in connection with mergers andbusiness acquisitions and such charges could be material. ResearchIn addition, R&D expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration recorded in connection with acquisitions. During 2016 and development2015, the Company recorded a reduction in expenses of $402 million and $24 million, respectively, to decrease the estimated fair value of liabilities for contingent consideration related to the discontinuation or delay of certain programs (see Note 3 to the consolidated financial statements). During 2014, the Company recorded a charge of $316 million to

increase the estimated fair value of liabilities for contingent consideration. R&D expenses in 2013, 20122016, 2015 and 20112014 also reflect $101$142 million, $57$52 million and $138$283 million, respectively, of accelerated depreciation and asset abandonment costs associated with restructuring activities.
Restructuring Costs
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In 2012,2010 and 2013, the Company recorded an adjustmentcommenced actions under global restructuring programs designed to accelerated depreciation costs includedstreamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development expenses revising previously recorded amounts for certainsites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations.

Restructuring Costs
Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $1.7 billion, $664$651 million, $619 million and $1.3$1.0 billion in 2013, 20122016, 2015 and 2011,2014, respectively. Costs in 2013 include $898 million of costs related to the 2013 Restructuring Program. Nearly all of the remaining costs recorded in 2013In 2016, 2015 and the costs recorded in 2012 and 2011 related to the Merger Restructuring Program. In 2013, 2012 and 2011,2014, separation costs of $1.4 billion, $489$216 million, $208 million and $1.1 billion,$674 million, respectively, were incurred associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. Merck eliminated approximately 6,0702,625 positions in 2013 (of which 1,5402016, 3,770 positions in 2015 and 6,085 positions in 2014 related to the 2013 Restructuring Program, 4,475 related to the Merger Restructuring Program and 55 related to the 2008 Restructuring Program), approximately 4,255 positions in 2012 (of which 3,975 related to the Merger Restructuring Program, 155 related to the 2008 Restructuring Program and 125 related to the legacy Schering-Plough program), and approximately 7,590 positions in 2011 (of which 6,880 related to the Merger Restructuring Program, 450 related to the 2008 Restructuring Program and 260 related to the legacy Schering-Plough program).these restructuring activities. These position eliminations are comprised of actual headcount reductions, and the elimination of contractors and vacant positions. Also included in restructuring costs are asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs, as well as contract termination and shutdown costs. For segment reporting, restructuring costs are unallocated expenses.
Additional costs associated with the Company’s restructuring activities are included in Materials and production, Marketing and administrative and Research and development as discussed above.

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Equity Income from Affiliates
Equity income from affiliates, which reflects$1.1 billion in 2016, $1.1 billion in 2015 and $2.0 billion in 2014 related to restructuring program activities (see Note 4 to the performanceconsolidated financial statements). The Company expects to substantially complete the remaining actions under the programs by the end of the Company’s joint ventures2017 and other equity method affiliates, declined 37% in 2013 to $404incur approximately $700 million compared with 2012 driven primarily by lower equity income from AZLP, partially offset by higher equity income from SPMSD. Equity income from affiliates increased 5% in 2012 to $642 million due primarily to higher equity income from AZLP. During 2011, the Company divested its interest in the Johnson & Johnson°Merck Consumer Pharmaceuticals Company (“JJMCP”) joint venture. (See “Selected Joint Venture and Affiliate Information” below.)

of additional pretax costs.
Other (Income) Expense, Net
Other (income) expense, net was $815$720 million of expense in 2013 compared with $1.12016, $1.5 billion of expense in 2012 reflecting a $493 million2015 and $11.6 billion of income in 2014. For details on the components of Other (income) expense, net charge in 2012 relating to the settlement of certain shareholder litigation (the ENHANCE Litigation”) (see Note 10 to the consolidated financial statements), partially offset by higher exchange losses in 2013 driven by $140 million of exchange losses related to a Venezuelan currency devaluation (seesee Note 14 to the consolidated financial statements), as well as higher interest expense in 2013 resulting in part from issuances of debt in September 2012 and May 2013. Other (income) expense, net was $1.1 billion of expense in 2012 compared with $946 million of expense in 2011 reflecting the $493 million net charge in 2012 relating to the settlement of the ENHANCE Litigation and gains recognized in 2011 of $136 million on the disposition of the Company’s interest in the JJMCP joint venture (see Note 8 to the consolidated financial statements) and $127 million on the sale of certain manufacturing facilities and related assets (see Note 4 to the consolidated financial statements), partially offset by a $500 million charge in 2011 related to the resolution of the arbitration proceeding involving the Company’s rights to market Remicade and Simponi and higher interest income in 2012.statements.
Segment Profits          
($ in millions)2013 2012 20112016 2015 2014
Pharmaceutical segment profits$22,983
 $25,852
 $25,617
$22,180
 $21,658
 $22,164
Other non-reportable segment profits3,094
 3,163
 2,995
1,507
 1,573
 2,386
Other(20,532) (20,276) (21,278)(19,028) (17,830) (7,267)
Income before income taxes$5,545
 $8,739
 $7,334
$4,659
 $5,401
 $17,283
Segment profits are comprised of segment sales less standard costs, certain operating expenses directly incurred by the segment, components of equity income or loss from affiliates and certain depreciation and amortization expenses. For internal management reporting presented to the chief operating decision maker, Merck does not allocate materials and production costs, other than standard costs, the majority of research and development expenses or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. Also excluded from the determination of segment profits are acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments and other acquisition-related costs, intangible asset impairment charges, restructuring costs, taxes paid at the joint venture level and a portion of equity income,income. Additionally, segment profits do not reflect other expenses from corporate and manufacturing cost centers and other

miscellaneous income or expense. Additionally, segment profits do not reflect theThese unallocated items, including a charge related to the settlement of worldwide Keytruda patent litigation, gains on divestitures, a net charge related to the ENHANCE Litigation recorded in 2012, the arbitration settlement charge,of Vioxx shareholder class action litigation, the gain on AstraZeneca’s option exercise, foreign exchange losses related to the divestituredevaluation of the Company’s interestnet monetary assets in Venezuela, the JJMCP joint ventureloss on extinguishment of debt and a gain onan additional year of expense related to the sale of certain manufacturing facilities and related assets recorded in 2011. All of these unallocated itemshealth care reform fee, are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales, divested products or businesses, and other supply sales.
Pharmaceutical segment profits grew 2% in 2016 compared with 2015 primarily reflecting higher sales. Pharmaceutical segment profits declined 11%2% in 2013 driven2015 compared with 2014 primarily byreflecting the unfavorable effects of the loss of market exclusivity for certain products, particularly Singulair. Pharmaceutical segment profits increased 1% in 2012 driven primarily by lower operating expenses mostly offset by the effects of the loss of U.S. market exclusivity for Singulair.foreign exchange.


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Taxes on Income
The effective income tax rates of 18.5%15.4% in 2013, 27.9%2016, 17.4% in 20122015 and 12.8%30.9% in 20112014 reflect the impacts of acquisition-relatedacquisition and divestiture-related costs, andwhich in 2016 include $3.6 billion of IPR&D impairment charges, as well as restructuring costs partially offset byand the beneficial impact of foreign earnings. The effective income tax rate in 2013for 2015 also reflects the favorable impact of a net benefit of $165$410 million fromrelated to the settlementssettlement of certain federal income tax issues, the impact of the net benefits from reductions incharge related to the settlement of Vioxx shareholder class action litigation being fully deductible at combined U.S. federal and state tax reserves upon expiration of applicable statutes of limitations,rates and the favorable impact of tax legislation enacted in the firstfourth quarter of 2013 that extended the R&D tax credit for both 2012 and 2013,2015, as well as an out-of-period net tax benefitthe unfavorable effect of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issuenon-tax deductible foreign exchange losses related to Venezuela (see Note 1514 to the consolidated financial statements). The effective income tax rate for 2012 also2014 reflects the favorable impacts of a tax settlement with the Canada Revenue Agency (the “CRA”), the realization of foreign tax credits and the impact of a favorable rulingthe gain on athe divestiture of MCC being taxed at combined U.S. federal and state tax matter.rates. In addition, the 2012 effective income tax rate reflectsfor 2014 includes a net tax benefit of $517 million recorded in connection with AstraZeneca’s option exercise (see Note 8 to the consolidated financial statements) and a benefit of approximately $300 million associated with a capital loss generated in connection with the sale of Sirna (see Note 3 to the consolidated financial statements). The effective income tax rate for 2014 also includes the unfavorable impact of an additional year of expense for the net chargenon-tax deductible health care reform fee that the Company recorded in connectionaccordance with final regulations issued by the IRS.
The Company is under examination by numerous tax authorities in various jurisdictions globally. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures. However, there is one item that is currently under discussion with the settlement of the ENHANCE Litigation for which no tax benefit was recorded and does not reflect any impacts for the R&D tax credit, which expired on December 31, 2011. As a result of legislation passed in 2013 that extended the R&D tax credit, both the 2012 and 2013 R&D tax credits were recognized in 2013 as noted above. The effective tax rate for 2011 reflects a net favorable impact of approximately $700 millionIRS relating to the 2006 through 2008 examination. The Company has concluded that its position should be sustained upon audit. However, if this item were to result in an unfavorable outcome or settlement, of Merck’s 2002-2005 federal income tax audit, the favorableit could have a material adverse impact of certain foreign and state tax rate changes that resulted in a net $270 million reduction of deferred tax liabilities on intangibles established in purchase accounting, and the unfavorable impact of a $500 million charge related to the resolution of the arbitration proceeding involving the Company’s rights to market Remicadefinancial position, liquidity and Simponi.

results of operations.
Net Income and Earnings per Common Share
Net income attributable to Merck & Co., Inc. was $3.9 billion in 2016, $4.4 billion in 2013, $6.22015 and $11.9 billion in 2012 and $6.3 billion in 2011.2014. EPS was $1.47$1.41 in 2013, $2.002016, $1.56 in 20122015 and $2.02$4.07 in 2011. The declines in net income and EPS in 2013 as compared with 2012 were due primarily to lower sales reflecting the loss of market exclusivity for certain products, particularly Singulair, as well as higher restructuring costs, intangible asset impairment charges and exchange losses, partially offset by the favorable impact of certain tax items and lower operating expenses. EPS in 2013 benefited from lower average shares outstanding due to the ASR program (see Note 11 to the consolidated financial statements). The decreases in net income and EPS in 2012 as compared with 2011 were due primarily to the net charge recorded in connection with the settlement of the ENHANCE Litigation, the effects of the loss of U.S. market exclusivity for Singulair in 2012 and the favorable impact of tax items in 2011, partially offset by lower marketing and administrative expenses, lower restructuring costs and lower intangible asset impairment charges in 2012 and the arbitration settlement charge recorded in 2011.

2014.
Non-GAAP Income and Non-GAAP EPS
Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance used by management that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results.results as it permits investors to understand how management assesses performance. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items (which should not be considered non-recurring) consist of acquisition-relatedacquisition and divestiture-related costs, restructuring costs and certain other items. These excluded items are significant components in understanding and assessing financial performance. Therefore,
Non-GAAP income and non-GAAP EPS are important internal measures for the information onCompany. Senior management receives a monthly analysis of operating results that includes non-GAAP EPS. Management uses these measures internally for planning and forecasting purposes and to measure the performance of the Company along with other metrics. Senior management’s annual compensation is derived in part using non-GAAP income and non-GAAP EPS should be considered in addition to, but not in lieu of, net income and EPS prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Additionally, sinceEPS. Since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of

similar measures of other companies.
Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes The information on non-GAAP income and non-GAAP EPS and the performance of the Company is measured on this basis along with other performance metrics. Senior management’s annual compensation is derivedshould be considered in part using non-GAAPaddition to, but not as a substitute for or superior to, net income and non-GAAP EPS.EPS prepared in accordance with generally accepted accounting principles in the United States (GAAP).

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A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:
($ in millions except per share amounts)2013 2012 20112016 2015 2014
Pretax income as reported under GAAP$5,545
 $8,739
 $7,334
$4,659
 $5,401
 $17,283
Increase (decrease) for excluded items:          
Acquisition-related costs5,549
 5,344
 5,939
Acquisition and divestiture-related costs7,312
 5,398
 5,946
Restructuring costs2,401
 999
 1,911
1,069
 1,110
 1,978
Other items:          
Net charge related to settlement of ENHANCE Litigation—
 493
 —
Arbitration settlement charge—
 —
 500
Gain on disposition of interest in JJMCP joint venture—
 —
 (136)
Gain on sale of manufacturing facilities and related assets—
 —
 (127)
Charge related to the settlement of worldwide Keytruda patent litigation
625
 —
 —
Foreign currency devaluation related to Venezuela—
 876
 —
Net charge related to the settlement of Vioxx shareholder class action litigation
—
 680
 —
Gain on sale of certain migraine clinical development programs—
 (250) —
Gain on divestiture of certain ophthalmic products—
 (147) (480)
Gain on divestiture of Merck Consumer Care—
 —
 (11,209)
Gain on AstraZeneca option exercise—
 —
 (741)
Loss on extinguishment of debt—
 —
 628
Additional year of expense for health care reform fee—
 —
 193
Other(13) —
 5
(67) (34) (9)
13,482
 15,575
 15,426
13,598
 13,034
 13,589
Taxes on income as reported under GAAP1,028
 2,440
 942
718
 942
 5,349
Estimated tax benefit on excluded items1,573
 1,261
 1,697
Net tax benefits from settlements of federal income tax issues325
 —
 700
Tax benefit from foreign and state tax rate changes—
 —
 270
Estimated tax benefit (provision) on excluded items (1)
2,321
 1,470
 (2,345)
Net tax benefits from the settlements of federal income tax issues—
 410
 —
Tax benefits related to sale of Sirna Therapeutics, Inc. subsidiary—
 —
 300
2,926
 3,701
 3,609
3,039
 2,822
 3,304
Non-GAAP net income10,556
 11,874
 11,817
10,559
 10,212
 10,285
Less: Net income attributable to noncontrolling interests113
 131
 120
Less: Net income attributable to noncontrolling interests as reported under GAAP21
 17
 14
Acquisition and divestiture-related costs attributable to non-controlling interests—
 —
 56
21
 17
 70
Non-GAAP net income attributable to Merck & Co., Inc.$10,443
 $11,743
 $11,697
$10,538
 $10,195
 $10,215
EPS assuming dilution as reported under GAAP$1.47
 $2.00
 $2.02
$1.41
 $1.56
 $4.07
EPS difference (1)
2.02
 1.82
 1.75
EPS difference (2)
2.37
 2.03
 (0.58)
Non-GAAP EPS assuming dilution$3.49
 $3.82
 $3.77
$3.78
 $3.59
 $3.49
(1)
The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments. Amount for 2014 includes a net benefit of $517 million recorded in connection with AstraZeneca’s option exercise.
(2) 
Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the applicable year.

Acquisition-RelatedAcquisition and Divestiture-Related Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with mergersbusiness acquisitions and acquisitions.divestitures. These amounts include the amortization of intangible assets and inventory step-up,amortization of purchase accounting adjustments to inventories, as well as intangible asset impairment charges.charges and expense or income related to changes in the estimated fair value measurement of contingent consideration. Also excluded are incremental, third-party integration, costs associated with the Merger, such as costs related to legal entitytransaction, and system integration, as well ascertain other costs associated with mergers andbusiness acquisitions, such asincluding severance costs which are not part

of the Company’s formal restructuring programs. Theseprograms, as well as transaction and certain other costs are excluded because management believes that these costs are not representativeassociated with divestitures of ongoing normal business activities.

businesses.
Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 34 to the consolidated financial statements). These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the site,asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs. The Company has undertaken restructurings of different types during the covered periods and, therefore, these charges should not be considered non-recurring; however, management excludes these amounts from non-GAAP income and non-GAAP EPS because it believes it is helpful for understanding the performance of the continuing business.

Certain Other Items
Non-GAAP income and non-GAAP EPS exclude certain other items. These items represent substantive, unusualare adjusted for after evaluating them on an individual basis, considering their quantitative and qualitative aspects, and typically consist of items that are evaluated on an individual basis. Such evaluation considers bothunusual in nature, significant to the quantitative and the qualitative aspectresults of their unusual nature and generally represent items that, either as a resultparticular period or not indicative of their nature or magnitude, management would not anticipate that they would occur as part of the Company’s normal business on a regular basis.

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Certain other items are comprised of the net charge recorded in connection with the settlement of the ENHANCE Litigation, the arbitration settlement charge, the gain on the disposition of the Company’s interest in the JJMCP joint venture and the gain associated with the sale of certain manufacturing facilities and related assets. Also excludedfuture operating results. Excluded from non-GAAP income and non-GAAP EPS in 2016 is a charge to settle worldwide patent litigation related to Keytruda (see Note 10 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2015 are foreign exchange losses related to the devaluation of the Company’s net monetary assets in Venezuela (see Note 14 to the consolidated financial statements), a net charge related to the settlement of Vioxx shareholder class action litigation (see Note 10 to the consolidated financial statements), a gain on the sale of certain migraine clinical development programs (see Note 3 to the consolidated financial statements), a gain on the divestiture of the Company’s remaining ophthalmics business in international markets (see Note 3 to the consolidated financial statements), as well as a net tax benefits frombenefit related to the resolutionsettlement of certain federal income tax issues.issues (see Note 15 to the consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2014 are certain gains, including a gain on the divestiture of MCC (see Note 3 to the consolidated financial statements), a gain recognized in conjunction with AstraZeneca’s option exercise, including a related net tax benefit on the transaction (see Note 8 to the consolidated financial statements), a gain on the divestiture of certain ophthalmic products in several international markets (see Note 3 to the consolidated financial statements), as well as a loss on extinguishment of debt (see Note 9 to the consolidated financial statements), an additional year of expense related to the health care reform fee as discussed above, and tax benefits from the sale of the Company’s Sirna Therapeutics, Inc. (Sirna) subsidiary (see Note 3 to the consolidated financial statements).
Research and Development
A chart reflecting the Company’s current research pipeline as of February 21, 201424, 2017 is set forth in Item 1. “Business — Research and Development” above.

Research and Development Update
The Company currently has several candidates under regulatory review in the United States or internationally.States.
MK-5348, vorapaxar,Keytruda is an investigational anti-thrombotic medicine under review byFDA-approved anti-PD-1 therapy in clinical development for expanded indications in different cancer types. Keytruda is currently approved for the treatment of NSCLC, melanoma, advanced melanoma, and head and neck cancer (see “Pharmaceutical Segment” above).
In February 2017, the FDA and the European Medicines Agency (the “EMA”). Merck is seeking approval of vorapaxaraccepted for the reduction of atherothrombotic events, when added to standard of care,review two sBLAs for Keytruda in patients with a historylocally advanced or metastatic urothelial cancer, including most bladder cancers. The application for first-line use was granted Priority Review for the treatment of heart attack and no history of strokethese patients who are ineligible for cisplatin-containing therapy. The application for second-line use was granted Priority Review for these patients with disease progression on or transient ischemic attack. In January 2014, the FDA’s Cardiovascular and Renal Drugs Advisory Committee recommended approval of vorapaxar.after platinum-containing chemotherapy. The Prescription Drug User Fee Act (PDUFA) action date for both applications is June 14, 2017. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines.
V503, the Company’s nine-valent HPV vaccine in developmentpreviously granted Breakthrough Therapy designation to help protect against certain HPV-related diseases, is under review by the FDA. V503 incorporates antigens against five additional cancer-causing HPV types as compared with GardasilKeytruda. The Company anticipates submitting a Marketing Authorization Application (“MAA”) to the EMA in the first half of 2014.
MK-8962, corifollitropin alfa injection, is an investigational fertility treatment under review by the FDA for controlled ovarian stimulation in women participating in assisted reproductive technology. If approved, corifollitropin alfa would be the first sustained follicular stimulant for use in a fertility treatment regimen in the United States. Merck’s corifollitropin alfa is currently approved in more than 50 markets outside the United States, including the EU.
MK-7243, Grastek, an investigational Timothy grass pollen allergy immunotherapy tablet (“AIT”), and MK-3641, Ragwitek, an investigational ragweed pollen AIT, are both under review by the FDA. MK-7243 and MK-3641 are investigational sublingual tablets designed to help treat the underlying cause of allergic rhinitis by generating an immune response to help protect allergic patients against effects triggered by the targeted allergen. Merck has partnered with ALK-Abello to develop its investigational sublingual allergy immunotherapy tablets for Timothy grass pollen, ragweed pollen and house dust mites in North America. In December 2013, the FDA’s Allergenic Products Advisory Committee had a positive discussion of MK-7243. In January 2014, the same Advisory Committee had a positive discussion of MK-3641. The FDA is not bound by the committee’s guidance, but takes its advice into consideration when reviewing investigational medicines. Merck expects the FDA’s review for both MK-7243 and MK-3641 to be completed in the first half of 2014. In February 2014, the Company announced that Grastek received regulatory approval in Canada.
MK-4305, suvorexant, is an investigational insomnia medicine in a new class of medicines called orexin receptor antagonists for use in patients with difficulty falling or staying asleep. In July 2013, the Company announced that it had received a CRL from the FDA regarding the NDA for suvorexant. In the CRL, the FDA advised Merck that: (1) the efficacy of suvorexant has been established at doses of 10 mg to 40 mg in elderly and non-elderly adult patients; (2) 10 mg should be the starting dose for most patients and must be available before suvorexant can be approved; (3) 15 mg and 20 mg doses would be appropriate in patients in whom the 10 mg dose is well-tolerated but not effective; and (4), for patients taking concomitant moderate CYP3A4 inhibitors, a 5 mg dose would be necessary. In addition, the FDA determined that the safety data do not support the approval of suvorexant 30 mg and 40 mg. In February, 2014, the Company resubmitted its NDA to the FDA. As previously disclosed, both FDA approval and a separate scheduling determination by the U.S. Drug Enforcement Administration are required before Merck can introduce suvorexant in the United States. Insomnia is a condition characterized by difficulty falling asleep and/or staying asleep. The Company has submitted a new drug application for suvorexant to the health authorities in Japan and is continuing with plans to seek approval for suvorexant in other countries around the world.

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MK-8616, sugammadex sodium injection, is an investigational agent for the reversal of neuromuscular blockade induced by rocuronium or vecuronium (neuromuscular blocking agents). Neuromuscular blockade is used in anesthesiology to induce muscle relaxation during surgery. In September 2013, Merck announced that it had received a CRL from the FDA for the resubmission of the NDA for sugammadex sodium injection. The FDA’s letter raised concerns about operational aspects of a hypersensitivity study that the agency had requested in 2008. To address the CRL, the Company is conducting a hypersensitivity study and anticipates filing an NDA resubmission with the FDA in 2014. Sugammadex sodium injection is approved and has been launched in many countries outside of the United States where it is marketed as Bridion.
MK-8109, vintafolide, is an investigational cancer candidate under review by the EMA. As part of an exclusive license agreement with Endocyte, Inc. (“Endocyte”), Merck is responsible for the development and worldwide commercialization of vintafolide in oncology. The EMA accepted the MAA filings for vintafolide and Endocyte’s investigational companion diagnostic imaging agent, etarfolatide, for the targetedsecond-line treatment of patients with folate-receptor positive platinum-resistant ovarianlocally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy.
In January 2017, the FDA accepted for review an sBLA for Keytruda plus chemotherapy (pemetrexed plus carboplatin) for the first-line treatment of patients with metastatic or advanced non-squamous NSCLC regardless of

PD-L1 expression and with no EGFR or ALK genomic tumor aberrations. This is the first application for regulatory approval of Keytruda in combination with pegylated liposomal doxorubicin. Both vintafolide and etarfolatide have beenanother treatment. The FDA granted orphan drug status byPriority Review with a PDUFA action date of May 10, 2017. The sBLA will be reviewed under the EC. Vintafolide is in Phase 3 development in the United States.FDA’s Accelerated Approval program.
MK-7009, vaniprevir, is an investigational, oral twice-daily protease inhibitor for the treatment of chronic hepatitis C virus infection under review in Japan.
In addition to the candidates under regulatory review, the Company has 12 drug candidates in Phase 3 development targeting a broad range of diseases. The Company anticipates filing an NDA or a BLA, as applicable, withDecember 2016, the FDA with respect to several of these candidates in 2014.
MK-3475,accepted for review an investigational anti-PD-1 immunotherapy, is currently being evaluatedsBLA for Keytruda for the treatment of patients with advanced melanoma and other tumor types. refractory classical Hodgkin lymphoma or for patients who have relapsed after three or more prior lines of therapy. The FDA granted Priority Review with a PDUFA action date of March 15, 2017. The sBLA will be reviewed under the FDA’s Accelerated Approval program.
In January 2014, the Company announced it has started a rolling submission toNovember 2016, the FDA accepted for review an sBLA for Keytruda for the treatment of a BLA for MK-3475 forpreviously treated patients with advanced melanoma who have previously been treatedmicrosatellite instability-high (MSI-H) cancer. The FDA granted Priority Review with ipilimumab. A rolling submission allows completed portionsa PDUFA action date of March 8, 2017. The sBLA will be reviewed under the application to be submitted and reviewed by theFDA’s Accelerated Approval program. The FDA on an ongoing basis. The Company expects to complete the application in the first half of 2014. In April 2013, Merck announced that MK-3475 received arecently granted Breakthrough Therapy designation to Keytrudafor advanced melanomaunresectable or metastatic MSI-H non-colorectal cancer, and previously granted it for the treatment of patients with unresectable or metastatic MSI-H colorectal cancer.
Additionally, Keytruda has also received Breakthrough Therapy designation from the FDA. FDA for the treatment of patients with primary mediastinal B-cell lymphoma that is refractory to or has relapsed after two prior lines of therapy.
The designation of an investigational drug as aFDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.
The MK-3475Keytruda clinical development program also includesconsists of more than 400 clinical trials, including more than 200 trials that combine Keytruda with other cancer treatments. These studies across a broad range ofencompass more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, non-small cell lung,multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal triple negativeand triple-negative breast, and hematological malignancies. In addition, the Company has announced four collaborations withmany of which are currently in Phase 3 clinical development. Further trials are being planned for other pharmaceutical companies to evaluate novel combination regimens with MK-3475.cancers.
MK-0822, odanacatib,MK-1293 is an oral, once-weekly investigational treatmentfollow-on biologic insulin glargine candidate for patients with osteoporosis. 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. In July 2012, Merck announced an update on the Phase 3 trial assessing fracture risk reduction with odanacatib. The independent Data Monitoring Committee (the “DMC”) for the study completed its first planned interim analysis for efficacy and recommended that the study be closed early due to robust efficacy and a favorable benefit-risk profile. The DMC noted that safety issues remain in certain selected areas and made recommendations with respect to following up on them. On February 1, 2013, Merck announced that it had recently received and was reviewing safety and efficacy data from the Phase 3 trial. As a result of its review of this data, the Company concluded that review of additional data from the previously planned, ongoing extension study was warranted and that filing an application for approval with the FDA should be delayed. As previously announced, the Company is conducting a blinded extension of the trial in approximately 8,200 women, which will provide additional safety and efficacy data. Merck continues to anticipate that it will file applications for approval of odanacatib in 2014 with additional data from the extension trial. The Company continues to believe that odanacatib will have the potential to address unmet medical needs in patients with osteoporosis.type 1 and type 2 diabetes under review by the FDA. MK-1293 was approved in the EU in January 2017. MK-1293 is being developed in collaboration with and partially funded by Samsung Bioepis.

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V419 is an investigational pediatric hexavalent pediatric combination vaccine, which contains components of current vaccines,DTaP5-IPV-Hib-HepB, under review with the FDA that is being developed and, if approved, will be commercialized through a partnership between Merck and Sanofi. This vaccine is designed to help protect against six potentially seriousimportant diseases —- diphtheria, tetanus, whooping cough (Bordetella pertussis) (whooping cough), polio (poliovirus types 1, 2, and 3), invasive disease caused by Haemophilus influenzae type b (Hib), and hepatitis B. On November 2, 2015, the FDA issued a Complete Response Letter (CRL) with respect to the Biologics License Application for V419. Both companies are reviewing the CRL and plan to have further communication with the FDA. In February 2016, the EC granted marketing authorization for V419 for prophylaxis against diphtheria, tetanus, pertussis, hepatitis B, — thatpoliomyelitis, and invasive disease caused by Hib, in infants and toddlers from the age of 6 weeks. V419 is being developedmarketed as Vaxelis in collaboration with Sanofi-Pasteur.the EU.
In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above.
MK-8931, verubecestat, is an investigational small molecule inhibitor of the beta-site amyloid precursor protein cleaving enzyme 1 (BACE1) for the treatment of Alzheimer’s disease. In February 2017, Merck announced that its external Data Monitoring Committee (eDMC) recommended termination of the Phase 2/3 EPOCH study of verubecestat in mild-to-moderate Alzheimer’s disease based on the low probability of success of this study. The Company continuessame eDMC recommended that a separate Phase 3 study, APECS, evaluating verubecestat for amnestic mild cognitive impairment due to anticipate filing a BLAAlzheimer’s disease, also known as prodromal Alzheimer’s disease, continue as planned. Estimated primary completion date for V419 with the FDA in 2014.APECS study, which is fully enrolled, is February 2019.
MK-0859, anacetrapib, is an investigational inhibitor of the cholesteryl ester transfer protein (“CETP”) that is being investigated(CETP) in lipid management to raisedevelopment for raising HDL-C and reducereducing LDL-C. Anacetrapib is being evaluated in a large,30,000 patient, event-driven cardiovascular clinical outcomes trial sponsored by Oxford University, REVEAL (Randomized EValuation of the Effects of Anacetrapib Through Lipid-modification), involving patients with preexisting vascular diseasedisease. In November

2015, Merck announced that is predictedthe Data Monitoring Committee (DMC) of the REVEAL outcomes study completed its planned review of unblinded study data and recommended the study continue with no changes. The DMC reviewed safety and efficacy data from the study, which included an assessment of futility. Merck remains blinded to be completedthe actual results of this analysis and to other REVEAL safety and efficacy data. Under the study, the last patient’s last visit occurred in January 2017. The Company anticipates receiving the top-line results from the study mid-year 2017.
MK-8931MK-7655A is Merck’s novela combination of relebactam, an investigational oral ß-amyloid precursor protein site-cleaving enzyme (“BACE”)beta-lactamase inhibitor, and imipenem/cilastatin (an approved carbapenem antibiotic). The FDA has designated this combination a Qualified Infectious Disease Product with designated Fast Track status for the treatment of Alzheimer’s disease being evaluated in a Phase 2/3 clinical trial (EPOCH) designed to evaluate the safetyhospital-acquired bacterial pneumonia, ventilator-associated bacterial pneumonia, complicated intra-abdominal infections and efficacy of MK-8931 versus placebo in patients with mild-to-moderate Alzheimer’s disease. Based on a positive DMC recommendation made following a planned analysis of interim safety data that included a safety cohort of 200 patients treated with MK-8931 for at least three months, the Company recently began enrolling patients in the Phase 3 portion of the trial, as well as a new Phase 3 trial (APECS) designed to evaluate the safety and efficacy of MK-8931 versus placebo in patients with amnestic mild cognitive impairment due to Alzheimer’s disease, also known as prodromal Alzheimer’s disease.complicated urinary tract infections.
MK-3415A, actoxumab/bezlotoxumab,MK-8228, letermovir, is an investigational oral once-daily or an intravenous infusion antiviral candidate for the prevention of Clostridium difficile infection recurrence, is a combinationclinically-significant cytomegalovirus (CMV) infection. Letermovir has received Orphan Drug Status in the EU and in the United States, where it has also been granted Fast Track designation. In October 2016, Merck announced that the pivotal Phase 3 clinical study of two monoclonal antibodies usedletermovir met its primary endpoint. The global, multicenter, randomized, placebo-controlled study evaluated the efficacy and safety of letermovir in adult (18 years and older) CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant. Merck plans to treat patients with a single infusion.
MK-3102, omarigliptin, is an investigational once-weekly DPP-4 inhibitor in developmentsubmit regulatory applications for the treatmentapproval of type 2 diabetes.letermovir in the United States and EU in 2017.
MK-8835, ertugliflozin, is an investigational oral sodium glucose cotransporter (“SGLT2”)SGLT2 inhibitor being evaluated for the treatment of type 2 diabetes. During 2013, the Company entered into a worldwide (except Japan)diabetes in collaboration agreement with Pfizer Inc. (“Pfizer”) for the development(Pfizer). In September 2016, Merck and commercializationPfizer announced that a Phase 3 study (VERTIS SITA2) of ertugliflozin as discussed below.
MK-1293met its primary endpoint. Both 5 mg and 15 mg daily doses of ertugliflozin showed significantly greater reductions in A1C (an average measure of blood glucose over the past two to three months) when added to patients on a background of sitagliptin and metformin. Ertugliflozin is an insulin glargine candidatealso being studied in combination with Januvia (sitagliptin) and metformin. In December 2016, Merck submitted New Drug Applications to the FDA for ertugliflozin and the treatmenttwo fixed-dose combinations: MK-8835A, ertugliflozin plus Januvia, and MK-8835B, ertugliflozin plus metformin. The Company anticipates a response from the FDA in the first quarter of patients with type 12017. Ertugliflozin and type 2 diabetes. In February 2014, the Company announced that it had expanded its collaboration with Samsung Bioepis to develop, manufacture and commercialize MK-1293.two fixed-dose combinations are currently under review in the EU. Under the terms of the collaboration agreement the companies will collaborate on clinical development, regulatory filings and manufacturing. If approved,with Pfizer, Merck will commercialize this candidate.make a $90 million milestone payment to Pfizer in 2017.
MK-0431J is an investigational fixed-dose combination of sitagliptin and ipragliflozin under development for commercialization in Japan in collaboration with Astellas Pharma Inc. (Astellas). Ipragliflozin, an SGLT2 inhibitor, co-developed by Astellas and Kotobuki Pharmaceutical Co., Ltd. (Kotobuki), is approved for use in Japan and is being co-promoted with Merck and Kotobuki.
V920 is an investigational rVSV-ZEBOV (Ebola) vaccine candidate being studied in large scale Phase 2/3 clinical trials. In November 2014, Merck and NewLink Genetics announced an exclusive licensing and collaboration agreement for the investigational Ebola vaccine. In December 2015, Merck announced that the application for Emergency Use Assessment and Listing (EUAL) for V920 was accepted for review by the World Health Organization (WHO). According to the WHO, the EUAL process is designed to expedite the availability of vaccines needed for public health emergencies such as another outbreak of Ebola. The decision to grant V920 EUAL status will be based on data regarding quality, safety, and efficacy/effectiveness; as well as a risk/benefit analysis for emergency use. While EUAL designation allows for emergency use, the vaccine remains investigational and has not yet been licensed for commercial distribution. In July 2016, Merck announced that the FDA granted V920 Breakthrough Therapy designation, and that the EMA granted the vaccine candidate PRIME (PRIority MEdicines) status. In December 2016, end of study results from the WHO ring vaccination trial were reported in Lancet supporting the July 2015 interim assessment that V920 offers substantial protection against Ebola virus disease, with no reported cases among vaccinated individuals from 10 days after vaccination in both randomized and non-randomized clusters. Results from other ongoing studies are anticipated in the second half of 2017.
MK-1242, vericiguat, is an investigational treatment for heart failure being studied in a Phase 3 clinical trial in patients suffering from chronic heart failure. The development of vericiguat is part of a worldwide strategic collaboration between Merck and Bayer (see Note 3 to the consolidated financial statements).
V212 is an inactivated varicella zoster virus vaccine in development for the prevention of herpes zoster. The Company is conducting twocompleted the Phase 3 trials, onetrial in autologous hematopoietic cell transplant patients and the otheris conducting another Phase 3 trial in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies. The
MK-3222, tildrakizumab,
study in autologous hematopoietic cell transplant patients met its primary endpoints and Merck presented the results from this study at the American Society for Blood and Marrow Transplantation Meetings in February 2017.
MK-1439, doravirine, is an anti-interleukin-23 monoclonal antibody candidateinvestigational non-nucleoside reverse transcriptase inhibitor being investigateddeveloped by Merck for the treatment of psoriasis.
MK-5172/MK-8742,HIV-1 infection. In February 2017, the Company received positive results from a first Phase 3 study showing that doravirine was non-inferior to an all-oral combinationalternative regimen in Phase 2achieving and maintaining HIV-1 suppression in infected adults during 48 weeks of treatment.
In 2016, the Company also divested or discontinued certain drug candidates.
Merck announced that it is discontinuing the development consisting of MK-5172,odanacatib, an investigational hepatitis C virus NS3/4A proteasecathepsin K inhibitor for osteoporosis, and MK-8742,will not seek regulatory approval for its use. Merck previously reported a numeric imbalance in adjudicated stroke events in the pivotal Phase 3 fracture outcomes study in postmenopausal women. The Company has decided to discontinue development after an independent adjudication and analysis of major adverse cardiovascular events confirmed an increased risk of stroke.
The Company determined that, for business reasons, it would terminate the North America partnership agreement with ALK-Abelló that included MK-8237, an investigational hepatitis C virus NS5A replication complex inhibitor, was granted a Breakthrough Therapy designation in October 2013 by the FDAallergy immunotherapy tablet for treatment of chronic hepatitis C virus infection. MK-5172 and MK-8742 are being investigated in a broad clinical program that includes studies in patients with multiple hepatitis C virus genotypes who are treatment-naïve, treatment failures as well as other important hepatitis C virus subpopulations such as patients with cirrhosis and those co-infected with HIV.
MK-8175A, NOMAC/E2, which is being marketed as Zoely in the EU, is an investigational oral contraceptive for use by women to prevent pregnancy. In November 2011, Merck received a CRL from the FDA for NOMAC/E2.house dust mite allergy. Merck has madegiven ALK-Abelló six months’ notice that it is terminating the agreement and therefore this compound will be returned to ALK-Abelló. This decision was not due to efficacy or safety concerns. In connection with the decision, the Company recorded an IPR&D impairment charge (see Note 7 to the consolidated financial statements).
The Company also decided, for business reasons, to discontinue the Phase 3 clinical trialdevelopment of MK-8342B, referred to as the Next Generation Ring, an investigational combination (etonogestrel and 17ß-estradiol) vaginal ring for NOMAC/E2 being conductedcontraception and the treatment of dysmenorrhea in women seeking contraception. This decision was not due to efficacy or safety concerns. As a result of this decision, the Company recorded an IPR&D impairment charge (see Note 7 to the consolidated financial statements).
Merck announced that, for business reasons, it will not proceed with submitting marketing applications for omarigliptin, an investigational, once-weekly DPP-4 inhibitor, in the United States.States or Europe. This decision is not based on any new safety or efficacy findings. 
In May 2013, the Company provided an update on the clinical program for preladenant, Merck’s investigational adenosine A2A receptor antagonist for the treatment of Parkinson’s disease. An initial review of data

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from three separate Phase 3 trials did not provide evidenceresult from concerns about the efficacy or safety of efficacy for preladenant compared with placebo. Based on these results, Merck has taken steps to discontinue the extension phases of these studies and no longer plans to pursue regulatory filings for preladenant. The decision to discontinue these studies was not based on any safety finding. The Company recorded an impairment charge of $181 million in 2013 related to the discontinuation of the clinical development program for preladenant.omarigliptin.
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 candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. Further, Merck has moved to diversify its portfolio through a collaboration on the development of biosimilars, which have the potential to harness the market opportunity presented by biological medicine patent expiries by delivering high quality biosimilars to enhance access for patients worldwide. The Company is committed to making externally sourced programs a greater component of its pipeline strategy, with a renewed focus on supplementing 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 access to new technologies.
The Company also reviews its pipeline to examine candidates which may provide more value through out-licensing. The Company is evaluatingcontinues to evaluate certain late-stage clinical development and platform technology assets to determine their out-licensing or sale potential.
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, osteoporosis,and respiratory diseases and women’s health.diseases.

Acquired In-Process Research and Development
In connection with mergers andbusiness acquisitions, the Company has recorded the fair value of incompletein-process research projects which, at the time of acquisition, had not yet reached technological feasibility. At December 31, 2013,2016, the balance of IPR&D was $1.9$1.7 billion. SomeDuring 2016, the Company recorded IPR&D for projects obtained in connection with the acquisitions of the more significant projects in late-stage development include vorapaxar, the Company’s BACE inhibitor, sugammadex sodium injectionAfferent and the AIT programsIOmet as discussed above.below.

During 2013, 20122016, 2015 and 2011, approximately $3462014, $8 million, $78$280 million and $666$654 million, respectively, of IPR&D projects received marketing approval in a major market and the Company began amortizing these assets based on their estimated useful lives.
All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates. The time periods to receive approvals from the FDA and other regulatory agencies are subject to uncertainty. Significant delays in the approval process, or the Company’s failure to obtain approval at all, would delay or prevent the Company from realizing revenues from these products. Additionally, if certain of the IPR&D programs fail or are abandoned during development, then the Company will not realize the future cash flows it has estimated and recorded as IPR&D as of the acquisition date, and the Company may also not recover the research and development expenditures made since the acquisition to further develop such program. If such circumstances were to occur, the Company’s future operating results could be adversely affected and the Company may recognize impairment charges and such charges could be material.
During 2013,2016, the Company recorded $279 million$3.6 billion of IPR&D impairment charges within Research and development expenses. Of this amount, $181 million related$2.9 billion relates to the write-off of the intangible asset associated with preladenant as a result of the discontinuation of the clinical development program for this compound. In addition,uprifosbuvir, a nucleotide prodrug in clinical development being evaluated for the treatment of HCV. The Company recorded impairment charges resulting fromdetermined that recent changes in cash flow assumptions for certain compounds,to the product profile, as well as changes to Merck’s expectations for pricing and the market opportunity, taken together constituted a triggering event that required the Company to evaluate the uprifosbuvir intangible asset for impairment. Utilizing market participant assumptions, and considering different scenarios, the Company concluded that its best estimate of the current fair value of the intangible asset related to uprifosbuvir was $240 million, resulting in the recognition of the pretax impairment charge noted above. The IPR&D impairment charges in 2016 also include charges of $180 million and $143 million related to the discontinuation of programs obtained in connection with the acquisitions of cCAM Biotherapeutics Ltd. and OncoEthix, respectively, resulting from unfavorable efficacy data. An additional $72 million relates to programs obtained in connection with the SmartCells acquisition following a decision to terminate the lead compound due to a lack of efficacy and to pursue a back-up compound which reduced projected future cash flows. The IPR&D impairment charges in 2016 also include $112 million related to an in-licensed program for house dust mite allergies that, for business reasons, will be returned to the licensor. The remaining IPR&D impairment charges for 2016 primarily relate to deprioritized pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use in the period. During 2012, the Company recorded $200 million of IPR&D impairment charges primarily for pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use during the period. During 2011, the Company recorded $587 million of IPR&D impairment charges primarily for

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pipeline programs that were abandoned and determined to have no alternative use, as well as for expected delays in the launch timing or changes in the cash flow assumptions for certain compounds. In addition, the impairment charges in 2011 related to pipeline programs that had previously been deprioritized and were either deemed to have no alternative use during the period, including a $79 million impairment charge for an investigational candidate for contraception. The discontinuation or were out-licensed todelay of certain of these clinical development programs resulted in a third party for consideration that was less thanreduction of the related asset’s carrying value.liabilities for contingent consideration (see Note 3 to the consolidated financial statements).
During 2015, the Company recorded $63 million of IPR&D impairment charges, of which $50 million related to the surotomycin clinical development program. During 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above.
During 2014, the Company recorded $49 million of IPR&D impairment charges primarily as a result of changes in cash flow assumptions for certain compounds obtained in connection with the Company’s joint venture with Supera Farma Laboratorios S.A., as well as for the discontinuation of certain Animal Health programs.
Additional research and development will be required before any of the remaining programs reach technological feasibility. The costs to complete the research projects will depend on whether the projects are brought to their final stages of development and are ultimately submitted to the FDA or other regulatory agencies for approval. As of December 31, 2013,2016, the estimated costs to complete projects acquired in connection with mergers and acquisitions in Phase 3 development for human health and the analogous stage of development for animal health were approximately $1.2 billion.$290 million.

Acquisitions, Divestitures, Research Collaborations and License Agreements
Merck continues to remain focused on pursuing opportunities that have the potential to drive both near- and long-term growth. During 2013,Certain of the Company completedmore recent significant transactions across a broad range of therapeutic categories.are described below. Merck is actively monitoring the landscape for growth opportunities that meet the Company’s strategic criteria.
In April 2013,July 2016, Merck and Pfizer announced that they had entered intoacquired Afferent, a worldwide (except Japan) collaboration agreement forprivately held pharmaceutical company focused on the development and commercialization of Pfizer’s ertugliflozin, an investigational oral sodium glucose cotransporter (“SGLT2”) inhibitor being evaluatedtherapeutic candidates targeting the P2X3 receptor for the treatment of typecommon, poorly-managed, neurogenic

conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is a selective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 2b clinical trial for the treatment of refractory, chronic cough as well as in a Phase 2 diabetes.clinical trial in idiopathic pulmonary fibrosis with cough. Total consideration transferred of $510 million included cash paid for outstanding Afferent shares of $487 million, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a total of up to an additional $750 million contingent upon the attainment of certain clinical development and commercial milestones for multiple indications and candidates, including MK-7264. This transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The Company has initiated Phase 3 clinical trialsdetermined the fair value of the contingent consideration was $223 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for ertugliflozinthe expected timing of each payment using an appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized an intangible asset for IPR&D of $832 million, net deferred tax liabilities of $258 million, and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets acquired of $130 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated based upon the asset’s probability-adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The net cash flows were then discounted to present value using a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.
In June 2016, Merck and Moderna entered into a strategic collaboration and license agreement to develop and commercialize novel mRNA-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based personalized cancer vaccines in combination with Pfizer. UnderMerck’s Keytruda. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of $200 million, which was recorded in Research and Pfizer will collaborate on the clinical development and commercialization of ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and with Januvia (sitagliptin) tablets.expenses. Following human proof of concept studies, Merck will continuehas the right to retainelect to make an additional payment to Moderna. If Merck exercises this right, the rights to its existing portfolio of sitagliptin-containing products. Through the end of 2013, Merck recorded research and development expenses of $125 million for upfront and milestone payments made to Pfizer. Pfizer will be eligible for additional payments associated with the achievement of pre-specified future clinical, regulatory and commercial milestones. Thetwo companies will then equally share potential revenuescost and certain costs 60% to Merck and 40% to Pfizer. Each partyprofits under a worldwide collaboration for the development of personalized cancer vaccines. Moderna will have certain manufacturing and supply obligations. The Company and Pfizer each have the right to terminateelect to co-promote the agreement due to a material, uncured breach by, or insolvency of, the other party, orpersonalized cancer vaccines in the event of a safety issue. Pfizer hasUnited States. The agreement entails exclusivity around combinations with Keytruda. Moderna and Merck will each have the rightability to terminate the agreement upon 12 months notice at any time following the first anniversary of the first commercial sale of a collaboration product, but must assign all rights to ertugliflozin to Merck. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligationscombine mRNA-based personalized cancer vaccines with respect to the continued development and commercialization of ertugliflozin and certain payment obligations.other (non-PD-1) agents.
In September 2013,January 2016, Merck and AstraZeneca announcedacquired IOmet, a worldwide out-licensing agreement for Merck’s oral small molecule inhibitorprivately held UK-based drug discovery company focused on the development of WEE1 kinase (MK-1775). MK-1775 is currently being evaluated in Phase 2a clinical studies in combination with standard-of-care therapiesinnovative medicines for the treatment of patientscancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition provides Merck with IOmet’s preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The transaction was accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of $150 million and future additional milestone payments of up to $250 million that are contingent upon certain types of ovarian cancer. Under the terms of the agreement, AstraZeneca paid Merck a $50 million upfront fee, which the Company recorded as revenue. In addition, Merck will be eligible to receive future payments tied to developmentclinical and regulatory milestones plus sales-related payments and tiered royalties. AstraZeneca will be responsible for all future clinical development, manufacturing and marketing.
In January 2014,being achieved. The Company determined the Company entered into an agreement to divest its Sirna Therapeutics, Inc. subsidiary and related RNAi technology assets to Alnylam Pharmaceuticals, Inc. (“Alnylam”). Under the termsfair value of the agreement, thecontingent consideration to be paid by Alnylam to Merck will consist of $25 million in cash and 2,520,044 shares of Alnylam common stock (valued at approximately $165was $94 million at the timeacquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment utilizing a discount rate of 10.5%. Merck recognized intangible assets for IPR&D of $155 million and net deferred tax assets of $32 million. The excess of the agreement). In addition, Merck is eligibleconsideration transferred over the fair value of net assets acquired of $57 million was recorded as goodwill that was allocated to receive up to $115 million in developmental and sales milestone payments, as well as single-digit royalties associated with certain preclinical candidates. The transaction is subject to customary closing conditionsthe Pharmaceutical segment and is expectednot deductible for tax purposes. The fair values of the identifiable intangible assets related to close during the first quarterIPR&D were determined using an income approach. The assets’ probability-adjusted future net cash flows were then discounted to present value also using a discount rate of 2014.10.5%. Actual cash flows are likely to be different than those assumed.



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Selected Joint Venture and Affiliate Information
To expand its research base and realize synergies from combining capabilities, opportunities and assets, in previous years Merck has formed a number of joint ventures.Sanofi Pasteur MSD

AstraZeneca LP
In 1982, Merck entered into an agreement with Astra AB (“Astra”) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (“AMI”), in whichOn December 31, 2016, Merck and Astra each owned a 50% share. ThisSanofi terminated the equally-owned joint venture formed in 1994 developedto develop and marketed mostmarket vaccines in Europe (see Note 8 to the consolidated financial statements).

Sales of Astra’s new prescription medicinesjoint venture products (prior to termination) were as follows:
($ in millions)2016 2015 2014
Gardasil/Gardasil 9
$216
 $184
 $248
Influenza vaccines106
 128
 159
Other viral vaccines95
 77
 87
RotaTeq56
 56
 65
Zostavax52
 87
 103
Hepatitis vaccines48
 62
 38
Other vaccines435
 329
 430
 $1,008
 $923
 $1,130
AstraZeneca LP
On June 30, 2014, AstraZeneca exercised an option that resulted in the United States including Prilosec,redemption of Merck’s remaining interest in AstraZeneca LP (AZLP), the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.
In 1998,partnership between Merck and Astra completed the restructuring of the ownership and operations of the joint venture whereby Merck acquired Astra’s interestAstraZeneca, for $419 million in AMI, renamed KBI Inc. (“KBI”), and contributed KBI’s operating assets to a new U.S. limited partnership, 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.,cash (see Note 8 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.
While maintaining a 1% limited partner interest in AZLP, Merck has consent and protective rights intended to preserve its business and economic interests, including restrictions on the power of the general partner to make certain distributions or dispositions. Furthermore, in limited events of default, additional rights will be granted to the Company, including powers to direct the actions of, or remove and replace, the Partnership’s chief executive officer and chiefconsolidated financial officer. Merck earns ongoing revenue based on sales of KBI products and such revenue was $920 million, $915 million and 1.2 billion in 2013, 2012 and 2011, respectively, primarily relating to sales of Nexium, as well as Prilosec. In addition, Merck earns certain Partnership returns which are recorded in Equity income from affiliates. Such returns include a priority return provided for in the Partnership Agreement, a preferential return representing Merck’s share of undistributed AZLP GAAP earnings, and a variable return related to the Company’s 1% limited partner interest. These returns aggregated $352 million, $621 million and $574 million in 2013, 2012 and 2011, respectively.
In 2014, AstraZeneca has the option to purchase Merck’s interest in KBI based in part on the value of Merck’s interest in Nexium and Prilosec. AstraZeneca’s option is exercisable between March 1, 2014 and April 30, 2014. If AstraZeneca chooses to exercisestatements). Of this option, the closing date is expected to be June 30, 2014. Under the amended agreement, AstraZeneca will make a payment to Merck upon closing ofamount, $327 million reflectingreflected an estimate of the fair value of Merck’s interest in Nexium and Prilosec.Prilosec (products sold by AZLP). This portion of the exercise price, which is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018, was deferred and recognized as income of $5 million, $182 million and $140 million, during 2016, 2015, and 2014, respectively, in Other (income) expense, net as the contingency was eliminated as sales occurred. Once the deferred income amount was fully amortized, in the first quarter of 2016, the Company began recognizing income and a corresponding receivable for amounts that will be due to Merck from AstraZeneca based on the sales performance of Nexium and Prilosec subject to the true-up in June 2018. The Company recognized $93 million of such income in 2016 included in Other (income) expense, net.
The remaining exercise price will also include an additional amount equal toof $91 million primarily represents a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. Merck recognized the $91 million as a gain in 2014 within Other (income) expense, net. The Company believes that it is likely that AstraZeneca will exercise its optionalso recognized a non-cash gain of approximately $650 million in 2014. If AstraZeneca exercises its option,2014 within Other (income) expense, net resulting from the Company will no longer recordretirement of $2.4 billion of preferred stock, the elimination of the Company’s $1.4 billion investment in AZLP and a $340 million reduction of goodwill. This transaction resulted in a net tax benefit of $517 million in 2014 primarily reflecting the reversal of deferred taxes on the AZLP investment balance.
In 2014, prior to termination, Merck recorded revenue from AZLP of $463 million and earned partnership returns of $192 million, which were recorded in equity income from AZLP and supply sales to AZLP will terminate. In addition, the Company will recognize a non-cash pretax gain of approximately $700 million.

Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe.

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Sales of joint venture products were as follows:
($ in millions)2013 2012 2011
Gardasil$291
 $264
 $253
Influenza vaccines162
 161
 183
Other viral vaccines104
 107
 105
Zostavax68
 —
 —
RotaTeq55
 47
 44
Hepatitis vaccines31
 31
 39
Other vaccines453
 474
 486
 $1,164
 $1,084
 $1,110
Johnson & Johnson°Merck Consumer Pharmaceuticals Company
In 2011, Merck sold its 50% interest in the JJMCP joint venture to J&J. The venture between Merck and J&J was formed in 1989 to develop, manufacture, market and distribute certain over-the-counter consumer products in the United States and Canada. Merck received a one-time payment of $175 million and recognized a pretax gain of $136 million in 2011 reflectedaffiliates included in Other (income) expense, net. The partnership assets also included a manufacturing facility. Sales of products marketed by the joint venture were $62 million for the period from January 1, 2011 until the September 29, 2011 divestiture date.
Capital Expenditures
Capital expenditures were $1.5$1.6 billion in 2013, $2.02016, $1.3 billion in 20122015 and $1.7$1.3 billion in 2011.2014. Expenditures in the United States were $902$1.0 billion in 2016, $879 million in 2013, $1.3 billion2015 and $873 million in 2012 and $1.2 billion in 2011.2014.
Depreciation expense was $2.2$1.6 billion in 2013, $2.02016, $1.6 billion in 20122015 and $2.4$2.5 billion in 20112014 of which $1.5$1.0 billion, $1.3$1.1 billion and $1.4$2.0 billion, respectively, applied to locations in the United States. Total depreciation expense in 2013, 20122016, 2015 and 20112014 included accelerated depreciation of $577$227 million, $235$174 million and $589$900 million, respectively, associated with restructuring activities (see Note 34 to the consolidated financial statements).
Analysis of Liquidity and Capital Resources
Merck’s strong financial profile enables it to fully fund research and development, focus on external alliances, support in-line products and maximize upcoming launches while providing significant cash returns to shareholders.
Selected Data          
($ in millions)2013 2012 20112016 2015 2014
Working capital$17,817
 $16,509
 $16,936
$13,410
 $10,550
 $14,198
Total debt to total liabilities and equity23.7% 19.4% 16.7%26.0% 26.0% 21.7%
Cash provided by operations to total debt0.5:1
 0.5:1
 0.7:1
0.4:1
 0.5:1
 0.4:1
Cash provided by operating activities was $11.7$10.4 billion in 2013, $10.02016, $12.5 billion in 20122015 and $12.4$8.0 billion in 2011.2014. Cash provided by operating activities in 2013 includes2016 reflects a net payment madeof approximately $680 million to fund the

Vioxx shareholder class action litigation settlement not covered by the Company of $480 million in connection with the previously disclosed settlement of the ENHANCE Litigationinsurance proceeds (see Note 10 to the consolidated financial statements). Cash provided by operating activities in 20122014 reflects higher contributions to its defined benefit plans as compared with 2013 and 2011. Cash provided by operating activities in 2012 also includes a paymentapproximately $5.0 billion of $960 million related totaxes paid on the resolutiondivestiture of certain litigation related to Vioxx. Cash provided by operating activities in 2011 includes a $500 million payment made to J&J as a result of the arbitration settlement, as well as net payments of approximately $465 million to the Internal Revenue Service as a result of the conclusion of its examination of certain of Merck’s federal income tax returns.MCC. Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, a portion of treasury stock purchases and dividends paid to shareholders. Global economic conditions and ongoing sovereign debt issues, among other factors, have adversely affected foreign receivables in certain European countries (see Note 5 to the consolidated financial statements). The Company received significant collections during 2013 and 2012, and has been successful in completing factoring arrangements for a portion of these receivables. Additionally, the Company continues to expand in the emerging markets where payment terms tend to be longer. The conditions in the EU and the emerging markets have resulted in an increase

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in the average length of time it takes to collect accounts receivable outstanding thereby adversely affecting cash provided by operating activities.
Cash used in investing activities was $3.1$3.2 billion in 20132016 compared with $6.8$4.8 billion in 20122015. The lower use of cash in 2016 was driven primarily by cash used in 2015 for the acquisition of Cubist, as well as lower purchases of securities and other investments in 2016, partially offset by lower proceeds from the sales of securities and other investments in 2016 and the use of cash in 2016 for the acquisitions of Afferent and StayWell. Cash used in investing activities was $4.8 billion in 2015 compared with $374 million in 2014 primarily reflecting cash received in 2014 from the divestiture of MCC, higher cash received in 2014 from other dispositions of businesses and in connection with AstraZeneca’s option exercise, as well as cash used for the acquisition of Cubist in 2015, partially offset by lower purchases of securities and other investments, higher proceeds from the sales of securities and other investments, and lower capital expenditures, partially offset by higher purchases of securities and other investments. Cashcash used in investing activities was $6.8 billion2014 for the acquisition of Idenix, and a cash payment made in 2012 compared2014 upon the formation of the collaboration with $2.9 billion in 2011 primarily reflecting higher purchases of securities and other investments, partially offset by higher proceeds from the sales of securities and other investments.Bayer.
Cash used in financing activities was $6.0$9.0 billion in 20132016 compared with $3.3$5.4 billion in 2012. The higher use of cash in financing activities was2015 driven primarily by higher purchaseslower proceeds from the issuance of treasury stock (largely under an ASR agreement as discussed below), as well as higher payments on debt, andpartially offset by a decrease in short-term borrowings partially offset byin the prior year, lower payments on debt, lower purchases of treasury stock and higher proceeds from the issuanceexercise of debt.stock options. Cash used in financing activities was $5.4 billion in 2012 was $3.3 billion2015 compared with $6.9$15.2 billion in 2011. The lower use of cash in financing activities was2014 driven primarily driven by higher proceeds from the issuance of debt, lower payments on debt and higherlower purchases of treasury stock, partially offset by lower proceeds from the exercise of stock options partially offset by increased purchases of treasury stock,and a decrease in short-term borrowings and higher dividends paidborrowings.
During 2015, the Company recorded charges of $876 million related to stockholders.the devaluation of its net monetary assets in Venezuela, the large majority of which was cash (see Note 14 to the consolidated financial statements).
At December 31, 2013,2016, the total of worldwide cash and investments was $27.3$25.8 billion, including $17.5$14.3 billion of cash, cash equivalents and short-term investments, and $9.8$11.4 billion of long-term investments. Generally 80%-90% of these cash and investments are held by foreign subsidiaries and would be subject to significant tax payments if such cash and investments were repatriated in the form of dividends. The Company records U.S. deferred tax liabilities for certain unremitted earnings, but when amounts earned overseas are expected to be indefinitely reinvested outside of the United States, no accrual for U.S. taxes is provided. The amount of cash and investments held by U.S. and foreign subsidiaries fluctuates due to a variety of factors including the timing and receipt of payments in the normal course of business. Cash provided by operating activities in the United States continues to be the Company’s primary source of funds to finance domestic operating needs, capital expenditures, a portion of treasury stock purchases and dividends paid to shareholders.
The Company’s contractual obligations as of December 31, 20132016 are as follows:
Payments Due by Period                  
($ in millions)Total 2014 2015—2016 2017—2018 ThereafterTotal 2017 2018—2019 2020—2021 Thereafter
Purchase obligations (1)
$2,948
 $762
 $791
 $462
 $933
$2,131
 $655
 $744
 $435
 $297
Loans payable and current portion of long-term debt(2)4,492
 4,492
 —
 —
 —
570
 570
 —
 —
 —
Long-term debt20,086
 —
 4,374
 4,043
 11,669
24,266
 —
 4,277
 4,156
 15,833
Interest related to debt obligations10,052
 841
 1,342
 1,179
 6,690
9,189
 683
 1,276
 1,101
 6,129
Unrecognized tax benefits (2)
59
 59
 —
 —
 —
Keytruda patent litigation settlement
625
 625
 —
 —
 —
Unrecognized tax benefits (3)
2,014
 2,014
 —
 —
 —
Operating leases898
 259
 340
 155
 144
754
 200
 263
 151
 140
$38,535
 $6,413
 $6,847
 $5,839
 $19,436
$39,549
 $4,747
 $6,560
 $5,843
 $22,399
(1)  
Includes future bulk supplyinventory purchases the Company has committed to in connection with certain divestitures, including the disposition of its API manufacturing business in 2013 discussed above.divestitures.
(2)
In February 2017, $300 million of floating rate notes matured and were repaid.
(3)  
As of December 31, 2013,2016, the Company’s Consolidated Balance Sheet reflects liabilities for unrecognized tax benefits, interest and penalties of $4.2$4.4 billion, including $59 million$2.0 billion reflected as a current liability. Due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities for unrecognized tax benefits beyond one year, a reasonable estimate of the period of cash settlement for years beyond 20142017 cannot be made.

Purchase obligations are enforceable and legally binding obligations for purchases of goods and services including minimum inventory contracts, research and development and advertising. Amounts reflected for research and development obligations do not include contingent milestone payments. In 2017, the Company will make a $90 million milestone payment in connection with a clinical program being developed in a collaboration (see “Research and Development” above). Also excluded from research and development obligations are potential future funding commitments of up to approximately $100$90 million for investments in research venture capital funds. Loans payable and current portion of long-term debt reflects $370$267 million of long-dated notes that are subject to repayment at the option of the holders. Required funding obligations for 20142017 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. However, the Company currently anticipates contributing approximately $250$50 million and $75 million, respectively, to its U.S. pension plans, $160 million to its international pension plans and $25 million to its other postretirement benefit plans during 2014.2017.

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TableIn November 2016, the Company issued €1.0 billion principal amount of Contents

senior unsecured notes consisting of €500 million principal amount of 0.50% notes due 2024 and €500 million principal amount of 1.375% notes due 2036. The Company hasintends to use the net proceeds of the offering of $1.1 billion for general corporate purposes, including without limitation, the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities.
In June 2016, the Company terminated its existing credit facility and entered into a $4.0new $6.0 billion, five-year credit facility maturingthat matures in May 2017.June 2021. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.
In May 2013, the Company completed an underwritten public offering of $6.5 billion senior unsecured notes consisting of $1.0 billion aggregate principal amount of 0.70% notes due in 2016, $500 million aggregate principal amount of floating rate notes due in 2016, $1.0 billion aggregate principal amount of 1.30% notes due in 2018, $1.0 billion aggregate principal amount of floating rate notes due in 2018, $1.75 billion aggregate principal amount of 2.80% notes due in 2023 and $1.25 billion aggregate principal amount of 4.15% notes due in 2043. Interest on the notes is payable semi-annually. The notes of each series are redeemable in whole or in part at any time at the Company’s option at varying redemption prices. A substantial portion of the net proceeds from the notes were used to repurchase the Company’s common stock pursuant to an accelerated share repurchase agreement in May 2013 as discussed below.
In December 2012,2015, the Company filed a securities registration statement with the U.S. Securities and Exchange Commission (“SEC”)(SEC) under the automatic shelf registration process available to “well-known seasoned issuers” which is effective for three years.
In February 2015, Merck issued $8.0 billion aggregate principal amount of senior unsecured notes. The Company used a portion of the net proceeds of the offering of $7.9 billion to repay commercial paper issued to substantially finance the Company’s acquisition of Cubist. The remaining net proceeds were used for general corporate purposes, including for repurchases of the Company’s common stock, and the repayment of outstanding commercial paper borrowings and debt maturities.
Also in February 2015, the Company redeemed $1.9 billion of legacy Cubist debt acquired in the acquisition (see Note 3 to the consolidated financial statements).
In October 2014, the Company issued €2.5 billion principal amount of senior unsecured notes. The net proceeds of the offering of $3.1 billion were used in part to repay debt that was validly tendered in connection with tender offers launched by the Company for certain outstanding notes and debentures. The Company paid $2.5 billion in aggregate consideration (applicable purchase price together with accrued interest) to redeem $1.8 billion principal amount of debt. In November 2014, Merck redeemed an additional $2.0 billion principal amount of senior unsecured notes.
Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp. (“MSD”)(MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.
The Company’s long-term credit ratings assigned by Moody’s Investors Service and Standard & Poor’s are A1 with a stable outlook and AA with a stable outlook, respectively. These ratings continue to allow access to the capital markets and flexibility in obtaining funds on competitive terms. The Company continues to maintain a conservative financial profile. The Company places its cash and investments in instruments that meet high credit quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issuer. Despite this strong financial profile, certain contingent events, if realized, which are discussed in Note 10 to the consolidated financial statements, could have a material adverse impact on the Company’s liquidity and capital resources. The Company does not participate in any off-balance sheet arrangements involving unconsolidated subsidiaries that provide financing or potentially expose the Company to unrecorded financial obligations.
In November 2013,2016, the Board of Directors declared a quarterly dividend of $0.44$0.47 per share on the Company’s common stock payable in January 2014.2017.
On May 1, 2013, the Company announced that itsIn March 2015, Merck’s board of directors authorized additional purchases of up to $15$10 billion of Merck’s common stock for its treasury. The Company expects to repurchase approximately $7.5 billion of commontreasury stock within 12 months following the date of the announcement, financed through a combination of debt issuance and operating cash flows, with the remainder to be repurchased over time withpurchase authorization has no time limit. Purchases maylimit and will be made over time

in open-market transactions, block transactions, on or off an exchange, or in privately negotiated transactions. The Company purchased $6.5$3.4 billion of its common stock (139(60 million shares) for its treasury during 2013, which includes shares under an ASR agreement discussed below.2016. The Company has approximately $10.4$5.1 billion remaining under the MayMarch share repurchase program. The Company purchased $2.6$4.2 billion and $1.9$7.7 billion of its common stock during 20122015 and 2011,2014, respectively, under this and previously authorized share repurchase programs.
On May 20, 2013, Merck entered into an ASR agreement with Goldman Sachs. Under the ASR, Merck agreed to purchase $5.0 billion of Merck’s common stock, in total, with an initial delivery of approximately 99.5 million shares of Merck’s common stock, based on current market price, made by Goldman Sachs to Merck, and payment of $5.0 billion made by Merck to Goldman Sachs, on May 21, 2013. Upon settlement of the ASR on October 31, 2013, Merck received an additional 5.5 million shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program bringing the total shares received by Merck under this program to 105 million. The ASR was entered into pursuant to the share repurchase program announced on May 1, 2013.



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Financial Instruments Market Risk Disclosures
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.

Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management, and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the potential for longer-term unfavorablevariability caused by changes in foreign exchange rates to decreasethat would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than threetwo years into the future. The Company will layer in hedges over time, increasing the portion of third-party and intercompany distributor entityforecasted sales hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The hedged anticipated sales are a specified component of a portfolio of similarly denominated foreign currency-based sales transactions, each of which responds to the hedged currency risk in the same manner. The Company manages its anticipated transaction exposure principally with purchased local currency put options, which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, total changes in the options’ cash flows offset the decline in the expected future U.S. dollar equivalent cash flows of the hedgedforward contracts, and purchased collar options.
Because Merck principally sells foreign currency sales. Conversely, if the U.S. dollar weakens, the options’ value reduces to zero, but the Company benefits from the increase in the U.S. dollar equivalent value of the anticipated foreign currency cash flows.
In connection with the Company’sits revenue hedging program, a purchased collar option strategy may be utilized. With a purchased collar option strategy, the Company writes a local currency call option and purchases a local currency put option. As compared to a purchased put option strategy alone, a purchased collar strategy reduces the upfront costs associated with purchasing puts through the collectionuniform weakening of premium by writing call options. If the U.S. dollar weakens relative towould yield the currency oflargest overall potential loss in the hedged anticipated sales, the purchased put optionmarket value of the collar strategy reduces to zero and the Company benefits from the increase in the U.S. dollar equivalent value of its anticipated foreign currency cash flows, however this benefit would be capped at the strike level of the written call. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the written call option value of the collar strategy reduces to zero and the changes in the purchased put cash flows of the collar strategy would offset the decline in the expected future U.S. dollar equivalent cash flows of the hedged foreign currency sales.
these hedge instruments. The Company may also utilize forward contracts in its revenue hedging program. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the increase in the fair value of the forward contracts offsets the decrease in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the decrease in the fair value of the forward contracts offsets the increase in the value of the anticipated foreign currency cash flows. While a weaker U.S. dollar would result in a net benefit, the market value of Merck’s hedges would have declined by an estimated $547$538 million and $453$502 million at December 31, 20132016 and 2012,2015, respectively, from a uniform 10% weakening of the U.S. dollar. The market value was determined using a foreign exchange option pricing model and holding all factors except exchange rates constant. Because Merck principally uses purchased local currency put options, a uniform weakening of the U.S. dollar would yield the largest overall potential loss in the market value of these options. The sensitivity measurement assumes that a change in one foreign currency relative to the U.S. dollar would not affect other foreign currencies relative to the U.S. dollar. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible near-term changes in Merck’s major foreign currency exposures relative to the U.S. dollar. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

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exchange on monetary assets and liabilities. The primary objective of theCompany also uses a balance sheet risk management program is to mitigate the exposure of foreign currency denominated net monetary assets of foreign subsidiaries where the U.S. dollar is thethat are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange contracts, which enable the Company to buy and sell foreign currencies in the future at fixed exchange rates and economically offset the consequences of changes in foreign exchange from the monetary assets. Merck routinely enters into contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The Company will also minimize the effect of exchange on monetary assets and liabilities by managingcash flows from these contracts are reported as operating activities and net asset positions atin the local level.Consolidated Statements of Cash Flows.
A sensitivity analysis to changes in the value of the U.S. dollar on foreign currency denominated derivatives, investments and monetary assets and liabilities indicated that if the U.S. dollar uniformly strengthenedweakened by 10% against all currency exposures of the Company at December 31, 2013,2016, Income before taxes would have declined by approximately $109$26 million in 2013.2016. Because the Company was in a net longshort (payable) position relative to its major foreign currencies after consideration of forward contracts, a uniform strengtheningweakening of the U.S. dollar will yield the largest overall potential net loss in earnings due to exchange. At December 31, 2012,2015, the Company was in a net short long (receivable)

position relative to its major foreign currencies after consideration of forward contracts, therefore a uniform 10% weakeningstrengthening of the U.S. dollar would have reduced Income before taxes by approximately $20$45 million. This measurement assumes that a change in one foreign currency relative to the U.S. dollar would not affect other foreign currencies relative to the U.S. dollar. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible near-term changes in Merck’s major foreign currency exposures relative to the U.S. dollar. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
In February 2013, the Venezuelan government devalued its currency (Bolívar Fuertes) from 4.30 VEF per U.S. dollar to 6.30 VEF per U.S. dollar. The Company recognized losses due to exchange of approximately $140 million in 2013 resulting from the remeasurement of the local monetary assets and liabilities at the new rate. Since January 2010, Venezuela has been designated hyperinflationary and, as a result, local foreign operations are remeasured in U.S. dollars with the impact recorded in results of operations.
In March 2013,2015, the Venezuelan government announcedidentified multiple exchange rates, which included the creationCENCOEX rate (6.3 VEF per U.S. dollar) and the SIMADI rate. While the Venezuelan government had indicated that essential goods, including food and medicine, would remain at the CENCOEX rate, during the second quarter of 2015, upon evaluation of evolving economic conditions in Venezuela and volatility in the country, combined with a new foreign exchange mechanism calleddecline in transactions that were settled at the “Complimentary SystemCENCOEX rate, the Company determined it was unlikely that all outstanding net monetary assets would be settled at the CENCOEX rate. Accordingly, during the second quarter of Foreign Currency Acquirement” (known as SICAD) that operates similar2015, the Company recorded a charge of $715 million within Other (income) expense, net to devalue its net monetary assets in Venezuela to an auction systemamount that represented the Company’s estimate of the U.S. dollar amount that would ultimately be collected. During the third quarter of 2015, the Company recorded additional exchange losses of $138 million in the aggregate reflecting the ongoing effect of translating transactions and allows entitiesnet monetary assets consistent with the second quarter. As a result of the further deterioration of economic conditions in specific sectors to bid for U.S. dollars to be used for specified import transactions. In December 2013,Venezuela and continued declines in transactions which were settled at the regulation that createdCENCOEX rate (subsequently replaced by the SICAD auction mechanismDIPRO rate), in the fourth quarter of 2015, the Company began using the SIMADI rate, which was amended to require the Central Bank of Venezuela to include on its website the weekly average exchange rate implied by transactions settled via the SICAD auction mechanism, which for the week of December 30, 2013, was 11.3 BsF198.70 VEF per U.S. dollar.at December 31, 2015, to report its Venezuelan operations. The Company has not usedalso revalued its remaining net monetary assets at the SICAD auction mechanism to settle any transactions. WhileSIMADI rate (subsequently replaced with the SICAD mechanism is described asDICOM rate), which resulted in an auction, it has several attributes that are inconsistent with a free market auction. Accordingly,additional charge in the Company does not believe it is appropriate to use the SICAD rate for remeasurement under U.S. GAAP. The Company will continue to monitor the SICAD auction mechanism. It is possible that circumstances may change such that the SICAD mechanism takes on the attributesfourth quarter of a true free market auction and the SICAD rate can be utilized for remeasurement purposes. If this occurs, or if a devaluation2015 of the official rate occurs, it could result in a material charge to the Company’s future results of operations.$161 million.
The Company may also usesuse forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates.rates that are recorded in Other (income) expense, net. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within Other Comprehensive Income (“(OCI”), and remains in Accumulated Other Comprehensive Income (“(AOCI”)AOCI) until either the sale or complete or substantially complete liquidation of the subsidiary. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment

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in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI.

Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.
During 2013,In May 2016, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0 billion, 0.70% fixed-rate notes due 2016 to variable rate debt. At December 31, 2016, the Company entered into 15was a party to 26 pay-floating, received-fixedreceive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes. There are four swaps maturingnotes as detailed in 2016 with notional amounts of $250 million each that effectively convert the Company’s 0.70% fixed-rate notes due in 2016 to floating-rate instruments; four swaps maturing in 2018 with notional amounts of $250 million each that effectively convert the Company’s 1.30% fixed-rate notes due in 2018 to floating-rate instruments; four swaps maturing in 2017, one with a notional amount of $200 million, two with notional amounts of $250 million each, and one with a notional amount of $300 million, that effectively convert the Company’s 6.00% fixed-rate notes due in 2017 to floating-rate instruments; and three swaps maturing in 2019, two with notional amounts of $200 million each, and one with a notional amount of $150 million, that effectively convert a portion of the Company’s 5.00% notes due in 2019 to floating rate instruments. table below.

($ in millions)2016
Debt InstrumentPar Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.30% notes due 20181,000
 4
 1,000
5.00% notes due 20191,250
 3
 550
1.85% notes due 20201,250
 5
 1,250
3.875% notes due 20211,150
 5
 1,150
2.40% notes due 20221,000
 4
 1,000
2.35% notes due 20221,250
 5
 1,250
The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (“LIBOR”)(LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense and offset by the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
There were no interest rate swaps outstanding as of December 31, 2012. During 2011, the Company terminated pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes. These swaps effectively converted certain of its fixed-rate notes to floating-rate instruments. The interest rate swap contracts were designated hedges of the fair value changes in the notes attributable to changes in the benchmark LIBOR swap rate. As a result of the swap terminations, the Company received $288 million in cash, which included $43 million in accrued interest. The corresponding $245 million basis adjustment of the debt associated with the terminated interest rate swap contracts was deferred and is being amortized as a reduction of interest expense over the respective term of the notes. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
The Company’s investment portfolio includes cash equivalents and short-term investments, the market values of which are not significantly affected by changes in interest rates. The market value of the Company’s medium- to long-term fixed-rate investments is modestly affected by changes in U.S. interest rates. Changes in medium- to long-term U.S. interest rates have a more significant impact on the market value of the Company’s fixed-rate borrowings, which generally have longer maturities. A sensitivity analysis to measure potential changes in the market value of Merck’s investments and debt from a change in interest rates indicated that a one percentage point increase in interest rates at December 31, 20132016 and 20122015 would have positively affected the net aggregate market value of these instruments by $1.1$1.3 billion and $1.2 billion, respectively. A one percentage point decrease at December 31, 20132016 and 20122015 would have negatively affected the net aggregate market value by $1.3$1.6 billion and $1.4$1.5 billion, respectively. The fair value of Merck’s debt was determined using pricing models reflecting one percentage point shifts in the appropriate yield curves. The fair values of Merck’s investments were determined using a combination of pricing and duration models.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with mergers and acquisitions, including initial fair value determinations of assets and liabilities, primarily IPR&D, and other intangible assets and contingent consideration, as well as subsequent fair value measurement.measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and goodwill) and investments, and taxes on income. Because of the uncertainty inherent

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in such estimates, actual results may differ from these estimates. Application of the following accounting policies result in accounting estimates having the potential for the most significant impact on the financial statements.
MergersAcquisitions
To determine whether acquisitions qualify as business combinations or asset acquisitions, the Company makes certain judgments, which include assessment of the inputs, processes, and Acquisitionsoutputs associated with the acquired set of activities. On October 1, 2016, the Company adopted new accounting guidance intended to clarify whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If the Company determines that substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business. To be considered a business, the assets in a transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, the Company would consider an acquisition or disposition a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs.
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the merger or acquisition at their respective fair values with limited exceptions.

Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the merger or acquisition. If the Company determines the assets acquired do not meet the definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. The fair values of intangible assets, including acquired IPR&D, are determined utilizing information available near the merger or acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a separate determination as to the then useful life of the asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset lives, can materially affect the Company’s results of operations.
If the Company determines the transaction will not be accounted for as an acquisition of a business, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense at the acquisition date.
The fair values of identifiable intangible assets related to currently marketed products and product rights are primarily determined by using an “income approach”income approach through which fair value is estimated based on each asset’s discounted projected net cash flows. The Company’s estimates of market participant net cash flows consider historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the time and investment that will be required to develop products and technologies; the ability to obtain marketing and regulatory approvals; the ability to manufacture and commercialize the products; the extent and timing of potential new product introductions by the Company’s competitors; and the life of each asset’s underlying patent, if any. The net cash flows are then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to IPR&D are also determined using an income approach, through which fair value is estimated based on each asset’s probability-adjusted future net cash flows, which reflect the different stages of development of each product and the associated probability of successful completion. The net cash flows are then discounted to present value using an appropriate discount rate.
Revenue Recognition
Revenues from sales of products are recognized at the time of delivery when title and risk of loss passes to the customer.customer, typically at time of delivery. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and

completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, or indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are

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recorded net of time value of money discounts for customers for which collection of accounts receivable is expected to be in excess of one year.
The provision for aggregate indirect customer discounts covers chargebacks and rebates. Chargebacks are discounts that occur when a contracted customer purchases directly through an intermediary wholesaler. The contracted customer generally purchases product at its contracted price plus a mark-up from the wholesaler. The wholesaler, in turn, charges the Company back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. The provision is based on expected payments, which are driven by patient usage and contract performance by the benefit provider customers.
The Company uses historical customer segment mix, adjusted for other known events, in order to estimate the expected provision. Amounts accrued for aggregate indirect customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers and other customers to the amounts accrued. Adjustments are recorded when trends or significant events indicate that a change in the estimated provision is appropriate.
The Company continually monitors its provision for aggregate indirect customer discounts. There were no material adjustments to estimates associated with the aggregate indirect customer discount provision in 2013, 20122016, 2015 or 2011.2014.
Summarized information about changes in the aggregate indirect customer discount accrual related to U.S. sales is as follows:
($ in millions)2013 20122016 2015
Balance January 1$1,873
 $1,824
$2,798
 $2,154
Current provision5,451
 5,694
9,831
 8,068
Adjustments to prior years(70) 89
(169) (77)
Payments(5,566) (5,734)(9,515) (7,347)
Balance December 31$1,688
 $1,873
$2,945
 $2,798
Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates as current liabilities. The accrued balances relative to these provisions included in Accounts receivable and Accrued and other current liabilities were $87$196 million and $1.6$2.7 billion, respectively, at December 31, 20132016 and were $120$145 million and $1.8$2.7 billion, respectively, at December 31, 2012.2015.
The Company maintains a returns policy that allows its U.S. pharmaceutical customers to return product within a specified period prior to and subsequent to the expiration date (generally, three to six months before and 12 months after product expiration). The estimate of the provision for returns is based upon historical experience with actual returns. Additionally, the Company considers factors such as levels of inventory in the distribution channel, product dating and expiration period, whether products have been discontinued, entrance in the market of additional generic competition, changes in formularies or launch of over-the-counter products, among others. The product returns provision for U.S. pharmaceutical sales as a percentage of U.S. net pharmaceutical sales was 1.4% in 2016, 1.5% in 2013, 1.4%2015 and 1.7% in 2012 and 1.3% in 2011.2014.
Through its distribution programs with U.S. wholesalers, the Company encourages wholesalers to align purchases with underlying demand and maintain inventories below specified levels. The terms of the programs allow the wholesalers to earn fees upon providing visibility into their inventory levels, as well as by achieving certain performance parameters such as inventory management, customer service levels, reducing shortage claims and reducing product returns. Information provided through the wholesaler distribution programs includes items such as sales trends, inventory on-hand, on-order quantity and product returns.

Wholesalers generally provide only the above mentioned data to the Company, as there is no regulatory requirement to report lot level information to manufacturers, which is the level of information needed to determine the remaining shelf life and original sale date of inventory. Given current wholesaler inventory levels, which are generally less than a month, the Company believes that collection of order lot information across all wholesale customers would have limited use in estimating sales discounts and returns.

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Inventories Produced in Preparation for Product Launches
The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory does not begin until the related product candidates are in Phase 3 clinical trials and are considered to have a high probability of regulatory approval. The Company monitors the status of each respective product within the regulatory approval process; however, the Company generally does not disclose specific timing for regulatory approval. If the Company is aware of any specific risks or contingencies other than the normal regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized. Expiry dates of the inventory are affected by the stage of completion. The Company manages the levels of inventory at each stage to optimize the shelf life of the inventory in relation to anticipated market demand in order to avoid product expiry issues. For inventories that are capitalized, anticipated future sales and shelf lives support the realization of the inventory value as the inventory shelf life is sufficient to meet initial product launch requirements. Inventories produced in preparation for product launches capitalized at December 31, 20132016 and 20122015 were $177$80 million and $196$63 million, respectively.
Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property and commercial litigation, as well as certain additional matters such as antitrust actions (see Note 10 to the consolidated financial statements.) The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable.
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, 20132016 and 20122015 of approximately $160$185 million and $260$245 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. When a legitimate claim for contribution is asserted, a liability is initially accrued based upon the estimated transaction costs to manage the site. Accruals are adjusted as site investigations, feasibility studies and related cost assessments of remedial techniques are completed, and as the extent to which other potentially responsible parties who may be jointly and severally liable can be expected to contribute is determined.
The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and takes an active role in identifying and providingaccruing for these costs. In the past, Merck performed a worldwide survey to assess all sites for potential contamination resulting from past industrial activities. Where assessment indicated that physical investigation was warranted, such investigation was performed, providing a better evaluation of the need for remedial action. Where such need was identified, remedial action was then initiated. As

definitive information became available during the course of investigations and/or remedial efforts at each site, estimates were refined and accruals were established or adjusted accordingly. These estimates and related accruals continue to be refined annually.
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. Expenditures for remediation and

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environmental liabilities were $20$11 million in 2013,2016, and are estimated at $117$44 million in the aggregate for the years 20142017 through 2018.2021. In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $213$83 million and $145$109 million at December 31, 20132016 and 2012,2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these 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 $84$64 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
Share-Based Compensation
The Company expenses all share-based payment awards to employees, including grants of stock options, over the requisite service period based on the grant date fair value of the awards. The Company determines the fair value of certain share-based awards using the Black-Scholes option-pricing model which uses both historical and current market data to estimate the fair value. This method incorporates various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. Total pretax share-based compensation expense was $276$300 million in 2013, $3352016, $299 million in 20122015 and $369$278 million in 2011.2014. At December 31, 2013,2016, there was $374$443 million of total pretax unrecognized compensation expense related to nonvested stock option, restricted stock unit and performance share unit awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.
Pensions and Other Postretirement Benefit Plans
Net periodic benefit cost for pension and other postretirement benefit plans totaled $716$56 million in 2013, $5092016, $253 million in 20122015 and $665$169 million in 2011.2014. Pension and other postretirement benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for plan benefit obligations and an expected rate of return on plan assets. The changes in net periodic benefit cost year over year for pension plans are largely attributable to changes in the discount rate affecting net amortization. The decrease in net periodic benefit cost for other postretirement benefit plans in 2016 as compared with 2015 is largely attributable to changes in retiree medical benefits approved by the Company in December 2015.
The Company reassesses its benefit plan assumptions on a regular basis. For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. At December 31, 2013, theThe discount rates for the Company’s U.S. pension and other postretirement benefit plans ranged from 3.60%3.40% to 5.20%4.30% at December 31, 2016, compared with a range of 3.00%3.80% to 4.20%4.80% at December 31, 2012.2015.
The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term compound annualized returns of historical market data as well as actual returns on the Company’s plan assets. Using this reference information, the Company develops forward-looking return expectations for each asset category and a weighted-average expected long-term rate of return for a target portfolio allocated across these investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. As a result of this analysis, for 2014,For 2017, the Company’s expected rate of return will range from 7.30% to 8.75% compared to a range of 6.00% to 8.75% in 2013 for itsthe Company’s U.S. pension and other postretirement benefit plans.plans will range from 8.00% to 8.75%, as compared to a range of 7.30% to 8.75% in 2016.
The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other

postretirement benefit plans is allocated 40% to 60% in U.S. equities, 20% to 40% in international equities, 15% to 25% in fixed-income investments, and up to 5% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio, which approximates 13%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For non-U.S. pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.

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Actuarial assumptions are based upon management’s best estimates and judgment. A reasonably possible change of plus (minus) 25 basis points in the discount rate assumption, with other assumptions held constant, would have an estimated $87$81 million favorable (unfavorable) impact on itsthe Company’s current year net periodic benefit cost. A reasonably possible change of plus (minus) 25 basis points in the expected rate of return assumption, with other assumptions held constant, would have an estimated $39$46 million favorable (unfavorable) impact on itsMerck’s current year net periodic benefit cost. Required funding obligations for 20142017 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. The preceding hypothetical changes in the discount rate and expected rate of return assumptions would not impact the Company’s funding requirements.
Net loss amounts, which reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions, are recorded as a component of AOCI. Expected returns for pension plans are based on a calculated market-related value of assets. Under this methodology, asset gains/losses resulting from actual returns that differ from the Company’s expected returns are recognized in the market-related value of assets ratably over a five-year period. Also, net loss amounts in AOCI in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees.
Restructuring Costs
Restructuring costs have been recorded in connection with restructuring programs designed to reducestreamline the Company’s cost structure, increase efficiency and enhance competitiveness.structure. As a result, the Company has made estimates and judgments regarding its future plans, including future termination benefits and other exit costs to be incurred when the restructuring actions take place. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. In connection with these actions, management also assesses the recoverability of long-lived assets employed in the business. In certain instances, asset lives have been shortened based on changes in the expected useful lives of the affected assets. Severance and other related costs are reflected within Restructuring costs. Asset-related charges are reflected within Materials and production costs, Marketing and administrative expenses and Research and development expenses depending upon the nature of the asset.
Impairments of Long-Lived Assets
The Company assesses changes in economic, regulatory and legal conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and other intangible assets.
The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows approach.
Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses purchasedacquired and is assigned to reporting units. The Company tests its goodwill for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of the factors considered in the assessment include general macro economicmacroeconomic conditions, conditions specific to the industry and market, cost factors which could have a significant effect on earnings or cash flows, the overall financial performance of the reporting unit, and whether there have been sustained declines in the Company’s share price. Additionally, the Company evaluates

the extent to which the fair value exceeded the carrying value of the reporting unit at the last date a valuation was performed. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Other acquired intangiblesintangible assets (excluding IPR&D) are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives. When events or circumstances warrant a review, the Company will assess recoverability from future operations using pretax undiscounted cash flows derived from the lowest appropriate asset groupings. Impairments are recognized in operating results to the extent that

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the carrying value of the intangible asset exceeds its fair value, which is determined based on the net present value of estimated future cash flows.
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects that the Company acquires through business combinations which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the project. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. For impairment testing purposes, the Company may combine separately recorded IPR&D intangible assets into one unit of account based on the relevant facts and circumstances. Generally, the Company will combine IPR&D intangible assets for testing purposes if they operate as a single asset and are essentially inseparable. If the fair value is less than the carrying amount, an impairment loss is recognized within the Company’s operating results.
The judgments made in evaluating impairment of long-lived intangibles can materially affect the Company’s results of operations.
Impairments of Investments
The Company reviews its investments for impairments based on the determination of whether the decline in market value of the investment below the carrying value is other-than-temporary. The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in OCI.
Taxes on Income
The Company’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the Company’s quarterly operating results. In the event that there is a significant unusual or one-time item recognized, or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item. The Company considers the resolution of prior year tax matters to be such items. Significant judgment is required in determining the Company’s tax provision and in evaluating its tax positions. The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period (see Note 15 to the consolidated financial statements.)

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which the Company has already recorded the tax benefit in the financial statements. The Company establishes valuation allowances for its deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred or expense for which the Company has already taken a deduction on the tax return, but has not yet recognized as expense in the financial statements. At December 31, 2013,2016, foreign earnings of $57.1$63.1 billion have been retained indefinitely by subsidiary companies for reinvestment; therefore, no provision has been made for income

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taxes that would be payable upon the distribution of such earnings and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued amended accounting guidance on revenue recognition that will be applied to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.
In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease).  Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.

In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
Cautionary Factors That May Affect Future Results
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors, including risk factors, described in the Company’s filings with the Securities and Exchange Commission, especially on this Form 10-K and Forms 10-Q and 8-K. In Item 1A. “Risk Factors” of this annual report on Form 10-K the Company discusses in more detail various important risk factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties.
 
Item 7a.Quantitative and Qualitative Disclosures about Market Risk.
The information required by this Item is incorporated by reference to the discussion under “Financial Instruments Market Risk Disclosures” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

73

Item 8.Financial Statements and Supplementary Data.                
(a)Financial Statements
The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 20132016 and 2012,2015, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2013,2016, the notes to consolidated financial statements, and the report dated February 27, 201428, 2017 of PricewaterhouseCoopers LLP, independent registered public accounting firm, are as follows:
Consolidated Statement of Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
2013 2012 20112016 2015 2014
Sales$44,033
 $47,267
 $48,047
$39,807
 $39,498
 $42,237
Costs, Expenses and Other          
Materials and production16,954
 16,446
 16,871
13,891
 14,934
 16,768
Marketing and administrative11,911
 12,776
 13,733
9,762
 10,313
 11,606
Research and development7,503
 8,168
 8,467
10,124
 6,704
 7,180
Restructuring costs1,709
 664
 1,306
651
 619
 1,013
Equity income from affiliates(404) (642) (610)
Other (income) expense, net815
 1,116
 946
720
 1,527
 (11,613)
38,488
 38,528
 40,713
35,148
 34,097
 24,954
Income Before Taxes5,545
 8,739
 7,334
4,659
 5,401
 17,283
Taxes on Income1,028
 2,440
 942
718
 942
 5,349
Net Income4,517
 6,299
 6,392
3,941
 4,459
 11,934
Less: Net Income Attributable to Noncontrolling Interests113
 131
 120
21
 17
 14
Net Income Attributable to Merck & Co., Inc.$4,404
 $6,168
 $6,272
$3,920
 $4,442
 $11,920
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders$1.49
 $2.03
 $2.04
$1.42
 $1.58
 $4.12
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders$1.47
 $2.00
 $2.02
$1.41
 $1.56
 $4.07
Consolidated Statement of Comprehensive Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
2013 2012 20112016 2015 2014
Net Income Attributable to Merck & Co., Inc.$4,404
 $6,168
 $6,272
$3,920
 $4,442
 $11,920
Other Comprehensive Income (Loss) Net of Taxes:          
Net unrealized gain (loss) on derivatives, net of reclassifications229
 (101) (37)
Net unrealized (loss) gain on derivatives, net of reclassifications(66) (126) 398
Net unrealized (loss) gain on investments, net of reclassifications(19) 52
 (10)(44) (70) 57
Benefit plan net gain (loss) and prior service cost (credit), net of amortization2,758
 (1,321) (303)
Benefit plan net (loss) gain and prior service (cost) credit, net of amortization(799) 579
 (2,077)
Cumulative translation adjustment(483) (180) 434
(169) (208) (504)
2,485
 (1,550) 84
(1,078) 175
 (2,126)
Comprehensive Income Attributable to Merck & Co., Inc.$6,889
 $4,618
 $6,356
$2,842
 $4,617
 $9,794
The accompanying notes are an integral part of these consolidated financial statements.

74

Consolidated Balance Sheet
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions except per share amounts)
2013 20122016 2015
Assets      
Current Assets      
Cash and cash equivalents$15,621
 $13,451
$6,515
 $8,524
Short-term investments1,865
 2,690
7,826
 4,903
Accounts receivable (net of allowance for doubtful accounts of $146 in 2013
and $163 in 2012) (excludes accounts receivable of $275 in 2013 and $473
in 2012 classified in Other assets - see Note 5)
7,184
 7,672
Inventories (excludes inventories of $1,704 in 2013 and $1,606
in 2012 classified in Other assets - see Note 6)
6,226
 6,535
Deferred income taxes and other current assets4,789
 4,509
Accounts receivable (net of allowance for doubtful accounts of $195 in 2016
and $165 in 2015) (excludes accounts receivable of $10 in 2015
classified in Other assets)
7,018
 6,484
Inventories (excludes inventories of $1,117 in 2016 and $1,569
in 2015 classified in Other assets - see Note 6)
4,866
 4,700
Other current assets4,389
 5,140
Total current assets35,685
 34,857
30,614
 29,751
Investments9,770
 7,305
11,416
 13,039
Property, Plant and Equipment (at cost)      
Land550
 591
412
 490
Buildings13,627
 13,196
11,439
 12,154
Machinery, equipment and office furnishings17,106
 17,188
14,053
 14,261
Construction in progress1,811
 2,440
1,871
 1,525
33,094
 33,415
27,775
 28,430
Less: accumulated depreciation18,121
 17,385
15,749
 15,923
14,973
 16,030
12,026
 12,507
Goodwill12,301
 12,134
18,162
 17,723
Other Intangibles, Net23,801
 29,083
17,305
 22,602
Other Assets9,115
 6,723
5,854
 6,055
$105,645
 $106,132
$95,377
 $101,677
Liabilities and Equity      
Current Liabilities      
Loans payable and current portion of long-term debt$4,521
 $4,315
$568
 $2,583
Trade accounts payable2,274
 1,753
2,807
 2,533
Accrued and other current liabilities9,501
 9,737
10,274
 11,216
Income taxes payable251
 1,200
2,239
 1,560
Dividends payable1,321
 1,343
1,316
 1,309
Total current liabilities17,868
 18,348
17,204
 19,201
Long-Term Debt20,539
 16,254
24,274
 23,829
Deferred Income Taxes6,776
 5,740
5,077
 6,535
Other Noncurrent Liabilities8,136
 10,327
8,514
 7,345
Merck & Co., Inc. Stockholders’ Equity      
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2013 and 2012
1,788
 1,788
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2016 and 2015
1,788
 1,788
Other paid-in capital40,508
 40,646
39,939
 40,222
Retained earnings39,257
 39,985
44,133
 45,348
Accumulated other comprehensive loss(2,197) (4,682)(5,226) (4,148)
79,356
 77,737
80,634
 83,210
Less treasury stock, at cost:
649,576,808 shares in 2013 and 550,468,221 shares in 2012
29,591
 24,717
Less treasury stock, at cost:
828,372,200 shares in 2016 and 795,975,449 shares in 2015
40,546
 38,534
Total Merck & Co., Inc. stockholders’ equity49,765
 53,020
40,088
 44,676
Noncontrolling Interests2,561
 2,443
220
 91
Total equity52,326
 55,463
40,308
 44,767
$105,645
 $106,132
$95,377
 $101,677
The accompanying notes are an integral part of this consolidated financial statement.

75

Consolidated Statement of Equity
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
 
Common
Stock
 
Other
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Non-
controlling
Interests
 Total
Balance January 1, 2011
$1,788
 $40,701
 $37,536
 $(3,216) $(22,433) $2,429
 $56,805
Net income attributable to Merck & Co., Inc.—
 —
 6,272
 —
 —
 —
 6,272
Other comprehensive income, net of tax—
 —
 —
 84
 —
 —
 84
Cash dividends declared on common stock ($1.56 per share)—
 —
 (4,818) —
 —
 —
 (4,818)
Treasury stock shares purchased—
 —
 —
 —
 (1,921) 

 (1,921)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 120
 120
Distributions attributable to noncontrolling interests—
 —
 —
 —
 

 (120) (120)
Share-based compensation plans and other—
 (38) —
 —
 562
 (3) 521
Balance December 31, 20111,788
 40,663
 38,990
 (3,132) (23,792) 2,426
 56,943
Net income attributable to Merck & Co., Inc.—
 —
 6,168
 —
 —
 —
 6,168
Other comprehensive loss, net of tax—
 —
 —
 (1,550) —
 —
 (1,550)
Cash dividends declared on common stock ($1.69 per share)—
 —
 (5,173) —
 —
 —
 (5,173)
Treasury stock shares purchased—
 —
 —
 —
 (2,591) —
 (2,591)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 131
 131
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (120) (120)
Share-based compensation plans and other—
 (17) —
 —
 1,666
 6
 1,655
Balance December 31, 20121,788
 40,646
 39,985
 (4,682) (24,717) 2,443
 55,463
Net income attributable to Merck & Co., Inc.—
 —
 4,404
 —
 —
 —
 4,404
Other comprehensive income, net of tax—
 —
 —
 2,485
 —
 —
 2,485
Cash dividends declared on common stock ($1.73 per share)—
 —
 (5,132) —
 —
 —
 (5,132)
Treasury stock shares purchased—
 —
 —
 —
 (6,516) —
 (6,516)
Supera joint venture formation—
 116
 —
 —
 —
 112
 228
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 113
 113
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (120) (120)
Share-based compensation plans and other—
 (254) —
 —
 1,642
 13
 1,401
Balance December 31, 2013$1,788
 $40,508
 $39,257
 $(2,197) $(29,591) $2,561
 $52,326
 
Common
Stock
 
Other
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Non-
controlling
Interests
 Total
Balance January 1, 2014
$1,788
 $40,508
 $39,257
 $(2,197) $(29,591) $2,561
 $52,326
Net income attributable to Merck & Co., Inc.—
 —
 11,920
 —
 —
 —
 11,920
Other comprehensive loss, net of tax—
 —
 —
 (2,126) —
 —
 (2,126)
Cash dividends declared on common stock ($1.77 per share)—
 —
 (5,156) —
 —
 —
 (5,156)
Treasury stock shares purchased—
 —
 —
 —
 (7,703) —
 (7,703)
AstraZeneca option exercise—
 —
 —
 —
 —
 (2,400) (2,400)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 14
 14
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (77) (77)
Share-based compensation plans and other—
 (85) —
 —
 2,032
 46
 1,993
Balance December 31, 20141,788
 40,423
 46,021
 (4,323) (35,262) 144
 48,791
Net income attributable to Merck & Co., Inc.—
 —
 4,442
 —
 —
 —
 4,442
Other comprehensive income, net of tax—
 —
 —
 175
 —
 —
 175
Cash dividends declared on common stock ($1.81 per share)—
 —
 (5,115) —
 —
 —
 (5,115)
Treasury stock shares purchased—
 —
 —
 —
 (4,186) —
 (4,186)
Changes in noncontrolling ownership interests—
 (20) —
 —
 —
 (55) (75)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 17
 17
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (15) (15)
Share-based compensation plans and other—
 (181) —
 —
 914
 —
 733
Balance December 31, 20151,788
 40,222
 45,348
 (4,148) (38,534) 91
 44,767
Net income attributable to Merck & Co., Inc.—
 —
 3,920
 —
 —
 —
 3,920
Other comprehensive loss, net of tax—
 —
 —
 (1,078) —
 —
 (1,078)
Cash dividends declared on common stock ($1.85 per share)—
 —
 (5,135) —
 —
 —
 (5,135)
Treasury stock shares purchased—
 —
 —
 —
 (3,434) —
 (3,434)
Changes in noncontrolling ownership interests—
 —
 —
 —
 —
 124
 124
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 21
 21
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (16) (16)
Share-based compensation plans and other—
 (283) —
 —
 1,422
 —
 1,139
Balance December 31, 2016$1,788
 $39,939
 $44,133
 $(5,226) $(40,546) $220
 $40,308
The accompanying notes are an integral part of this consolidated financial statement.

76

Consolidated Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
2013 2012 20112016 2015 2014
Cash Flows from Operating Activities          
Net income$4,517
 $6,299
 $6,392
$3,941
 $4,459
 $11,934
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization6,988
 6,978
 7,427
5,441
 6,375
 6,691
Intangible asset impairment charges765
 200
 705
3,948
 162
 1,222
Gain on disposition of interest in equity method investment—
 —
 (136)
Charge related to the settlement of worldwide Keytruda patent litigation
625
 —
 —
Foreign currency devaluation related to Venezuela—
 876
 —
Net charge related to the settlement of Vioxx shareholder class action litigation
—
 680
 —
Gain on divestiture of Merck Consumer Care business—
 —
 (11,209)
Gain on AstraZeneca option exercise—
 —
 (741)
Loss on extinguishment of debt—
 —
 628
Equity income from affiliates(404) (642) (610)(86) (205) (257)
Dividends and distributions from equity affiliates237
 291
 216
Dividends and distributions from equity method affiliates16
 50
 185
Deferred income taxes(330) 669
 (1,537)(1,521) (764) (2,600)
Share-based compensation276
 335
 369
300
 299
 278
Other399
 28
 323
313
 874
 34
Net changes in assets and liabilities:          
Accounts receivable436
 349
 (1,168)(619) (480) (554)
Inventories(365) (482) (678)206
 805
 79
Trade accounts payable522
 (302) 182
278
 (37) 593
Accrued and other current liabilities(397) (717) 1,444
(2,018) (8) 1,635
Income taxes payable(1,421) (34) (277)124
 (266) (21)
Noncurrent liabilities(132) (1,747) (7)(809) (277) 190
Other563
 (1,203) (262)237
 (5) (98)
Net Cash Provided by Operating Activities11,654
 10,022
 12,383
10,376
 12,538
 7,989
Cash Flows from Investing Activities          
Capital expenditures(1,548) (1,954) (1,723)(1,614) (1,283) (1,317)
Purchases of securities and other investments(17,991) (12,841) (7,325)(15,651) (16,681) (24,944)
Proceeds from sales of securities and other investments16,298
 7,783
 6,149
14,353
 20,413
 15,114
Proceeds from sale of interest in equity method investment—
 —
 175
Acquisitions of businesses, net of cash acquired(246) —
 (373)
Dispositions of businesses, net of cash divested46
 —
 323
Cash inflows (outflows) from net investment hedges350
 39
 (86)
Divestiture of Merck Consumer Care business, net of cash divested—
 —
 13,951
Dispositions of other businesses, net of cash divested—
 316
 1,169
Proceeds from AstraZeneca option exercise—
 —
 419
Acquisition of Cubist Pharmaceuticals, Inc., net of cash acquired—
 (7,598) —
Acquisition of Idenix Pharmaceuticals, Inc., net of cash acquired—
 —
 (3,700)
Acquisitions of other businesses, net of cash acquired(780) (146) (181)
Acquisition of Bayer AG collaboration rights—
 —
 (1,000)
Cash inflows from net investment hedges29
 139
 195
Other(57) 168
 (30)453
 82
 (80)
Net Cash Used in Investing Activities(3,148) (6,805) (2,890)(3,210) (4,758) (374)
Cash Flows from Financing Activities          
Net change in short-term borrowings(159) 624
 1,076
—
 (1,540) (460)
Payments on debt(1,775) (22) (1,547)(2,386) (2,906) (6,617)
Proceeds from issuance of debt6,467
 2,562
 —
1,079
 7,938
 3,146
Purchases of treasury stock(6,516) (2,591) (1,921)(3,434) (4,186) (7,703)
Dividends paid to stockholders(5,157) (5,116) (4,691)(5,124) (5,117) (5,170)
Other dividends paid(120) (120) (120)—
 —
 (77)
Proceeds from exercise of stock options1,210
 1,310
 321
939
 485
 1,560
Other60
 86
 (22)(118) (61) 79
Net Cash Used in Financing Activities(5,990) (3,267) (6,904)(9,044) (5,387) (15,242)
Effect of Exchange Rate Changes on Cash and Cash Equivalents(346) (30) 42
(131) (1,310) (553)
Net Increase (Decrease) in Cash and Cash Equivalents2,170
 (80) 2,631
Net (Decrease) Increase in Cash and Cash Equivalents(2,009) 1,083
 (8,180)
Cash and Cash Equivalents at Beginning of Year13,451
 13,531
 10,900
8,524
 7,441
 15,621
Cash and Cash Equivalents at End of Year$15,621
 $13,451
 $13,531
$6,515
 $8,524
 $7,441
The accompanying notes are an integral part of this consolidated financial statement.

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Notes to Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1.    Nature of Operations
Merck & Co., Inc. (“Merck”(Merck or “the Company”)the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health and consumer care products, which it markets directly and through its joint ventures.products. The Company’s operations are principally managed on a products basis and are comprised ofinclude four operating segments, which are the Pharmaceutical, Animal Health, Consumer CareHealthcare Services and Alliances segments, and one reportablesegments. The Pharmaceutical segment which is the Pharmaceuticalonly reportable 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. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD (SPMSD) joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets that were previously part of the joint venture.
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’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company has consumer care operationsdivested its Consumer Care segment that develop, manufacturedeveloped, manufactured and marketmarketed over-the-counter, foot care and sun care products which are sold through wholesale and retail drug, food chain and mass merchandiser outlets, as well as club stores and specialty channels.(see Note 3).
2.    Summary of Accounting Policies
Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as Noncontrolling interests in equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the Company and a third party that are under shared control, are carried on the equity basis.
Mergers and Acquisitions — In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the merger or acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the merger or acquisition. If the Company determines the assets acquired do not meet the

definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded.
Foreign Currency Translation — The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the

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foreign currency translation account, which is included in Accumulated other comprehensive income (loss) (“(AOCI”) and reflected as a separate component of equity. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other (income) expense, net.
Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.
Inventories — Inventories are valued at the lower of cost or market. The cost of a substantial majority of domestic pharmaceutical and vaccine inventories is determined using the last-in, first-out (“LIFO”)(LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (“FIFO”)(FIFO) method. Inventories consist of currently marketed products, andas well as certain products awaitinginventories produced in preparation for product launches that are considered to have a high probability of regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process.
Investments — Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair values of the Company’s investments are determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are considered temporary are reported net of tax in Other Comprehensive Income (“(OCI”). For declines in the fair value of equity securities that are considered other-than-temporary, impairment losses are charged to Other (income) expense, net. The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in Other (income) expense, net, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in OCI. Realized gains and losses for both debt and equity securities are included in Other (income) expense, net.
Revenue Recognition — Revenues from sales of products are recognized at the time of delivery when title and risk of loss passes to the customer.customer, typically upon delivery. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, or indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts if collection of accounts receivable is expected to be in excess of one year. Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates are recorded as current liabilities. The accrued balances relative to the provisions for chargebacks and rebates included in Accounts receivable and Accrued and other current liabilities were $87196 million and $1.62.7 billion, respectively, at December 31, 20132016 and $120145 million and $1.82.7 billion, respectively, at December 31, 2012.2015.

The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (“SEC”)(SEC) Interpretation, Commission Guidance Regarding Accounting for Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile.
Depreciation — Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated tax methods are used. The estimated useful lives primarily range from 1025 to 5045 years for Buildings, and from 3 to 15 years for Machinery, equipment and office furnishings. Depreciation expense was $2.2$1.6 billion in 2013, $2.02016, $1.6 billion in 20122015 and $2.4$2.5 billion in 2011.2014.

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Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion expenses of $2.52.1 billion, $2.82.1 billion and $3.12.3 billion in 2013, 20122016, 2015 and 2011,2014, respectively.
Software Capitalization — The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including external direct costs of material and services, and payroll costs for employees directly involved with the software development. Capitalized software costs are included in Property, plant and equipment and amortized beginning when the software project is substantially complete and the asset is ready for its intended use. Capitalized software costs associated with projects that are being amortized over 6 to 10 years (including the Company’s on-going multi-year implementation of an enterprise-wide resource planning system) were $529452 million and $428421 million, net of accumulated amortization at December 31, 20132016 and 2012,2015, respectively. All other capitalized software costs are being amortized over periods ranging from 3 to 5 years. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred.
Goodwill — Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses purchased.acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed. Based upon the Company’s most recent annual impairment test completed as of October 1, 2013, the Company concluded goodwill was not impaired.
Acquired Intangibles — Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives ranging from 32 to 4020 years (see Note 7). The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.
Acquired In-Process Research and Development — In-processAcquired in-process research and development (“IPR&D”)(IPR&D) that the Company acquires through business combinations represents the fair value assigned to incomplete research projects that the Company acquires through business combinations which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.

Contingent Consideration — Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
Research and Development — Research and development is expensed as incurred. Upfront and milestone payments due to third parties in connection with research and development collaborations prior to regulatory approval are expensed as incurred. Payments due to third parties upon or subsequent to regulatory approval are capitalized and amortized over the shorter of the remaining license or product patent life. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expenses when the specific milestone has been achieved. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment charges in all periods. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration.

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Share-Based Compensation — The Company expenses all share-based payments to employees over the requisite service period based on the grant-date fair value of the awards.
Restructuring Costs — The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee termination costs are accrued when the restructuring actions are probable and estimable. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.
Contingencies and Legal Defense Costs — The Company records accruals for contingencies and legal defense costs expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Taxes on Income — Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. The Company recognizes interest and penalties associated with uncertain tax positions as a component of Taxes on income in the Consolidated Statement of Income.
Use of Estimates — The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”)(GAAP) and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with mergers and acquisitions, including initial fair value determinations of assets and liabilities, primarily IPR&D, and other intangible assets and contingent consideration, as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and

goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Reclassifications — Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Recently Adopted Accounting Standards — In the first quarter of 2013,2016, the Company adopted accounting guidance issued by the Financial Accounting Standards Board (the “FASB”) that simplifies how an entity tests indefinite-lived intangibles for impairment. The amended guidance allows companies(FASB) in April of 2015, which requires debt issuance costs to first assess qualitative factors to determine whether it is more-likely-than-not that an indefinite-lived intangible asset is impairedbe presented as a basis for determining whether it is necessary to performdirect deduction from the quantitative impairment test. The adoptioncarrying amount of this guidance had no impactthat debt on the Company’s financial position and resultsbalance sheet as opposed to being presented as a deferred charge. Approximately $100 million of operations.



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3.    Restructuring
2013 Restructuring Program
In October 2013,2016 as a result of the Company announced a new global restructuring program (the “2013 Restructuring Program”) as part of a global initiative to sharpen its commercial and research and development focus. As partadoption of the new program,standard. Prior period amounts have been recast to conform to the new presentation.
In the second quarter of 2016, the Company expectselected to reduce its total workforceearly adopt an accounting standards update issued by approximately 8,500 positions. These workforce reductions will primarily comethe FASB in March of 2016 intended to simplify the accounting and reporting for employee share-based payment transactions. Among other provisions, the new standard requires that excess tax benefits and deficiencies that arise upon vesting or exercise of share-based payments be recognized in the income statement (as opposed to previous guidance under which tax effects were recorded to Other paid-in-capital in certain instances). This aspect of the new guidance, which was required to be adopted prospectively, resulted in the recognition of $79 million of excess tax benefits in Taxes on income in 2016 arising from share-based payments. The new guidance also amended the eliminationpresentation of positionscertain share-based payment items in sales, administrative and headquarters organizations,the statement of cash flows. Cash flows related to excess income tax benefits are now classified as wellan operating activity (formerly included as research and development.a financing activity). The Company willelected to adopt this aspect of the new guidance prospectively. The standard also reduce its global real estate footprintclarified that cash payments made to taxing authorities on the employees’ behalf for shares withheld should be presented as a financing activity. This aspect of the guidance was adopted retrospectively; accordingly, the Company reclassified $117 million and $129 million of such payments from operating activities to financing activities in the Consolidated Statement of Cash Flows for the years ended December 31, 2015 and 2014, respectively, to conform to the current presentation. The Company has elected to continue to improveestimate the efficiencyimpact of its manufacturing and supply network. The Company will continue to hire employees in strategic growth areasforfeitures when determining the amount of the business as necessary.
The Company recorded total pretax costs of $1.2 billion in 2013 related to this restructuring program. The actions under the 2013 Restructuring Program are expectedcompensation cost to be substantially completed by the end of 2015 with the cumulative pretax costs estimated to be approximately $2.5 billion to $3.0 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs will result in 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.

Merger Restructuring Programrecognized each period rather than account for them as they occur.
In 2010, subsequent to the Merck and Schering-Plough Corporation (“Schering-Plough”) merger (the “Merger”), the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) designed to streamline the cost structure of the combined company. Further actions under this program were initiated in 2011. The actions under this 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.
On October 1, 2013, the Company sold its active pharmaceutical ingredient (“API”) manufacturing business, including the related manufacturing facility, in the Netherlands to Aspen Holdings (“Aspen”) as part of planned manufacturing facility rationalizations under the Merger Restructuring Program. In conjunction with the sale, the parties entered into a strategic long-term supply agreement whereby Aspen will supply API to the Company and approximately 960 employees who support the API business were transferred from Merck to Aspen. Also in connection with the sale, Aspen acquired certain branded products from Merck, which transferred to Aspen effective December 31, 2013. Consideration for the transaction included cash of $705 million and notes receivable with a present value of $198 million at the time of disposition. The notes receivable consist of a $261 million note with a present value of $138 million due in 2023 and a $67.5 million note with a present value of $60 million that is payable over five years beginning on December 31, 2014. Of the cash portion of the consideration, the Company received $172 million in the fourth quarter of 2013. The remaining $533 million was received2016, the Company elected to early adopt an accounting standards update issued by the Company inFASB on January 2014; therefore, at December 31, 2013, this amount was recorded5, 2017 intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as a receivable within Deferred income taxes and other currentacquisitions (or disposals) of assets on or businesses. If substantially all of the Consolidated Balance Sheet. In conjunction with this transaction, the Company transferred inventoryfair value of $420 million, property, plant and equipment of $220 million and cash of $125 million to Aspen, reduced goodwill by $45 million, other intangiblegross assets by $45 million and other assets by $23 million and recorded $90 million of transaction-related liabilities. This transaction resultedincluded in a losstransaction is concentrated in a single asset (or a group of $65 millionsimilar assets), the assets would not represent a business. To be considered a business, the assets in the transaction need to include an input and a substantive process that was recorded within Restructuring costs in 2013.

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The Company recorded total pretax costs of $1.1 billion in 2013, $951 million in 2012 and $1.8 billion in 2011 relatedtogether significantly contribute to this restructuring program. Since inceptionthe ability to create outputs. Prior to the adoption of the Merger Restructuring Program through December 31, 2013, Merck has recorded total pretax accumulated costs of approximately $7.2 billion and eliminated approximately 26,880 positions comprised of employee separations,new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Entities are permitted to apply the updated guidance to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. Accordingly, the Company elected to adopt this guidance prospectively as of October 1, 2016.
Recently Issued Accounting Standards — In May 2014, the FASB issued amended accounting guidance on revenue recognition that will be applied to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.

In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease).  Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of contractorsStep 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new guidance is effective for interim and vacant positions. Approximately 6,300 position eliminations remain pending under this program as of December 31, 2013, which includeannual periods in 2021. The Company does not anticipate the remaining actions under the 2008 Restructuring Program that are now being reported as partadoption of the Merger Restructuring Program as discussed below. The restructuring actions under the Merger Restructuring Program were substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related. Subsequent to the Merger, the Company has rationalizednew guidance will have a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2016. The Company expects the estimated total cumulative pretax costs for this program to be approximately $7.4 billion to $7.7 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.material effect on its consolidated financial statements.

2008 Restructuring Program
In October 2008, Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. Pretax costs of $54 million, $48 million and $45 million were recorded in 2013, 2012 and 2011, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through June 30, 2013, Merck has recorded total pretax accumulated costs of $1.7 billion and eliminated approximately 6,460 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program was substantially completed in 2011, with the exception of certain manufacturing-related actions, which are expected to be completed by 2015. As of July 1, 2013, the remaining accrued liability for future separations under the 2008 Restructuring Program was transferred to the Merger Restructuring Program and any remaining activities under the 2008 Restructuring Program are now being accounted for as part of the Merger Restructuring Program.
For segment reporting, restructuring charges are unallocated expenses.

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The following table summarizes the charges related to restructuring program activities by type of cost:
Year Ended December 31, 2013
Separation
Costs
 
Accelerated
Depreciation
 Other Total
2013 Restructuring Program       
Materials and production$—
 $186
 $7
 $193
Marketing and administrative—
 72
 3
 75
Research and development—
 76
 (1) 75
Restructuring costs866
 —
 32
 898
 866
 334
 41
 1,241
Merger Restructuring Program       
Materials and production—
 151
 98
 249
Marketing and administrative—
 63
 3
 66
Research and development—
 27
 (1) 26
Restructuring costs481
 —
 284
 765
 481
 241
 384
 1,106
2008 Restructuring Program       
Materials and production—
 (2) 6
 4
Marketing and administrative—
 4
 —
 4
Restructuring costs34
 —
 12
 46
 34
 2
 18
 54
 $1,381
 $577
 $443
 $2,401
Year Ended December 31, 2012       
Merger Restructuring Program       
Materials and production$—
 $92
 $70
 $162
Marketing and administrative—
 75
 6
 81
Research and development—
 53
 4
 57
Restructuring costs497
 —
 154
 651
 497
 220
 234
 951
2008 Restructuring Program       
Materials and production—
 7
 19
 26
Marketing and administrative—
 8
 1
 9
Restructuring costs(8) —
 21
 13
 (8) 15
 41
 48
 $489
 $235
 $275
 $999
Year Ended December 31, 2011       
Merger Restructuring Program       
Materials and production$—
 $282
 $17
 $299
Marketing and administrative—
 108
 11
 119
Research and development—
 151
 (17) 134
Restructuring costs1,117
 —
 177
 1,294
 1,117
 541
 188
 1,846
2008 Restructuring Program       
Materials and production—
 24
 5
 29
Research and development—
 4
 —
 4
Restructuring costs(6) —
 18
 12
 (6) 28
 23
 45
 $1,111
 $569
 $211
 $1,891
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In 2013, approximately 1,540 positions were eliminated under the 2013 Restructuring Program. Positions eliminated under the Merger Restructuring Program were approximately 4,475 in 2013, 3,975 in 2012 and 6,880 in 2011 and positions eliminated under the 2008 Restructuring Program were approximately 55 in 2013, 155 in 2012 and 450 in 2011. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the site, based upon the anticipated date the

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site will be closed or divested, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were sufficient to recover the respective book values, Merck was required to accelerate depreciation of the site assets rather than record an impairment charge. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2013, 2012 and 2011 includes $259 million, $155 million and $72 million, respectively, of asset abandonment, shut-down and other related costs. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 13) and share-based compensation. Other activity also reflects net pretax (losses) gains resulting from sales of facilities and related assets of $(64) million in 2013 (primarily reflecting the loss on the transaction with Aspen discussed above), $28 million in 2012 and $10 million in 2011.
Adjustments to the recorded amounts were not material in any period.
The following table summarizes the charges and spending relating to restructuring activities by program:
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
        
2013 Restructuring Program       
Restructuring reserves January 1, 2013$—
 $—
 $—
 $—
Expenses866
 334
 41
 1,241
(Payments) receipts, net(121) —
 9
 (112)
Non-cash activity—
 (334) (27) (361)
Restructuring reserves December 31, 2013 (1)
$745
 $—
 $23
 $768
        
Merger Restructuring Program       
Restructuring reserves January 1, 2012$1,144
 $—
 $51
 $1,195
Expenses497
 220
 234
 951
(Payments) receipts, net(942) —
 (170) (1,112)
Non-cash activity—
 (220) (96) (316)
Restructuring reserves December 31, 2012699
 —
 19
 718
Expenses481
 241
 384
 1,106
(Payments) receipts, net(517) —
 (258) (775)
Non-cash activity62
 (241) (133) (312)
Restructuring reserves December 31, 2013 (1)
$725
 $—
 $12
 $737
        
2008 Restructuring Program       
Restructuring reserves January 1, 2012$126
 $—
 $—
 $126
Expenses(8) 15
 41
 48
(Payments) receipts, net(41) —
 (21) (62)
Non-cash activity—
 (15) (20) (35)
Restructuring reserves December 31, 201277
 —
 —
 77
Expenses34
 2
 18
 54
(Payments) receipts, net(49) —
 (11) (60)
Non-cash activity(62) (2) (7) (71)
Restructuring reserves December 31, 2013$—
 $—
 $—
 $—
(1)
The cash outlays associated with the 2013 Restructuring Program are expected to be substantially completed by the end of 2015. The cash outlays associated with the Merger Restructuring Program were substantially completed by the end of 2013 with the exception of certain actions, principally manufacturing-related, which are expected to be substantially completed by 2016.
Legacy Schering-Plough Program
Prior to the Merger, Schering-Plough commenced a Productivity Transformation Program which was designed to reduce and avoid costs and increase productivity. During 2011, the Company recorded $20 million of accelerated depreciation costs included in Materials and production costs for this program which was substantially complete at the end of 2011.

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4.3.    Acquisitions, Divestitures, Research Collaborations and License Agreements
The Company continues its strategy of establishingto acquire businesses and establish external alliances such as research collaborations and licensing agreements to complement its substantial internal research capabilities, including research collaborations, licensing preclinical and clinical compounds and technology platforms to drive both near- and long-term growth. 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.capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development,development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as well as expense reimbursements or payments topart of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the third party.historical financial results of the acquired entity are not significant when compared with the Company’s financial results.
2016 Transactions
In September 2013,July 2016, Merck and AstraZeneca announcedacquired Afferent Pharmaceuticals (Afferent), a worldwide out-licensing agreement for Merck’s oral small molecule inhibitorprivately held pharmaceutical company focused on the development of WEE1 kinase (MK-1775). MK-1775 is currently being evaluated in Phase 2a clinical studies in combination with standard-of-care therapiestherapeutic candidates targeting the P2X3 receptor for the treatment of patients with certain types of ovarian cancer. Under the terms of the agreement, AstraZeneca paid Merckcommon, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is a $50 million upfront fee, which the Company recorded as revenue. In addition, Merck will be eligible to receive future payments tied to development and regulatory milestones, plus sales-related payments and tiered royalties. AstraZeneca will be responsible for all future clinical development, manufacturing and marketing.
In April 2013, Merck and Pfizer Inc. (“Pfizer”) announced that they had entered into a worldwide (except Japan) collaboration agreement for the development and commercialization of Pfizer’s ertugliflozin, an investigational oral sodium glucose cotransporter (“SGLT2”) inhibitor being evaluated for the treatment of type 2 diabetes. The Company has initiated Phase 3 clinical trials for ertugliflozin with Pfizer. Under the terms of the agreement, Merck and Pfizer will collaborate on the clinical development and commercialization of ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and with Januvia (sitagliptin) tablets. Merck will continue to retain the rights to its existing portfolio of sitagliptin-containing products. Through the end of 2013, Merck recorded research and development expenses of $125 million for upfront and milestone payments made to Pfizer. Pfizer will be eligible for additional payments associated with the achievement of pre-specified future clinical, regulatory and commercial milestones. The companies will share potential revenues and certain costs 60% to Merck and 40% to Pfizer. Each party will have certain manufacturing and supply obligations. The Company and Pfizer each have the right to terminate the agreement due to a material, uncured breach by, or insolvency of, the other party, or in the event of a safety issue. Pfizer has the right to terminate the agreement upon 12 months notice at any time following the first anniversary of the first commercial sale of a collaboration product, but must assign all rights to ertugliflozin to Merck. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of ertugliflozin and certain payment obligations.
In February 2013, Merck and Supera Farma Laboratorios S.A. (“Supera”), a Brazilian pharmaceutical company co-owned by Cristália and Eurofarma, established the previously announced joint venture that markets, distributes and sells a portfolio of pharmaceutical and branded generic products from Merck, Cristália and Eurofarma in Brazil. Merck owns 51% of the joint venture, and Cristália and Eurofarma collectively own 49%. The transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values. This resulted in Merck recognizing intangible assets for currently marketed products of $89 million, IPR&D of $100 million, goodwill of $103 million, and deferred tax liabilities of $64 million. The Company also recorded increases to Noncontrolling interests and Other paid-in capital in the amounts of $112 million and $116 million, respectively. This transaction closed on February 1, 2013, and accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after that date. During the fourth quarter of 2013, as a result of changes in cash flows assumptions for certain compounds, the Company recorded $15 million of impairment charges related to the IPR&D recorded in the Supera transaction.
In October 2012, Merck and AiCuris entered into an exclusive licensing agreement which provides Merck with worldwide rights to develop and commercialize candidates in AiCuris’ novel portfolio of investigational medicines targeting human cytomegalovirus (“HCMV”), including letermovir (MK-8228), an oral, late-stage antiviral candidate being investigated for the treatment and prevention of HCMV infection in transplant recipients. AiCuris received an upfront payment of €110 million (approximately $140 million), which the Company recorded as research and development expense, and is eligible for milestone payments of up to €332.5 million based on successful achievement of development, regulatory and commercialization goals for HCMV candidates, including letermovir, an additional

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back-up candidate as well as other Phase 1 candidates designed to act via an alternate mechanism. In addition, AiCuris will be entitled to receive royalty payments reflecting the advanced stage of the clinical program on any potential products that result from the agreement. Merck will be responsible for all development activities and costs. The agreement may be terminated by either party in the event of a material uncured breach or insolvency. The agreement may be terminated by Merck at any time in the event that any of the compounds licensed from AiCuris develop an adverse safety profile or any material adverse issue arises related to the development, efficacy or dosing regimen of any of the compounds, and/or in the event that certain patents are invalid and/or unenforceable in certain jurisdictions. Merck (i) may terminate the agreement with respect to certain compounds after successful completion of the first proof of concept clinical trial or (ii) must terminate the agreement with respect to certain compounds if Merck fails to minimally invest in such compounds. In addition, Merck may terminate the agreement as a whole at any time upon six months prior written notice at any time after completion of the first Phase 3 clinical trial for a compound. AiCuris may terminate the agreement in the event that Merck challenges any AiCuris patent covering the compounds licensed from AiCuris. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of compounds and, in the case of termination for cause by Merck, certain royalty obligations.
In April 2012, the Company entered into an agreement with Endocyte, Inc. (“Endocyte”) to develop and commercialize Endocyte’s novel investigational therapeutic candidate vintafolide (MK-8109). Vintafolide is currentlyselective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 32b clinical trial for folate-receptor positive platinum-resistant ovarian cancer (PROCEED) andthe treatment of refractory, chronic cough as well as in a Phase 2 clinical trial in idiopathic pulmonary fibrosis with cough. Total consideration transferred of $510 million included cash paid for non-small cell lung cancer. Under the agreement, Merck gained worldwide rightsoutstanding Afferent shares of $487 million, as well as share-based compensation payments to developsettle equity awards attributable to precombination service and commercialize vintafolide. Endocyte receivedcash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a $120 million upfront payment, which the Company recorded as research and development expense, and is eligible for milestone paymentstotal of up to $880an additional $750 million based on the successful achievement of development, regulatory and commercialization goals for vintafolide for a total of six cancer indications. In addition, if vintafolide receives regulatory approval, Merck and Endocyte will share equally profits and losses in the United States. Endocyte will receive a royalty on sales of the product in the rest of the world. Endocyte has retained the right to co-promote vintafolide with Merck in the United States and Merck has the exclusive right to promote vintafolide in the rest of world. Endocyte will be responsible for the majority of funding and completion of the PROCEED trial. Merck will be responsible for all other development activities and development costs and have all decision rights for vintafolide. Merck has the right to terminate the agreement on 90 days notice. Merck and Endocyte both have the right to terminate the agreement due to the material breach or insolvency of the other party. Endocyte has the right to terminate the agreement in the event that Merck challenges an Endocyte patent right relating to vintafolide. Upon termination of the agreement, depending contingent upon the circumstances, the parties have varying rights and obligations with respect to the continuedattainment of certain clinical development and commercialization of vintafolidecommercial milestones for multiple indications and in the case of termination for cause by Merck, certain royalty obligations and U.S. profit and loss sharing.
In May 2011, Merck completed the acquisition of Inspire Pharmaceuticals, Inc. (“Inspire”), a specialty pharmaceutical company focused on developing and commercializing ophthalmic products. Under the terms of the merger agreement, Merck acquired all outstanding shares of common stock of Inspire at a price of $5.00 per share in cash for a total of approximately $420 million. Thecandidates, including MK-7264. This transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The determination ofCompany determined the fair value requires management to make significant estimates and assumptions. In connection withof the contingent consideration was $223 million at the acquisition substantially alldate utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment using an appropriate discount rate dependent on the nature and timing of the purchase pricemilestone payment. Merck recognized an intangible asset for in-process research and development (IPR&D) of $832 million, net deferred tax liabilities of $258 million, and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets acquired of $130 million was recorded as goodwill that was allocated to Inspire’s productthe Pharmaceutical segment and product rightis not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated based upon the asset’s probability-adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The net cash flows were then discounted to present value using a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.
Also in July 2016, Merck, through its wholly owned subsidiary Healthcare Services & Solutions, LLC, acquired a majority ownership interest in The StayWell Company LLC (StayWell), a portfolio company of Vestar Capital Partners (Vestar). StayWell is a health engagement company that helps its clients engage and educate people to improve health and business results. Under the terms of the transaction, Merck paid $150 million for a majority ownership interest. Additionally, Merck provided StayWell with a $150 million intercompany loan to pay down preexisting third-party debt. Merck has an option to buy, and Vestar has an option to require Merck to buy, some or all of Vestar’s remaining ownership interest at fair value beginning three years from the acquisition date. This transaction was accounted for as an acquisition of a business. Merck recognized intangible assets and relatedof $238 million, deferred tax liabilities of $84 million, other net liabilities of $5 million and noncontrolling interest of $124 million. The excess of the consideration transferred over the fair value of net assets acquired of $275 million was recorded as goodwill and is largely attributable to anticipated synergies expected to arise after the acquisition. The goodwill was allocated to the Healthcare Services segment and is not deductible for tax purposes. The intangible assets recognized primarily relate to customer relationships, which are being amortized over a deferred tax asset relating10-year useful life, and medical information and solutions content, which are being amortized over a five-year useful life.
Additionally, in July 2016, Merck announced it had executed an agreement to Inspire’s net operating loss carryforwards,acquire a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil. Vallée has an extensive portfolio of products spanning parasiticides, anti-infectives and goodwill. In November 2013, Merck sold the U.S. rights to certain ophthalmicvaccines that include products to Akorn, Inc., including AzaSite which was acquired from Inspire in this transaction.
In March 2011, the Company sold the Merck BioManufacturing Network, a provider of contract manufacturingfor livestock, horses, and development services for the biopharmaceutical industry and wholly owned by Merck, to Fujifilm Corporation (“Fujifilm”).companion animals. Under the terms of the agreement, FujifilmMerck will acquire approximately 93% of the shares of Vallée for approximately $400 million, based on exchange rates at the time of the announcement. This agreement is subject to regulatory review and certain closing conditions.

In June 2016, Merck and Moderna Therapeutics (Moderna) entered into a strategic collaboration and license agreement to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based personalized cancer vaccines in combination with Merck’s Keytruda. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of $200 million, which was recorded in Research and development expenses. Following human proof of concept studies, Merck has the right to elect to make an additional payment to Moderna. If Merck exercises this right, the two companies will then equally share cost and profits under a worldwide collaboration for the development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines in the United States. The agreement entails exclusivity around combinations with Keytruda. Moderna and Merck will each have the ability to combine mRNA-based personalized cancer vaccines with other (non-PD-1) agents.
In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a privately held UK-based drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition provides Merck with IOmet’s preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The transaction was accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of $150 million and future additional milestone payments of up to $250 million that are contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair value of the contingent consideration was $94 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment utilizing a discount rate of 10.5%. Merck recognized intangible assets for IPR&D of $155 million and net deferred tax assets of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $57 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. The assets’ probability-adjusted future net cash flows were then discounted to present value also using a discount rate of 10.5%. Actual cash flows are likely to be different than those assumed.

2015 Transactions
In December 2015, the Company divested its remaining ophthalmics portfolio in international markets to Mundipharma Ophthalmology Products Limited. Merck received consideration of approximately $170 million and recognized a gain of $147 million recorded in Other (income) expense, net in 2015.
In July 2015, Merck acquired cCAM Biotherapeutics Ltd. (cCAM), a privately held biopharmaceutical company focused on the discovery and development of novel cancer immunotherapies. Total purchase consideration in the transaction included an upfront payment of $96 million in cash and future additional payments of up to $510 million associated with the attainment of certain clinical development, regulatory and commercial milestones. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $180 million related to CM-24, a monoclonal antibody, as well as a liability for contingent consideration of $105 million, goodwill of $14 million and other net assets of $7 million. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue development of the pipeline program. Accordingly, the Company recorded an IPR&D impairment charge of $180 million related to CM-24 and reversed the related liability for contingent consideration, which had a fair value of $116 million at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in Research and development expenses in 2016.
Also in July 2015, Merck and Allergan plc (Allergan) entered into an agreement pursuant to which Allergan acquired the exclusive worldwide rights to MK-1602 and MK-8031, Merck’s investigational small molecule oral calcitonin gene-related peptide (CGRP) receptor antagonists, which are being developed for the treatment and prevention of migraine. Under the terms of the agreement, Allergan acquired these rights for upfront payments of $250 million, of which $125 million was paid in August 2015 upon closing of the transaction and the remaining $125 million was paid in April of 2016. The Company recorded a gain of $250 million within Other (income) expense, net in 2015 related to the transaction. Allergan is fully responsible for development of the CGRP programs, as well as manufacturing and commercialization upon approval and launch of the products. Under the agreement, Merck is entitled to receive potential development and commercial milestone payments and royalties at tiered double-digit rates based on commercialization

of the programs. During 2016, Merck recognized gains of $100 million within Other (income) expense, net resulting from payments by Allergan for the achievement of research and development milestones.
In February 2015, Merck and NGM Biopharmaceuticals, Inc. (NGM), a privately held biotechnology company, entered into a multi-year collaboration to research, discover, develop and commercialize novel biologic therapies across a wide range of therapeutic areas. Under the terms of the agreement, Merck made an upfront payment to NGM of $94 million, which was included in Research and development expenses, and purchased a 15% equity stake in NGM for $106 million. Merck committed up to $250 million to fund all of NGM’s efforts under the initial five-year term of the collaboration, with the potential for additional funding if certain conditions are met. Prior to Merck initiating a Phase 3 study for a licensed program, NGM may elect to either receive milestone and royalty payments or, in certain cases, to co-fund development and participate in a global cost and revenue share arrangement of up to 50%. The agreement also provides NGM with the option to participate in the co-promotion of any co-funded program in the United States. Merck has the option to extend the research agreement for two additional two-year terms.
In January 2015, Merck acquired Cubist Pharmaceuticals, Inc. (Cubist), a leader in the development of therapies to treat serious infections caused by a broad range of bacteria. Total consideration transferred of $8.3 billion included cash paid for outstanding Cubist shares of $7.8 billion, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Cubist. Share-based compensation payments to settle non-vested equity awards attributable to postcombination service were recognized as transaction expense in 2015. In addition, the Company assumed all of the equity interestsoutstanding convertible debt of Cubist, which had a fair value of approximately $1.9 billion at the acquisition date. Merck redeemed this debt in two Merck subsidiariesFebruary 2015. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Cubist is as follows:
Estimated fair value at January 21, 2015 
Cash and cash equivalents$733
Accounts receivable123
Inventories216
Other current assets55
Property, plant and equipment151
Identifiable intangible assets: 
Products and product rights (11 year weighted-average useful life)6,923
IPR&D50
Other noncurrent assets184
Current liabilities (1)
(233)
Deferred income tax liabilities(2,519)
Long-term debt(1,900)
Other noncurrent liabilities (1)
(122)
Total identifiable net assets3,661
Goodwill (2)
4,670
Consideration transferred$8,331
(1)
Included in current liabilities and other noncurrent liabilities is contingent consideration of $73 million and $50 million, respectively.
(2)
The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Pharmaceutical segment. The goodwill is not deductible for tax purposes.

The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach through which together owned allfair value is estimated based on market participant expectations of each asset’s discounted projected net cash flows. The Company’s estimates of projected net cash flows considered historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the extent and timing of potential new product introductions by the Company’s competitors; and the life of

each asset’s underlying patent. The net cash flows were then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product were then discounted to present value utilizing a discount rate of 8%. Actual cash flows are likely to be different than those assumed.
The Company recorded the fair value of incomplete research project surotomycin (MK-4261) which, at the time of acquisition, had not reached technological feasibility and had no alternative future use. During the second quarter of 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and an IPR&D impairment charge (see Note 7).
In connection with the Cubist acquisition, liabilities were recorded for potential future consideration that is contingent upon the achievement of future sales-based milestones. The fair value of contingent consideration liabilities was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and a risk-adjusted discount rate of 8% used to present value the probability-weighted cash flows. Changes in the inputs could result in a different fair value measurement.
This transaction closed on January 21, 2015; accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after that date. During 2015, the Company incurred $324 million of transaction costs directly related to the acquisition of Cubist including share-based compensation costs, severance costs, and legal and advisory fees which are reflected in Marketing and administrative expenses.
The following unaudited supplemental pro forma data presents consolidated information as if the acquisition of Cubist had been completed on January 1, 2014:
Years Ended December 312015 2014
Sales$39,584
 $43,437
Net income attributable to Merck & Co., Inc.4,640
 10,887
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders1.65
 3.76
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders1.63
 3.72
The unaudited supplemental pro forma data reflects the historical information of Merck and Cubist adjusted to include additional amortization expense based on the fair value of assets acquired, additional interest expense that would have been incurred on borrowings used to fund the acquisition, transaction costs associated with the acquisition, and the related tax effects of these adjustments. The pro forma data should not be considered indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2014, nor are they indicative of future results.
2014 Transactions
In December 2014, Merck acquired OncoEthix, a privately held biotechnology company specializing in oncology drug development. Total purchase consideration in the transaction included an upfront cash payment of $110 million and future additional milestone payments of up to $265 million that were contingent upon certain clinical and regulatory milestones being achieved. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $143 million related to MK-8628 (formerly OTX015), an investigational, novel oral BET (bromodomain) inhibitor, as well as a liability for contingent consideration of $43 million and other net assets of $10 million. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue the development of MK-8628. Accordingly, the Company recorded an IPR&D impairment charge of $143 million related to MK-8628 and reversed the related liability for contingent consideration, which had a fair value of $40 million at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in Research and development expenses in 2016.
On October 1, 2014, the Company completed the sale of its Merck BioManufacturing Network comprising facilities locatedConsumer Care (MCC) business to Bayer AG (Bayer) for $14.2 billion ($14.0 billion net of cash divested), less customary closing adjustments as well as certain contingent amounts held back that were payable upon the manufacturing site transfer in Research Triangle Park, North CarolinaCanada and Billingham, United Kingdom. As partregulatory approval

in Korea. Under the terms of the agreement, Bayer acquired Merck’s existing over-the-counter business, including the global trademark and prescription rights for Claritin and Afrin. The Company recognized a pretax gain from the sale of MCC of $11.2 billion recorded in Other (income) expense, net in 2014.
Also on October 1, 2014, the Company entered into a worldwide clinical development collaboration with Fujifilm, Merck committedBayer AG (Bayer) to purchase certainmarket and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat), which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies will equally share costs and profits from the collaboration and implement a joint development and manufacturing servicescommercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development at Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. In return for these broad collaboration rights, Merck made an upfront payment to Bayer of $1.0 billion with the potential for additional milestone payments of up to $1.1 billion upon the achievement of agreed-upon sales goals. Under the agreement, Bayer will lead commercialization of Adempas in the Americas, while Merck will lead commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. The Company determined that Merck’s payment to access Bayer’s compounds constituted an acquisition of an asset. Of the $1.0 billion consideration paid by Merck, $915 million of fair value related to Adempas and was capitalized as an intangible asset subject to amortization over its estimated useful life of 12 years, and the remaining $85 million of fair value related to the vericiguat compound in clinical development and was expensed within Research and development expenses. The fair values of Adempas and vericiguat were determined using an income approach. The probability-adjusted future net cash flows were then discounted to present value using a discount rate of 10.0% for Adempas and 10.5% for vericiguat. During the second quarter of 2016, the Company determined it was probable that, in 2017, Adempas sales would exceed the threshold triggering a $350 million milestone payment from FujifilmMerck to Bayer. Accordingly, in the second quarter of 2016, the Company recorded a $350 million liability and a corresponding intangible asset and also recognized $50 million of cumulative amortization expense within Materials and production costs. The remaining intangible asset at June 30, 2016 of $300 million is being amortized over its then-remaining estimated useful life of 10.5 years as supported by projected future cash flows, subject to impairment testing. The remaining potential future milestone payments of $775 million have not yet been accrued as they are not deemed by the Company to be probable at this time.
In August 2014, Merck completed the acquisition of Idenix Pharmaceuticals, Inc. (Idenix) for approximately $3.9 billion in cash ($3.7 billion net of cash acquired). Idenix was a three-year period followingbiopharmaceutical company engaged in the closingdiscovery and development of medicines for the treatment of human viral diseases, whose primary focus was on the development of next-generation oral antiviral therapeutics to treat hepatitis C virus (HCV) infection. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $3.2 billion related to MK-3682 (formerly IDX21437), uprifosbuvir, as well as net deferred tax liabilities of $951 million and other net liabilities of $12 million. Uprifosbuvir is a nucleotide prodrug in clinical development being evaluated for the treatment of HCV infection. The excess of the transaction.consideration transferred over the fair value of net assets acquired of $1.5 billion was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The asset’s probability-adjusted future net cash flows were then discounted to present value using a discount rate of 11.5%. During 2016, the Company recorded a $2.9 billion IPR&D impairment charge related to uprifosbuvir that resulted from recent changes to the product profile taken together with changes to the Company’s expectations for pricing and the market opportunity (see Note 7).
In May 2014, Merck entered into an agreement to sell certain ophthalmic products to Santen Pharmaceutical Co., Ltd. (Santen) in Japan and markets in Europe and Asia Pacific. The agreement provided for upfront payments from Santen and additional payments based on defined sales milestones. Santen will also purchase supply of ophthalmology products covered by the agreement for a two- to five-year period. The transaction resultedclosed in a gainmost markets on July 1, 2014 and in the remaining markets on October 1, 2014. The Company received $565 million of $127upfront payments from Santen, net of certain adjustments, and recognized gains of $480 million on the transactions in 2011 reflected2014 included in Other (income) expense, net.


87In March 2014, Merck sold its Sirna Therapeutics, Inc. (Sirna) subsidiary to Alnylam Pharmaceuticals, Inc. (Alnylam) for consideration of $25 million and 2,520,044 shares of Alnylam common stock. Merck is eligible to receive future payments associated with the achievement of certain regulatory and commercial milestones, as well as royalties on future sales. Merck recorded a gain of $204 million in
Other (income) expense, net in 2014 related to this transaction. The excess of Merck’s tax basis in its investment in Sirna over the value received resulted in an approximate $300 million tax benefit recorded in 2014.
TableIn January 2014, Merck sold the U.S. marketing rights to Saphris, an antipsychotic indicated for the treatment of Contentsschizophrenia and bipolar I disorder in adults to Forest Laboratories, Inc. (Forest). Under the terms of the agreement, Forest made upfront payments of $232 million, which were recorded in Sales in 2014, and will make additional payments to Merck based on defined sales milestones. In addition, as part of this transaction, Merck agreed to supply product to Forest (subsequently acquired by Allergan) until patent expiry.

Remicade/Simponi
In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (“Centocor”)(Centocor), a Johnson & Johnson (“J&J”)(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 has exclusive marketing rights to both products throughout Europe, Russia and Turkey. In December 2007, Schering-Plough and Centocor revised their distribution agreement regarding the development, commercialization and distribution of both Remicade lost market exclusivity in major European markets in February 2015 and the Company no longer has market exclusivity in any of its marketing territoriesSimponi, extending the Company’s rights. The Company continues to exclusivelyhave market Remicade to match the duration of the Company’s exclusive marketing rightsexclusivity for Simponi. In addition, Schering-Plough and Centocor agreed to share certain development costs relating to in all of its marketing territories. Simponi’s auto-injector delivery system. On October 6, 2009, the European Commission 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 European Union (the “EU”) following the receipt of pricing and reimbursement approval within the EU. All profits derived from Merck’s exclusive distribution of the two products in these countries are equally divided between Merck and J&J. In April 2011,
4.    Restructuring
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with an agreementthe integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations.
The Company recorded total pretax costs of $1.1 billion in 2016, $1.1 billion in 2015 and $2.0 billion in 2014 related to restructuring program activities. Since inception of the programs through December 31, 2016, Merck has recorded total pretax accumulated costs of approximately $12.6 billion and eliminated approximately 40,900 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company expects to substantially complete the remaining actions under these programs by the end of 2017 and incur approximately $700 million of additional pretax costs. The Company estimates that approximately two-thirds of the cumulative pretax costs will result in 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.
For segment reporting, restructuring charges are unallocated expenses.

The following table summarizes the charges related to restructuring program activities by type of cost:
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
Year Ended December 31, 2016       
Materials and production$—
 $77
 $104
 $181
Marketing and administrative—
 8
 87
 95
Research and development—
 142
 —
 142
Restructuring costs216
 —
 435
 651
 $216
 $227
 $626
 $1,069
Year Ended December 31, 2015       
Materials and production$—
 $78
 $283
 $361
Marketing and administrative—
 59
 19
 78
Research and development—
 37
 15
 52
Restructuring costs208
 —
 411
 619
 $208

$174

$728

$1,110
Year Ended December 31, 2014       
Materials and production$—
 $429
 $53
 $482
Marketing and administrative—
 198
 2
 200
Research and development—
 273
 10
 283
Restructuring costs674
 —
 339
 1,013
 $674

$900

$404

$1,978
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. Positions eliminated under restructuring program activities were approximately 2,625 in 2016, 3,770 in 2015 and 6,085 in 2014. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were sufficient to recover the respective book values, Merck recorded accelerated depreciation of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and J&Jmay continue to amend the agreement governing the distribution rightsbe adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2016, 2015 and 2014 includes Remicade$409 million, $550 million and Simponi$240 million,J&J received a one-time payment respectively, of asset abandonment, shut-down and other related costs. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 13) and share-based compensation. Other activity also reflects net pretax losses resulting from Mercksales of $500facilities and related assets of $151 million which the Company recorded as a charge to Other (income) expense, net in 2011.2016, $117 million in 2015 and $133 million in 2014.

The following table summarizes the charges and spending relating to restructuring program activities:
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
Restructuring reserves January 1, 2015$1,031
 $—
 $20
 $1,051
Expenses208
 174
 728
 1,110
(Payments) receipts, net(647) —
 (435) (1,082)
Non-cash activity—
 (174) (260) (434)
Restructuring reserves December 31, 2015592
 —
 53
 645
Expenses216
 227
 626
 1,069
(Payments) receipts, net(413) —
 (347) (760)
Non-cash activity—
 (227) (186) (413)
Restructuring reserves December 31, 2016 (1)
$395
 $—
 $146
 $541
(1)
The remaining cash outlays are expected to be substantially completed by the end of 2017.
5.    Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.

Foreign CurrencyInterest Rate Risk Management
The Company has established revenue hedging, balance sheet risk managementmay use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment hedging programsactivities that would put principal capital at risk.
In May 2016, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0 billion, 0.70% fixed-rate notes due 2016 to protect against volatility of future foreign currency cash flows and changes invariable rate debt. At December 31, 2016, the Company was a party to 26 pay-floating, receive-fixed interest rate swap contracts designated as fair value caused by volatilityhedges of fixed-rate notes in foreign exchange rates.
The objective ofwhich the revenue hedging program is to reducenotional amounts match the potential for longer-term unfavorable changes in foreign exchange rates to decrease the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales that are expected to occur over its planning cycle, typically no more than three years into the future. The Company will layer in hedges over time, increasing the portion of third-party and intercompany distributor entity sales hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales. The portion of sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The hedged anticipated sales are a specified component of a portfolio of similarly denominated foreign currency-based sales transactions, each of which responds to the hedged currency risk in the same manner. The Company manages its anticipated transaction exposure principally with purchased local currency put options, which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currencyamount of the hedged anticipated sales, totalfixed-rate notes as detailed in the table below.

($ in millions)2016
Debt InstrumentPar Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.30% notes due 20181,000
 4
 1,000
5.00% notes due 20191,250
 3
 550
1.85% notes due 20201,250
 5
 1,250
3.875% notes due 20211,150
 5
 1,150
2.40% notes due 20221,000
 4
 1,000
2.35% notes due 20221,250
 5
 1,250
The interest rate swap contracts are designated hedges of the fair value changes in the options’ cash flows offset the decline in the expected future U.S. dollar equivalent cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options’ value reducesnotes attributable to zero, but the Company benefits from the increase in the U.S. dollar equivalent value of the anticipated foreign currency cash flows.

88
Table of Contents

In connection with the Company’s revenue hedging program, a purchased collar option strategy may be utilized. With a purchased collar option strategy, the Company writes a local currency call option and purchases a local currency put option. As compared to a purchased put option strategy alone, a purchased collar strategy reduces the upfront costs associated with purchasing puts through the collection of premium by writing call options. If the U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value of the collar strategy reduces to zero and the Company benefits from the increase in the U.S. dollar equivalent value of its anticipated foreign currency cash flows, however this benefit would be capped at the strike level of the written call. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the written call option value of the collar strategy reduces to zero and the changes in the purchased put cash flows of the collar strategy would offset the declinebenchmark London Interbank Offered Rate (LIBOR) swap rate. The fair value changes in the expected future U.S. dollar equivalent cash flows ofnotes attributable to changes in the hedged foreign currency sales.
The Company may also utilize forward contractsLIBOR swap rate are recorded in its revenue hedging program. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the increase ininterest expense and offset by the fair value of the forward contracts offsets the decreasechanges in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the decrease in the fair value of the forward contracts offsets the increase in the value of the anticipated foreign currency cash flows.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or OCI, depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the effective portion of the unrealized gains or losses on these contracts is recorded in AOCI and reclassified into Sales when the hedged anticipated revenue is recognized. The hedge relationship is highly effective and hedge ineffectiveness has been de minimis. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period.swap contracts. The cash flows from both designated and non-designatedthese contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
The Company’s investment portfolio includes cash equivalents and short-term investments, the market values of which are not significantly affected by changes in interest rates. The market value of the Company’s medium- to long-term fixed-rate investments is modestly affected by changes in U.S. interest rates. Changes in medium- to long-term U.S. interest rates have a more significant impact on the market value of the Company’s fixed-rate borrowings, which generally have longer maturities. A sensitivity analysis to measure potential changes in the market value of Merck’s investments and debt from a change in interest rates indicated that a one percentage point increase in interest rates at December 31, 2016 and 2015 would have positively affected the net aggregate market value of these instruments by $1.3 billion and $1.2 billion, respectively. A one percentage point decrease at December 31, 2016 and 2015 would have negatively affected the net aggregate market value by $1.6 billion and $1.5 billion, respectively. The fair value of Merck’s debt was determined using pricing models reflecting one percentage point shifts in the appropriate yield curves. The fair values of Merck’s investments were determined using a combination of pricing and duration models.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities, primarily IPR&D, other intangible assets and contingent consideration, as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Application of the following accounting policies result in accounting estimates having the potential for the most significant impact on the financial statements.
Acquisitions
To determine whether acquisitions qualify as business combinations or asset acquisitions, the Company makes certain judgments, which include assessment of the inputs, processes, and outputs associated with the acquired set of activities. On October 1, 2016, the Company adopted new accounting guidance intended to clarify whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If the Company determines that substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business. To be considered a business, the assets in a transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, the Company would consider an acquisition or disposition a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs.
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions.

Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. The fair values of intangible assets, including acquired IPR&D, are determined utilizing information available near the acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a separate determination as to the then useful life of the asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset lives, can materially affect the Company’s results of operations.
If the Company determines the transaction will not be accounted for as an acquisition of a business, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense at the acquisition date.
The fair values of identifiable intangible assets related to currently marketed products and product rights are primarily determined by using an income approach through which fair value is estimated based on each asset’s discounted projected net cash flows. The Company’s estimates of market participant net cash flows consider historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the time and investment that will be required to develop products and technologies; the ability to obtain marketing and regulatory approvals; the ability to manufacture and commercialize the products; the extent and timing of potential new product introductions by the Company’s competitors; and the life of each asset’s underlying patent, if any. The net cash flows are then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to IPR&D are also determined using an income approach, through which fair value is estimated based on each asset’s probability-adjusted future net cash flows, which reflect the different stages of development of each product and the associated probability of successful completion. The net cash flows are then discounted to present value using an appropriate discount rate.
Revenue Recognition
Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically at time of delivery. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and

completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts for customers for which collection of accounts receivable is expected to be in excess of one year.
The provision for aggregate indirect customer discounts covers chargebacks and rebates. Chargebacks are discounts that occur when a contracted customer purchases directly through an intermediary wholesaler. The contracted customer generally purchases product at its contracted price plus a mark-up from the wholesaler. The wholesaler, in turn, charges the Company back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. The provision is based on expected payments, which are driven by patient usage and contract performance by the benefit provider customers.
The Company uses historical customer segment mix, adjusted for other known events, in order to estimate the expected provision. Amounts accrued for aggregate indirect customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers and other customers to the amounts accrued. Adjustments are recorded when trends or significant events indicate that a change in the estimated provision is appropriate.
The Company continually monitors its provision for aggregate indirect customer discounts. There were no material adjustments to estimates associated with the aggregate indirect customer discount provision in 2016, 2015 or 2014.
Summarized information about changes in the aggregate indirect customer discount accrual related to U.S. sales is as follows:
($ in millions)2016 2015
Balance January 1$2,798
 $2,154
Current provision9,831
 8,068
Adjustments to prior years(169) (77)
Payments(9,515) (7,347)
Balance December 31$2,945
 $2,798
Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates as current liabilities. The accrued balances relative to these provisions included in Accounts receivable and Accrued and other current liabilities were $196 million and $2.7 billion, respectively, at December 31, 2016 and were $145 million and $2.7 billion, respectively, at December 31, 2015.
The Company maintains a returns policy that allows its U.S. pharmaceutical customers to return product within a specified period prior to and subsequent to the expiration date (generally, three to six months before and 12 months after product expiration). The estimate of the provision for returns is based upon historical experience with actual returns. Additionally, the Company considers factors such as levels of inventory in the distribution channel, product dating and expiration period, whether products have been discontinued, entrance in the market of additional generic competition, changes in formularies or launch of over-the-counter products, among others. The product returns provision for U.S. pharmaceutical sales as a percentage of U.S. net pharmaceutical sales was 1.4% in 2016, 1.5% in 2015 and 1.7% in 2014.
Through its distribution programs with U.S. wholesalers, the Company encourages wholesalers to align purchases with underlying demand and maintain inventories below specified levels. The terms of the programs allow the wholesalers to earn fees upon providing visibility into their inventory levels, as well as by achieving certain performance parameters such as inventory management, customer service levels, reducing shortage claims and reducing product returns. Information provided through the wholesaler distribution programs includes items such as sales trends, inventory on-hand, on-order quantity and product returns.

Wholesalers generally provide only the above mentioned data to the Company, as there is no regulatory requirement to report lot level information to manufacturers, which is the level of information needed to determine the remaining shelf life and original sale date of inventory. Given current wholesaler inventory levels, which are generally less than a month, the Company believes that collection of order lot information across all wholesale customers would have limited use in estimating sales discounts and returns.
Inventories Produced in Preparation for Product Launches
The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory does not begin until the related product candidates are in Phase 3 clinical trials and are considered to have a high probability of regulatory approval. The Company monitors the status of each respective product within the regulatory approval process; however, the Company generally does not disclose specific timing for regulatory approval. If the Company is aware of any specific risks or contingencies other than the normal regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized. Expiry dates of the inventory are affected by the stage of completion. The Company manages the levels of inventory at each stage to optimize the shelf life of the inventory in relation to anticipated market demand in order to avoid product expiry issues. For inventories that are capitalized, anticipated future sales and shelf lives support the realization of the inventory value as the inventory shelf life is sufficient to meet initial product launch requirements. Inventories produced in preparation for product launches capitalized at December 31, 2016 and 2015 were $80 million and $63 million, respectively.
Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property and commercial litigation, as well as certain additional matters (see Note 10 to the consolidated financial statements.) The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable.
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, 2016 and 2015 of approximately $185 million and $245 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. When a legitimate claim for contribution is asserted, a liability is initially accrued based upon the estimated transaction costs to manage the site. Accruals are adjusted as site investigations, feasibility studies and related cost assessments of remedial techniques are completed, and as the extent to which other potentially responsible parties who may be jointly and severally liable can be expected to contribute is determined.
The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and takes an active role in identifying and accruing for these costs. In the past, Merck performed a worldwide survey to assess all sites for potential contamination resulting from past industrial activities. Where assessment indicated that physical investigation was warranted, such investigation was performed, providing a better evaluation of the need for remedial action. Where such need was identified, remedial action was then initiated. As

definitive information became available during the course of investigations and/or remedial efforts at each site, estimates were refined and accruals were established or adjusted accordingly. These estimates and related accruals continue to be refined annually.
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. Expenditures for remediation and environmental liabilities were $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these 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 $64 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
Share-Based Compensation
The Company expenses all share-based payment awards to employees, including grants of stock options, over the requisite service period based on the grant date fair value of the awards. The Company determines the fair value of certain share-based awards using the Black-Scholes option-pricing model which uses both historical and current market data to estimate the fair value. This method incorporates various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. Total pretax share-based compensation expense was $300 million in 2016, $299 million in 2015 and $278 million in 2014. At December 31, 2016, there was $443 million of total pretax unrecognized compensation expense related to nonvested stock option, restricted stock unit and performance share unit awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.
Pensions and Other Postretirement Benefit Plans
Net periodic benefit cost for pension and other postretirement benefit plans totaled $56 million in 2016, $253 million in 2015 and $169 million in 2014. Pension and other postretirement benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for plan benefit obligations and an expected rate of return on plan assets. The changes in net periodic benefit cost year over year for pension plans are largely attributable to changes in the discount rate affecting net amortization. The decrease in net periodic benefit cost for other postretirement benefit plans in 2016 as compared with 2015 is largely attributable to changes in retiree medical benefits approved by the Company in December 2015.
The Company reassesses its benefit plan assumptions on a regular basis. For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The discount rates for the Company’s U.S. pension and other postretirement benefit plans ranged from 3.40% to 4.30% at December 31, 2016, compared with a range of 3.80% to 4.80% at December 31, 2015.
The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term compound annualized returns of historical market data as well as actual returns on the Company’s plan assets. Using this reference information, the Company develops forward-looking return expectations for each asset category and a weighted-average expected long-term rate of return for a target portfolio allocated across these investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2017, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from 8.00% to 8.75%, as compared to a range of 7.30% to 8.75% in 2016.
The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other

postretirement benefit plans is allocated 40% to 60% in U.S. equities, 20% to 40% in international equities, 15% to 25% in fixed-income investments, and up to 5% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio, which approximates 13%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For non-U.S. pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.
Actuarial assumptions are based upon management’s best estimates and judgment. A reasonably possible change of plus (minus) 25 basis points in the discount rate assumption, with other assumptions held constant, would have an estimated $81 million favorable (unfavorable) impact on the Company’s current year net periodic benefit cost. A reasonably possible change of plus (minus) 25 basis points in the expected rate of return assumption, with other assumptions held constant, would have an estimated $46 million favorable (unfavorable) impact on Merck’s current year net periodic benefit cost. Required funding obligations for 2017 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. The preceding hypothetical changes in the discount rate and expected rate of return assumptions would not impact the Company’s funding requirements.
Net loss amounts, which reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions, are recorded as a component of AOCI. Expected returns for pension plans are based on a calculated market-related value of assets. Under this methodology, asset gains/losses resulting from actual returns that differ from the Company’s expected returns are recognized in the market-related value of assets ratably over a five-year period. Also, net loss amounts in AOCI in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees.
Restructuring Costs
Restructuring costs have been recorded in connection with restructuring programs designed to streamline the Company’s cost structure. As a result, the Company has made estimates and judgments regarding its future plans, including future termination benefits and other exit costs to be incurred when the restructuring actions take place. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. In connection with these actions, management also assesses the recoverability of long-lived assets employed in the business. In certain instances, asset lives have been shortened based on changes in the expected useful lives of the affected assets. Severance and other related costs are reflected within Restructuring costs. Asset-related charges are reflected within Materials and production costs, Marketing and administrative expenses and Research and development expenses depending upon the nature of the asset.
Impairments of Long-Lived Assets
The Company assesses changes in economic, regulatory and legal conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and other intangible assets.
The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows approach.
Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired and is assigned to reporting units. The Company tests its goodwill for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of the factors considered in the assessment include general macroeconomic conditions, conditions specific to the industry and market, cost factors which could have a significant effect on earnings or cash flows, the overall financial performance of the reporting unit, and whether there have been sustained declines in the Company’s share price. Additionally, the Company evaluates

the extent to which the fair value exceeded the carrying value of the reporting unit at the last date a valuation was performed. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Other acquired intangible assets (excluding IPR&D) are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives. When events or circumstances warrant a review, the Company will assess recoverability from future operations using pretax undiscounted cash flows derived from the lowest appropriate asset groupings. Impairments are recognized in operating results to the extent that the carrying value of the intangible asset exceeds its fair value, which is determined based on the net present value of estimated future cash flows.
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the project. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. For impairment testing purposes, the Company may combine separately recorded IPR&D intangible assets into one unit of account based on the relevant facts and circumstances. Generally, the Company will combine IPR&D intangible assets for testing purposes if they operate as a single asset and are essentially inseparable. If the fair value is less than the carrying amount, an impairment loss is recognized within the Company’s operating results.
The judgments made in evaluating impairment of long-lived intangibles can materially affect the Company’s results of operations.
Impairments of Investments
The Company reviews its investments for impairments based on the determination of whether the decline in market value of the investment below the carrying value is other-than-temporary. The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in OCI.
Taxes on Income
The Company’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the Company’s quarterly operating results. In the event that there is a significant unusual or one-time item recognized, or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item. The Company considers the resolution of prior year tax matters to be such items. Significant judgment is required in determining the Company’s tax provision and in evaluating its tax positions. The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period (see Note 15 to the consolidated financial statements.)

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which the Company has already recorded the tax benefit in the financial statements. The Company establishes valuation allowances for its deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred or expense for which the Company has already taken a deduction on the tax return, but has not yet recognized as expense in the financial statements. At December 31, 2016, foreign earnings of $63.1 billion have been retained indefinitely by subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued amended accounting guidance on revenue recognition that will be applied to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.
In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease).  Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.

In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company does not enter into derivativesanticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for tradinginterim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
Cautionary Factors That May Affect Future Results
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or speculative purposes.current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
The primary objectiveCompany does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors, including risk factors, described in the Company’s filings with the Securities and Exchange Commission, especially on this Form 10-K and Forms 10-Q and 8-K. In Item 1A. “Risk Factors” of this annual report on Form 10-K the Company discusses in more detail various important risk factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties.
Item 7a.Quantitative and Qualitative Disclosures about Market Risk.
The information required by this Item is incorporated by reference to the discussion under “Financial Instruments Market Risk Disclosures” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 8.Financial Statements and Supplementary Data.                
(a)Financial Statements
The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the balance sheet risk management programthree years in the period ended December 31, 2016, the notes to consolidated financial statements, and the report dated February 28, 2017 of PricewaterhouseCoopers LLP, independent registered public accounting firm, are as follows:
Consolidated Statement of Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
 2016 2015 2014
Sales$39,807
 $39,498
 $42,237
Costs, Expenses and Other     
Materials and production13,891
 14,934
 16,768
Marketing and administrative9,762
 10,313
 11,606
Research and development10,124
 6,704
 7,180
Restructuring costs651
 619
 1,013
Other (income) expense, net720
 1,527
 (11,613)
 35,148
 34,097
 24,954
Income Before Taxes4,659
 5,401
 17,283
Taxes on Income718
 942
 5,349
Net Income3,941
 4,459
 11,934
Less: Net Income Attributable to Noncontrolling Interests21
 17
 14
Net Income Attributable to Merck & Co., Inc.$3,920
 $4,442
 $11,920
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders$1.42
 $1.58
 $4.12
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders$1.41
 $1.56
 $4.07
Consolidated Statement of Comprehensive Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
 2016 2015 2014
Net Income Attributable to Merck & Co., Inc.$3,920
 $4,442
 $11,920
Other Comprehensive Income (Loss) Net of Taxes:     
Net unrealized (loss) gain on derivatives, net of reclassifications(66) (126) 398
Net unrealized (loss) gain on investments, net of reclassifications(44) (70) 57
Benefit plan net (loss) gain and prior service (cost) credit, net of amortization(799) 579
 (2,077)
Cumulative translation adjustment(169) (208) (504)
 (1,078) 175
 (2,126)
Comprehensive Income Attributable to Merck & Co., Inc.$2,842
 $4,617
 $9,794
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Balance Sheet
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions except per share amounts)
 2016 2015
Assets   
Current Assets   
Cash and cash equivalents$6,515
 $8,524
Short-term investments7,826
 4,903
Accounts receivable (net of allowance for doubtful accounts of $195 in 2016
and $165 in 2015) (excludes accounts receivable of $10 in 2015
classified in Other assets)
7,018
 6,484
Inventories (excludes inventories of $1,117 in 2016 and $1,569
in 2015 classified in Other assets - see Note 6)
4,866
 4,700
Other current assets4,389
 5,140
Total current assets30,614
 29,751
Investments11,416
 13,039
Property, Plant and Equipment (at cost)   
Land412
 490
Buildings11,439
 12,154
Machinery, equipment and office furnishings14,053
 14,261
Construction in progress1,871
 1,525
 27,775
 28,430
Less: accumulated depreciation15,749
 15,923
 12,026
 12,507
Goodwill18,162
 17,723
Other Intangibles, Net17,305
 22,602
Other Assets5,854
 6,055
 $95,377
 $101,677
Liabilities and Equity   
Current Liabilities   
Loans payable and current portion of long-term debt$568
 $2,583
Trade accounts payable2,807
 2,533
Accrued and other current liabilities10,274
 11,216
Income taxes payable2,239
 1,560
Dividends payable1,316
 1,309
Total current liabilities17,204
 19,201
Long-Term Debt24,274
 23,829
Deferred Income Taxes5,077
 6,535
Other Noncurrent Liabilities8,514
 7,345
Merck & Co., Inc. Stockholders’ Equity   
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2016 and 2015
1,788
 1,788
Other paid-in capital39,939
 40,222
Retained earnings44,133
 45,348
Accumulated other comprehensive loss(5,226) (4,148)
 80,634
 83,210
Less treasury stock, at cost:
828,372,200 shares in 2016 and 795,975,449 shares in 2015
40,546
 38,534
Total Merck & Co., Inc. stockholders’ equity40,088
 44,676
Noncontrolling Interests220
 91
Total equity40,308
 44,767
 $95,377
 $101,677
The accompanying notes are an integral part of this consolidated financial statement.

Consolidated Statement of Equity
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
 
Common
Stock
 
Other
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Non-
controlling
Interests
 Total
Balance January 1, 2014
$1,788
 $40,508
 $39,257
 $(2,197) $(29,591) $2,561
 $52,326
Net income attributable to Merck & Co., Inc.—
 —
 11,920
 —
 —
 —
 11,920
Other comprehensive loss, net of tax—
 —
 —
 (2,126) —
 —
 (2,126)
Cash dividends declared on common stock ($1.77 per share)—
 —
 (5,156) —
 —
 —
 (5,156)
Treasury stock shares purchased—
 —
 —
 —
 (7,703) —
 (7,703)
AstraZeneca option exercise—
 —
 —
 —
 —
 (2,400) (2,400)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 14
 14
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (77) (77)
Share-based compensation plans and other—
 (85) —
 —
 2,032
 46
 1,993
Balance December 31, 20141,788
 40,423
 46,021
 (4,323) (35,262) 144
 48,791
Net income attributable to Merck & Co., Inc.—
 —
 4,442
 —
 —
 —
 4,442
Other comprehensive income, net of tax—
 —
 —
 175
 —
 —
 175
Cash dividends declared on common stock ($1.81 per share)—
 —
 (5,115) —
 —
 —
 (5,115)
Treasury stock shares purchased—
 —
 —
 —
 (4,186) —
 (4,186)
Changes in noncontrolling ownership interests—
 (20) —
 —
 —
 (55) (75)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 17
 17
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (15) (15)
Share-based compensation plans and other—
 (181) —
 —
 914
 —
 733
Balance December 31, 20151,788
 40,222
 45,348
 (4,148) (38,534) 91
 44,767
Net income attributable to Merck & Co., Inc.—
 —
 3,920
 —
 —
 —
 3,920
Other comprehensive loss, net of tax—
 —
 —
 (1,078) —
 —
 (1,078)
Cash dividends declared on common stock ($1.85 per share)—
 —
 (5,135) —
 —
 —
 (5,135)
Treasury stock shares purchased—
 —
 —
 —
 (3,434) —
 (3,434)
Changes in noncontrolling ownership interests—
 —
 —
 —
 —
 124
 124
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 21
 21
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (16) (16)
Share-based compensation plans and other—
 (283) —
 —
 1,422
 —
 1,139
Balance December 31, 2016$1,788
 $39,939
 $44,133
 $(5,226) $(40,546) $220
 $40,308
The accompanying notes are an integral part of this consolidated financial statement.


Consolidated Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
 2016 2015 2014
Cash Flows from Operating Activities     
Net income$3,941
 $4,459
 $11,934
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization5,441
 6,375
 6,691
Intangible asset impairment charges3,948
 162
 1,222
Charge related to the settlement of worldwide Keytruda patent litigation
625
 —
 —
Foreign currency devaluation related to Venezuela—
 876
 —
Net charge related to the settlement of Vioxx shareholder class action litigation
—
 680
 —
Gain on divestiture of Merck Consumer Care business—
 —
 (11,209)
Gain on AstraZeneca option exercise—
 —
 (741)
Loss on extinguishment of debt—
 —
 628
Equity income from affiliates(86) (205) (257)
Dividends and distributions from equity method affiliates16
 50
 185
Deferred income taxes(1,521) (764) (2,600)
Share-based compensation300
 299
 278
Other313
 874
 34
Net changes in assets and liabilities:     
Accounts receivable(619) (480) (554)
Inventories206
 805
 79
Trade accounts payable278
 (37) 593
Accrued and other current liabilities(2,018) (8) 1,635
Income taxes payable124
 (266) (21)
Noncurrent liabilities(809) (277) 190
Other237
 (5) (98)
Net Cash Provided by Operating Activities10,376
 12,538
 7,989
Cash Flows from Investing Activities     
Capital expenditures(1,614) (1,283) (1,317)
Purchases of securities and other investments(15,651) (16,681) (24,944)
Proceeds from sales of securities and other investments14,353
 20,413
 15,114
Divestiture of Merck Consumer Care business, net of cash divested—
 —
 13,951
Dispositions of other businesses, net of cash divested—
 316
 1,169
Proceeds from AstraZeneca option exercise—
 —
 419
Acquisition of Cubist Pharmaceuticals, Inc., net of cash acquired—
 (7,598) —
Acquisition of Idenix Pharmaceuticals, Inc., net of cash acquired—
 —
 (3,700)
Acquisitions of other businesses, net of cash acquired(780) (146) (181)
Acquisition of Bayer AG collaboration rights—
 —
 (1,000)
Cash inflows from net investment hedges29
 139
 195
Other453
 82
 (80)
Net Cash Used in Investing Activities(3,210) (4,758) (374)
Cash Flows from Financing Activities     
Net change in short-term borrowings—
 (1,540) (460)
Payments on debt(2,386) (2,906) (6,617)
Proceeds from issuance of debt1,079
 7,938
 3,146
Purchases of treasury stock(3,434) (4,186) (7,703)
Dividends paid to stockholders(5,124) (5,117) (5,170)
Other dividends paid—
 —
 (77)
Proceeds from exercise of stock options939
 485
 1,560
Other(118) (61) 79
Net Cash Used in Financing Activities(9,044) (5,387) (15,242)
Effect of Exchange Rate Changes on Cash and Cash Equivalents(131) (1,310) (553)
Net (Decrease) Increase in Cash and Cash Equivalents(2,009) 1,083
 (8,180)
Cash and Cash Equivalents at Beginning of Year8,524
 7,441
 15,621
Cash and Cash Equivalents at End of Year$6,515
 $8,524
 $7,441
The accompanying notes are an integral part of this consolidated financial statement.

Notes to Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1.    Nature of Operations
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 and animal health products. The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable 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 mitigatedrug 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. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD (SPMSD) joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets that were previously part of the joint venture.
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. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products (see Note 3).
2.    Summary of Accounting Policies
Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as Noncontrolling interests in equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the Company and a third party that are under shared control, are carried on the equity basis.
Acquisitions — In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. If the Company determines the assets acquired do not meet the

definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded.
Foreign Currency Translation — The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency denominated net monetary assetstranslation account, which is included in Accumulated other comprehensive income (loss) (AOCI) and reflected as a separate component of foreignequity. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar ishas been determined to be the functional currency, from the effects of volatility innon-monetary foreign exchange. In these instances, Merck principally utilizes forward exchange contracts, which enable the Company to buycurrency assets and sell foreign currencies in the future at fixed exchangeliabilities are translated using historical rates, and economically offset the consequences of changes in foreign exchange from the monetary assets. Merck routinely enters into contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The Company will also minimize the effect of exchange onwhile monetary assets and liabilities by managing operating activities and net asset positionsare translated at the local level.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spotcurrent rates, in effect on the balance sheet date with the U.S. dollar effects of rate changes in spot rates reportedincluded in Other (income) expense, net.
Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.
Inventories — Inventories are valued at the lower of cost or market. The forward contractscost of a substantial majority of domestic pharmaceutical and vaccine inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product launches that are not designatedconsidered to have a high probability of regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process.
Investments — Investments in marketable debt and equity securities classified as hedges andavailable-for-sale are markedreported at fair value. Fair values of the Company’s investments are determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are considered temporary are reported net of tax in Other Comprehensive Income (OCI). For declines in the fair value of equity securities that are considered other-than-temporary, impairment losses are charged to market through Other (income) expense, net. Accordingly,The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in Other (income) expense, net, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in OCI. Realized gains and losses for both debt and equity securities are included in Other (income) expense, net.
Revenue Recognition — Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically upon delivery. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts if collection of accounts receivable is expected to be in excess of one year. Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates are recorded as current liabilities. The accrued balances relative to the provisions for chargebacks and rebates included in Accounts receivable and Accrued and other current liabilities were $196 million and $2.7 billion, respectively, at December 31, 2016 and $145 million and $2.7 billion, respectively, at December 31, 2015.

The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (SEC) Interpretation, Commission Guidance Regarding Accounting for Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile.
Depreciation — Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated tax methods are used. The estimated useful lives primarily range from 25 to 45 years for Buildings, and from 3 to 15 years for Machinery, equipment and office furnishings. Depreciation expense was $1.6 billion in 2016, $1.6 billion in 2015 and $2.5 billion in 2014.
Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion expenses of $2.1 billion, $2.1 billion and $2.3 billion in 2016, 2015 and 2014, respectively.
Software Capitalization — The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including external direct costs of material and services, and payroll costs for employees directly involved with the software development. Capitalized software costs are included in Property, plant and equipment and amortized beginning when the software project is substantially complete and the asset is ready for its intended use. Capitalized software costs associated with projects that are being amortized over 6 to 10 years (including the Company’s on-going multi-year implementation of an enterprise-wide resource planning system) were $452 million and $421 million, net of accumulated amortization at December 31, 2016 and 2015, respectively. All other capitalized software costs are being amortized over periods ranging from 3 to 5 years. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred.
Goodwill — Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Acquired Intangibles — Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives ranging from 2 to 20 years (see Note 7). The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.
Acquired In-Process Research and Development — Acquired in-process research and development (IPR&D) that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.

Contingent Consideration — Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
Research and Development — Research and development is expensed as incurred. Upfront and milestone payments due to third parties in connection with research and development collaborations prior to regulatory approval are expensed as incurred. Payments due to third parties upon or subsequent to regulatory approval are capitalized and amortized over the shorter of the remaining license or product patent life. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expenses when the specific milestone has been achieved. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment charges in all periods. In addition, research and development expenses include expense or income related to changes in the forward contracts help mitigateestimated fair value measurement of liabilities for contingent consideration.
Share-Based Compensation — The Company expenses all share-based payments to employees over the changes inrequisite service period based on the grant-date fair value of the remeasuredawards.
Restructuring Costs — The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee termination costs are accrued when the restructuring actions are probable and estimable. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.
Contingencies and Legal Defense Costs — The Company records accruals for contingencies and legal defense costs expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Taxes on Income — Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. The Company recognizes interest and penalties associated with uncertain tax positions as a component of Taxes on income in the Consolidated Statement of Income.
Use of Estimates — The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP) and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities, attributableprimarily IPR&D, other intangible assets and contingent consideration, as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and

goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Reclassifications — Certain reclassifications have been made to changes in foreign currency exchange rates, exceptprior year amounts to conform to the extentcurrent year presentation.
Recently Adopted Accounting Standards — In the first quarter of 2016, the Company adopted accounting guidance issued by the Financial Accounting Standards Board (FASB) in April of 2015, which requires debt issuance costs to be presented as a direct deduction from the carrying amount of that debt on the balance sheet as opposed to being presented as a deferred charge. Approximately $100 million of debt issuance costs were reclassified in the first quarter of 2016 as a result of the spot-forward differences. These differences are not significant dueadoption of the new standard. Prior period amounts have been recast to conform to the short-term naturenew presentation.
In the second quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB in March of 2016 intended to simplify the accounting and reporting for employee share-based payment transactions. Among other provisions, the new standard requires that excess tax benefits and deficiencies that arise upon vesting or exercise of share-based payments be recognized in the income statement (as opposed to previous guidance under which tax effects were recorded to Other paid-in-capital in certain instances). This aspect of the contracts,new guidance, which typically have average maturities at inceptionwas required to be adopted prospectively, resulted in the recognition of less than one year.

89$79 million of excess tax benefits in
Taxes on income
Table in 2016 arising from share-based payments. The new guidance also amended the presentation of Contents

certain share-based payment items in the statement of cash flows. Cash flows related to excess income tax benefits are now classified as an operating activity (formerly included as a financing activity). The Company also uses forward exchange contractselected to hedge its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedgesadopt this aspect of the net investment innew guidance prospectively. The standard also clarified that cash payments made to taxing authorities on the employees’ behalf for shares withheld should be presented as a foreign operation. The Company hedges a portionfinancing activity. This aspect of the net investment in certainguidance was adopted retrospectively; accordingly, the Company reclassified $117 million and $129 million of its foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within OCI, and remains in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The cash flowssuch payments from these contracts are reported as investingoperating activities to financing activities in the Consolidated Statement of Cash Flows.Flows for the years ended December 31, 2015 and 2014, respectively, to conform to the current presentation. The Company has elected to continue to estimate the impact of forfeitures when determining the amount of compensation cost to be recognized each period rather than account for them as they occur.
Foreign exchange riskIn the fourth quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB on January 5, 2017 intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business. To be considered a business, the assets in the transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Entities are permitted to apply the updated guidance to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. Accordingly, the Company elected to adopt this guidance prospectively as of October 1, 2016.
Recently Issued Accounting Standards — In May 2014, the FASB issued amended accounting guidance on revenue recognition that will be applied to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.

In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also managed throughsimplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease).  Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of foreign currencyan allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.


3.    Acquisitions, Divestitures, Research Collaborations and License Agreements
The Company continues to acquire businesses and establish external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.
2016 Transactions
In July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the P2X3 receptor for the treatment of common, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is a selective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 2b clinical trial for the treatment of refractory, chronic cough as well as in a Phase 2 clinical trial in idiopathic pulmonary fibrosis with cough. Total consideration transferred of $510 million included cash paid for outstanding Afferent shares of $487 million, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a total of up to an additional $750 million contingent upon the attainment of certain clinical development and commercial milestones for multiple indications and candidates, including MK-7264. This transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The Company determined the fair value of the contingent consideration was $223 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment using an appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized an intangible asset for in-process research and development (IPR&D) of $832 million, net deferred tax liabilities of $258 million, and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets acquired of $130 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated based upon the asset’s probability-adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The net cash flows were then discounted to present value using a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.
Also in July 2016, Merck, through its wholly owned subsidiary Healthcare Services & Solutions, LLC, acquired a majority ownership interest in The StayWell Company LLC (StayWell), a portfolio company of Vestar Capital Partners (Vestar). StayWell is a health engagement company that helps its clients engage and educate people to improve health and business results. Under the terms of the transaction, Merck paid $150 million for a majority ownership interest. Additionally, Merck provided StayWell with a $150 million intercompany loan to pay down preexisting third-party debt. Merck has an option to buy, and Vestar has an option to require Merck to buy, some or all of Vestar’s remaining ownership interest at fair value beginning three years from the acquisition date. This transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $238 million, deferred tax liabilities of $84 million, other net liabilities of $5 million and noncontrolling interest of $124 million. The excess of the consideration transferred over the fair value of net assets acquired of $275 million was recorded as goodwill and is largely attributable to anticipated synergies expected to arise after the acquisition. The goodwill was allocated to the Healthcare Services segment and is not deductible for tax purposes. The intangible assets recognized primarily relate to customer relationships, which are being amortized over a 10-year useful life, and medical information and solutions content, which are being amortized over a five-year useful life.
Additionally, in July 2016, Merck announced it had executed an agreement to acquire a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil. Vallée has an extensive portfolio of products spanning parasiticides, anti-infectives and vaccines that include products for livestock, horses, and companion animals. Under the terms of the agreement, Merck will acquire approximately 93% of the shares of Vallée for approximately $400 million, based on exchange rates at the time of the announcement. This agreement is subject to regulatory review and certain closing conditions.

In June 2016, Merck and Moderna Therapeutics (Moderna) entered into a strategic collaboration and license agreement to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based personalized cancer vaccines in combination with Merck’s Keytruda. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of $200 million, which was recorded in Research and development expenses. Following human proof of concept studies, Merck has the right to elect to make an additional payment to Moderna. If Merck exercises this right, the two companies will then equally share cost and profits under a worldwide collaboration for the development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines in the United States. The agreement entails exclusivity around combinations with Keytruda. Moderna and Merck will each have the ability to combine mRNA-based personalized cancer vaccines with other (non-PD-1) agents.
In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a privately held UK-based drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition provides Merck with IOmet’s preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The transaction was accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of $150 million and future additional milestone payments of up to $250 million that are contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair value of the contingent consideration was $94 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment utilizing a discount rate of 10.5%. Merck recognized intangible assets for IPR&D of $155 million and net deferred tax assets of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $57 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. The assets’ probability-adjusted future net cash flows were then discounted to present value also using a discount rate of 10.5%. Actual cash flows are likely to be different than those assumed.

2015 Transactions
In December 2015, the Company divested its remaining ophthalmics portfolio in international markets to Mundipharma Ophthalmology Products Limited. Merck received consideration of approximately $170 million and recognized a gain of $147 million recorded in Other (income) expense, net in 2015.
In July 2015, Merck acquired cCAM Biotherapeutics Ltd. (cCAM), a privately held biopharmaceutical company focused on the discovery and development of novel cancer immunotherapies. Total purchase consideration in the transaction included an upfront payment of $96 million in cash and future additional payments of up to $510 million associated with the attainment of certain clinical development, regulatory and commercial milestones. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $180 million related to CM-24, a monoclonal antibody, as well as a liability for contingent consideration of $105 million, goodwill of $14 million and other net assets of $7 million. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue development of the pipeline program. Accordingly, the Company recorded an IPR&D impairment charge of $180 million related to CM-24 and reversed the related liability for contingent consideration, which had a fair value of $116 million at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in Research and development expenses in 2016.
Also in July 2015, Merck and Allergan plc (Allergan) entered into an agreement pursuant to which Allergan acquired the exclusive worldwide rights to MK-1602 and MK-8031, Merck’s investigational small molecule oral calcitonin gene-related peptide (CGRP) receptor antagonists, which are being developed for the treatment and prevention of migraine. Under the terms of the agreement, Allergan acquired these rights for upfront payments of $250 million, of which $125 million was paid in August 2015 upon closing of the transaction and the remaining $125 million was paid in April of 2016. The Company recorded a gain of $250 million within Other (income) expense, net in 2015 related to the transaction. Allergan is fully responsible for development of the CGRP programs, as well as manufacturing and commercialization upon approval and launch of the products. Under the agreement, Merck is entitled to receive potential development and commercial milestone payments and royalties at tiered double-digit rates based on commercialization

of the programs. During 2016, Merck recognized gains of $100 million within Other (income) expense, net resulting from payments by Allergan for the achievement of research and development milestones.
In February 2015, Merck and NGM Biopharmaceuticals, Inc. (NGM), a privately held biotechnology company, entered into a multi-year collaboration to research, discover, develop and commercialize novel biologic therapies across a wide range of therapeutic areas. Under the terms of the agreement, Merck made an upfront payment to NGM of $94 million, which was included in Research and development expenses, and purchased a 15% equity stake in NGM for $106 million. Merck committed up to $250 million to fund all of NGM’s efforts under the initial five-year term of the collaboration, with the potential for additional funding if certain conditions are met. Prior to Merck initiating a Phase 3 study for a licensed program, NGM may elect to either receive milestone and royalty payments or, in certain cases, to co-fund development and participate in a global cost and revenue share arrangement of up to 50%. The agreement also provides NGM with the option to participate in the co-promotion of any co-funded program in the United States. Merck has the option to extend the research agreement for two additional two-year terms.
In January 2015, Merck acquired Cubist Pharmaceuticals, Inc. (Cubist), a leader in the development of therapies to treat serious infections caused by a broad range of bacteria. Total consideration transferred of $8.3 billion included cash paid for outstanding Cubist shares of $7.8 billion, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Cubist. Share-based compensation payments to settle non-vested equity awards attributable to postcombination service were recognized as transaction expense in 2015. In addition, the Company assumed all of the outstanding convertible debt of Cubist, which had a fair value of approximately $1.9 billion at the acquisition date. Merck redeemed this debt in February 2015. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Cubist is as follows:
Estimated fair value at January 21, 2015 
Cash and cash equivalents$733
Accounts receivable123
Inventories216
Other current assets55
Property, plant and equipment151
Identifiable intangible assets: 
Products and product rights (11 year weighted-average useful life)6,923
IPR&D50
Other noncurrent assets184
Current liabilities (1)
(233)
Deferred income tax liabilities(2,519)
Long-term debt(1,900)
Other noncurrent liabilities (1)
(122)
Total identifiable net assets3,661
Goodwill (2)
4,670
Consideration transferred$8,331
(1)
Included in current liabilities and other noncurrent liabilities is contingent consideration of $73 million and $50 million, respectively.
(2)
The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Pharmaceutical segment. The goodwill is not deductible for tax purposes.

The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach through which fair value is estimated based on market participant expectations of each asset’s discounted projected net cash flows. The Company’s senior unsecured euro-denominated notes have been designatedestimates of projected net cash flows considered historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the extent and timing of potential new product introductions by the Company’s competitors; and the life of

each asset’s underlying patent. The net cash flows were then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as and are effectivewell as economic hedgesthe risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product were then discounted to present value utilizing a discount rate of 8%. Actual cash flows are likely to be different than those assumed.
The Company recorded the fair value of incomplete research project surotomycin (MK-4261) which, at the time of acquisition, had not reached technological feasibility and had no alternative future use. During the second quarter of 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and an IPR&D impairment charge (see Note 7).
In connection with the Cubist acquisition, liabilities were recorded for potential future consideration that is contingent upon the achievement of future sales-based milestones. The fair value of contingent consideration liabilities was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and a risk-adjusted discount rate of 8% used to present value the probability-weighted cash flows. Changes in the inputs could result in a different fair value measurement.
This transaction closed on January 21, 2015; accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after that date. During 2015, the Company incurred $324 million of transaction costs directly related to the acquisition of Cubist including share-based compensation costs, severance costs, and legal and advisory fees which are reflected in Marketing and administrative expenses.
The following unaudited supplemental pro forma data presents consolidated information as if the acquisition of Cubist had been completed on January 1, 2014:
Years Ended December 312015 2014
Sales$39,584
 $43,437
Net income attributable to Merck & Co., Inc.4,640
 10,887
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders1.65
 3.76
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders1.63
 3.72
The unaudited supplemental pro forma data reflects the historical information of Merck and Cubist adjusted to include additional amortization expense based on the fair value of assets acquired, additional interest expense that would have been incurred on borrowings used to fund the acquisition, transaction costs associated with the acquisition, and the related tax effects of these adjustments. The pro forma data should not be considered indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2014, nor are they indicative of future results.
2014 Transactions
In December 2014, Merck acquired OncoEthix, a privately held biotechnology company specializing in oncology drug development. Total purchase consideration in the transaction included an upfront cash payment of $110 million and future additional milestone payments of up to $265 million that were contingent upon certain clinical and regulatory milestones being achieved. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $143 million related to MK-8628 (formerly OTX015), an investigational, novel oral BET (bromodomain) inhibitor, as well as a liability for contingent consideration of $43 million and other net assets of $10 million. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue the development of MK-8628. Accordingly, the Company recorded an IPR&D impairment charge of $143 million related to MK-8628 and reversed the related liability for contingent consideration, which had a fair value of $40 million at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in Research and development expenses in 2016.
On October 1, 2014, the Company completed the sale of its Merck Consumer Care (MCC) business to Bayer AG (Bayer) for $14.2 billion ($14.0 billion net of cash divested), less customary closing adjustments as well as certain contingent amounts held back that were payable upon the manufacturing site transfer in Canada and regulatory approval

in Korea. Under the terms of the agreement, Bayer acquired Merck’s existing over-the-counter business, including the global trademark and prescription rights for Claritin and Afrin. The Company recognized a pretax gain from the sale of MCC of $11.2 billion recorded in Other (income) expense, net in 2014.
Also on October 1, 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat), which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies will equally share costs and profits from the collaboration and implement a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development at Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. In return for these broad collaboration rights, Merck made an upfront payment to Bayer of $1.0 billion with the potential for additional milestone payments of up to $1.1 billion upon the achievement of agreed-upon sales goals. Under the agreement, Bayer will lead commercialization of Adempas in the Americas, while Merck will lead commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. The Company determined that Merck’s payment to access Bayer’s compounds constituted an acquisition of an asset. Of the $1.0 billion consideration paid by Merck, $915 million of fair value related to Adempas and was capitalized as an intangible asset subject to amortization over its estimated useful life of 12 years, and the remaining $85 million of fair value related to the vericiguat compound in clinical development and was expensed within Research and development expenses. The fair values of Adempas and vericiguat were determined using an income approach. The probability-adjusted future net cash flows were then discounted to present value using a discount rate of 10.0% for Adempas and 10.5% for vericiguat. During the second quarter of 2016, the Company determined it was probable that, in 2017, Adempas sales would exceed the threshold triggering a $350 million milestone payment from Merck to Bayer. Accordingly, in the second quarter of 2016, the Company recorded a $350 million liability and a corresponding intangible asset and also recognized $50 million of cumulative amortization expense within Materials and production costs. The remaining intangible asset at June 30, 2016 of $300 million is being amortized over its then-remaining estimated useful life of 10.5 years as supported by projected future cash flows, subject to impairment testing. The remaining potential future milestone payments of $775 million have not yet been accrued as they are not deemed by the Company to be probable at this time.
In August 2014, Merck completed the acquisition of Idenix Pharmaceuticals, Inc. (Idenix) for approximately $3.9 billion in cash ($3.7 billion net of cash acquired). Idenix was a biopharmaceutical company engaged in the discovery and development of medicines for the treatment of human viral diseases, whose primary focus was on the development of next-generation oral antiviral therapeutics to treat hepatitis C virus (HCV) infection. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $3.2 billion related to MK-3682 (formerly IDX21437), uprifosbuvir, as well as net deferred tax liabilities of $951 million and other net liabilities of $12 million. Uprifosbuvir is a nucleotide prodrug in clinical development being evaluated for the treatment of HCV infection. The excess of the consideration transferred over the fair value of net assets acquired of $1.5 billion was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The asset’s probability-adjusted future net cash flows were then discounted to present value using a discount rate of 11.5%. During 2016, the Company recorded a $2.9 billion IPR&D impairment charge related to uprifosbuvir that resulted from recent changes to the product profile taken together with changes to the Company’s expectations for pricing and the market opportunity (see Note 7).
In May 2014, Merck entered into an agreement to sell certain ophthalmic products to Santen Pharmaceutical Co., Ltd. (Santen) in Japan and markets in Europe and Asia Pacific. The agreement provided for upfront payments from Santen and additional payments based on defined sales milestones. Santen will also purchase supply of ophthalmology products covered by the agreement for a two- to five-year period. The transaction closed in most markets on July 1, 2014 and in the remaining markets on October 1, 2014. The Company received $565 million of upfront payments from Santen, net of certain adjustments, and recognized gains of $480 million on the transactions in 2014 included in Other (income) expense, net.

In March 2014, Merck sold its Sirna Therapeutics, Inc. (Sirna) subsidiary to Alnylam Pharmaceuticals, Inc. (Alnylam) for consideration of $25 million and 2,520,044 shares of Alnylam common stock. Merck is eligible to receive future payments associated with the achievement of certain regulatory and commercial milestones, as well as royalties on future sales. Merck recorded a gain of $204 million in Other (income) expense, net in 2014 related to this transaction. The excess of Merck’s tax basis in its investment in Sirna over the value received resulted in an approximate $300 million tax benefit recorded in 2014.
In January 2014, Merck sold the U.S. marketing rights to Saphris, an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults to Forest Laboratories, Inc. (Forest). Under the terms of the agreement, Forest made upfront payments of $232 million, which were recorded in Sales in 2014, and will make additional payments to Merck based on defined sales milestones. In addition, as part of this transaction, Merck agreed to supply product to Forest (subsequently acquired by Allergan) until patent expiry.
Remicade/Simponi
In 1998, a foreign operation. Accordingly, foreign currency transaction gains or losses duesubsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (Centocor), a Johnson & Johnson (J&J) company, to spot rate fluctuations onmarket Remicade, which is prescribed for the euro-denominated debt instruments are includedtreatment 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 has marketing rights to both products throughout Europe, Russia and Turkey. Remicade lost market exclusivity in foreign currency translation adjustment within OCImajor European markets in February 2015 and the Company no longer has market exclusivity in any of its marketing territories. IncludedThe Company continues to have market exclusivity for Simponi in all of its marketing territories. All profits derived from Merck’s distribution of the two products in these countries are equally divided between Merck and J&J.
4.    Restructuring
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations.
The Company recorded total pretax costs of $1.1 billion in 2016, $1.1 billion in 2015 and $2.0 billion in 2014 related to restructuring program activities. Since inception of the programs through December 31, 2016, Merck has recorded total pretax accumulated costs of approximately $12.6 billion and eliminated approximately 40,900 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company expects to substantially complete the remaining actions under these programs by the end of 2017 and incur approximately $700 million of additional pretax costs. The Company estimates that approximately two-thirds of the cumulative translation adjustmentpretax costs will result in 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.
For segment reporting, restructuring charges are unallocated expenses.

The following table summarizes the charges related to restructuring program activities by type of cost:
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
Year Ended December 31, 2016       
Materials and production$—
 $77
 $104
 $181
Marketing and administrative—
 8
 87
 95
Research and development—
 142
 —
 142
Restructuring costs216
 —
 435
 651
 $216
 $227
 $626
 $1,069
Year Ended December 31, 2015       
Materials and production$—
 $78
 $283
 $361
Marketing and administrative—
 59
 19
 78
Research and development—
 37
 15
 52
Restructuring costs208
 —
 411
 619
 $208

$174

$728

$1,110
Year Ended December 31, 2014       
Materials and production$—
 $429
 $53
 $482
Marketing and administrative—
 198
 2
 200
Research and development—
 273
 10
 283
Restructuring costs674
 —
 339
 1,013
 $674

$900

$404

$1,978
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. Positions eliminated under restructuring program activities were approximately 2,625 in 2016, 3,770 in 2015 and 6,085 in 2014. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were sufficient to recover the respective book values, Merck recorded accelerated depreciation of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2016, 2015 and 2014 includes $409 million, $550 million and $240 million, respectively, of asset abandonment, shut-down and other related costs. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 13) and share-based compensation. Other activity also reflects net pretax losses resulting from sales of facilities and related assets of $84151 million in 20132016, $117 million in 2015 and $31133 million in 2012 and pretax gains of $6 million in 2011 from the euro-denominated notes.2014.

The following table summarizes the charges and spending relating to restructuring program activities:
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
Restructuring reserves January 1, 2015$1,031
 $—
 $20
 $1,051
Expenses208
 174
 728
 1,110
(Payments) receipts, net(647) —
 (435) (1,082)
Non-cash activity—
 (174) (260) (434)
Restructuring reserves December 31, 2015592
 —
 53
 645
Expenses216
 227
 626
 1,069
(Payments) receipts, net(413) —
 (347) (760)
Non-cash activity—
 (227) (186) (413)
Restructuring reserves December 31, 2016 (1)
$395
 $—
 $146
 $541
(1)
The remaining cash outlays are expected to be substantially completed by the end of 2017.
5.    Financial Instruments
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.
During 2013,In May 2016, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0 billion, 0.70% fixed-rate notes due 2016 to variable rate debt. At December 31, 2016, the Company entered intowas a party to 1526 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes. There are four swaps maturingnotes as detailed in 2016 with notional amounts of $250 million each that effectively convert the Company’s 0.70% fixed-rate notes due in 2016 to floating-rate instruments; table below.four swaps maturing in 2018 with notional amounts of $250 million each that effectively convert the Company’s 1.30% fixed-rate notes due in 2018 to floating-rate instruments; four swaps maturing in 2017, one with a notional amount of $200 million, two with notional amounts of $250 million each, and one with a notional amount of $300 million, that effectively convert the Company’s 6.00% fixed-rate notes due in 2017 to floating-rate instruments; and three swaps maturing in 2019, two with notional amounts of $200 million each, and one with a notional amount of $150 million, that effectively convert a portion of the Company’s 5.00% notes due in 2019 to floating rate instruments.

($ in millions)2016
Debt InstrumentPar Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.30% notes due 20181,000
 4
 1,000
5.00% notes due 20191,250
 3
 550
1.85% notes due 20201,250
 5
 1,250
3.875% notes due 20211,150
 5
 1,150
2.40% notes due 20221,000
 4
 1,000
2.35% notes due 20221,250
 5
 1,250
The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (“LIBOR”)(LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate are recorded in interest expense and offset by the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
The Company’s investment portfolio includes cash equivalents and short-term investments, the market values of which are not significantly affected by changes in interest rates. The market value of the Company’s medium- to long-term fixed-rate investments is modestly affected by changes in U.S. interest rates. Changes in medium- to long-term U.S. interest rates have a more significant impact on the market value of the Company’s fixed-rate borrowings, which generally have longer maturities. A sensitivity analysis to measure potential changes in the market value of Merck’s investments and debt from a change in interest rates indicated that a one percentage point increase in interest rates at December 31, 2016 and 2015 would have positively affected the net aggregate market value of these instruments by $1.3 billion and $1.2 billion, respectively. A one percentage point decrease at December 31, 2016 and 2015 would have negatively affected the net aggregate market value by $1.6 billion and $1.5 billion, respectively. The fair value of Merck’s debt was determined using pricing models reflecting one percentage point shifts in the appropriate yield curves. The fair values of Merck’s investments were determined using a combination of pricing and duration models.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in conformity with GAAP and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities, primarily IPR&D, other intangible assets and contingent consideration, as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Application of the following accounting policies result in accounting estimates having the potential for the most significant impact on the financial statements.
Acquisitions
To determine whether acquisitions qualify as business combinations or asset acquisitions, the Company makes certain judgments, which include assessment of the inputs, processes, and outputs associated with the acquired set of activities. On October 1, 2016, the Company adopted new accounting guidance intended to clarify whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If the Company determines that substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business. To be considered a business, the assets in a transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, the Company would consider an acquisition or disposition a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs.
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions.

Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. The fair values of intangible assets, including acquired IPR&D, are determined utilizing information available near the acquisition date based on expectations and assumptions that are deemed reasonable by management. Given the considerable judgment involved in determining fair values, the Company typically obtains assistance from third-party valuation specialists for significant items. Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a separate determination as to the then useful life of the asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as asset lives, can materially affect the Company’s results of operations.
If the Company determines the transaction will not be accounted for as an acquisition of a business, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense at the acquisition date.
The fair values of identifiable intangible assets related to currently marketed products and product rights are primarily determined by using an income approach through which fair value is estimated based on each asset’s discounted projected net cash flows. The Company’s estimates of market participant net cash flows consider historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the time and investment that will be required to develop products and technologies; the ability to obtain marketing and regulatory approvals; the ability to manufacture and commercialize the products; the extent and timing of potential new product introductions by the Company’s competitors; and the life of each asset’s underlying patent, if any. The net cash flows are then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product are then discounted to present value utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to IPR&D are also determined using an income approach, through which fair value is estimated based on each asset’s probability-adjusted future net cash flows, which reflect the different stages of development of each product and the associated probability of successful completion. The net cash flows are then discounted to present value using an appropriate discount rate.
Revenue Recognition
Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically at time of delivery. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and

completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts for customers for which collection of accounts receivable is expected to be in excess of one year.
The provision for aggregate indirect customer discounts covers chargebacks and rebates. Chargebacks are discounts that occur when a contracted customer purchases directly through an intermediary wholesaler. The contracted customer generally purchases product at its contracted price plus a mark-up from the wholesaler. The wholesaler, in turn, charges the Company back for the difference between the price initially paid by the wholesaler and the contract price paid to the wholesaler by the customer. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to contracted customers, as well as estimated wholesaler inventory levels. Rebates are amounts owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. The provision is based on expected payments, which are driven by patient usage and contract performance by the benefit provider customers.
The Company uses historical customer segment mix, adjusted for other known events, in order to estimate the expected provision. Amounts accrued for aggregate indirect customer discounts are evaluated on a quarterly basis through comparison of information provided by the wholesalers, health maintenance organizations, pharmacy benefit managers and other customers to the amounts accrued. Adjustments are recorded when trends or significant events indicate that a change in the estimated provision is appropriate.
The Company continually monitors its provision for aggregate indirect customer discounts. There were no interest rate swaps outstandingmaterial adjustments to estimates associated with the aggregate indirect customer discount provision in 2016, 2015 or 2014.
Summarized information about changes in the aggregate indirect customer discount accrual related to U.S. sales is as follows:
($ in millions)2016 2015
Balance January 1$2,798
 $2,154
Current provision9,831
 8,068
Adjustments to prior years(169) (77)
Payments(9,515) (7,347)
Balance December 31$2,945
 $2,798
Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates as current liabilities. The accrued balances relative to these provisions included in Accounts receivable and Accrued and other current liabilities were $196 million and $2.7 billion, respectively, at December 31, 2016 and were $145 million and $2.7 billion, respectively, at December 31, 2015.
The Company maintains a returns policy that allows its U.S. pharmaceutical customers to return product within a specified period prior to and subsequent to the expiration date (generally, three to six months before and 12 months after product expiration). The estimate of the provision for returns is based upon historical experience with actual returns. Additionally, the Company considers factors such as levels of inventory in the distribution channel, product dating and expiration period, whether products have been discontinued, entrance in the market of additional generic competition, changes in formularies or launch of over-the-counter products, among others. The product returns provision for U.S. pharmaceutical sales as a percentage of U.S. net pharmaceutical sales was 1.4% in 2016, 1.5% in 2015 and 1.7% in 2014.
Through its distribution programs with U.S. wholesalers, the Company encourages wholesalers to align purchases with underlying demand and maintain inventories below specified levels. The terms of the programs allow the wholesalers to earn fees upon providing visibility into their inventory levels, as well as by achieving certain performance parameters such as inventory management, customer service levels, reducing shortage claims and reducing product returns. Information provided through the wholesaler distribution programs includes items such as sales trends, inventory on-hand, on-order quantity and product returns.

Wholesalers generally provide only the above mentioned data to the Company, as there is no regulatory requirement to report lot level information to manufacturers, which is the level of information needed to determine the remaining shelf life and original sale date of inventory. Given current wholesaler inventory levels, which are generally less than a month, the Company believes that collection of order lot information across all wholesale customers would have limited use in estimating sales discounts and returns.
Inventories Produced in Preparation for Product Launches
The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory does not begin until the related product candidates are in Phase 3 clinical trials and are considered to have a high probability of regulatory approval. The Company monitors the status of each respective product within the regulatory approval process; however, the Company generally does not disclose specific timing for regulatory approval. If the Company is aware of any specific risks or contingencies other than the normal regulatory approval process or if there are any specific issues identified during the research process relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized. Expiry dates of the inventory are affected by the stage of completion. The Company manages the levels of inventory at each stage to optimize the shelf life of the inventory in relation to anticipated market demand in order to avoid product expiry issues. For inventories that are capitalized, anticipated future sales and shelf lives support the realization of the inventory value as the inventory shelf life is sufficient to meet initial product launch requirements. Inventories produced in preparation for product launches capitalized at December 31, 2016 and 2015 were $80 million and $63 million, respectively.
Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property and commercial litigation, as well as certain additional matters (see Note 10 to the consolidated financial statements.) The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable.
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, 2012. During 2011,2016 and 2015 of approximately $185 million and $245 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. When a legitimate claim for contribution is asserted, a liability is initially accrued based upon the estimated transaction costs to manage the site. Accruals are adjusted as site investigations, feasibility studies and related cost assessments of remedial techniques are completed, and as the extent to which other potentially responsible parties who may be jointly and severally liable can be expected to contribute is determined.
The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites and takes an active role in identifying and accruing for these costs. In the past, Merck performed a worldwide survey to assess all sites for potential contamination resulting from past industrial activities. Where assessment indicated that physical investigation was warranted, such investigation was performed, providing a better evaluation of the need for remedial action. Where such need was identified, remedial action was then initiated. As

definitive information became available during the course of investigations and/or remedial efforts at each site, estimates were refined and accruals were established or adjusted accordingly. These estimates and related accruals continue to be refined annually.
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. Expenditures for remediation and environmental liabilities were $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these 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 $64 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
Share-Based Compensation
The Company expenses all share-based payment awards to employees, including grants of stock options, over the requisite service period based on the grant date fair value of the awards. The Company determines the fair value of certain share-based awards using the Black-Scholes option-pricing model which uses both historical and current market data to estimate the fair value. This method incorporates various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. Total pretax share-based compensation expense was $300 million in 2016, $299 million in 2015 and $278 million in 2014. At December 31, 2016, there was $443 million of total pretax unrecognized compensation expense related to nonvested stock option, restricted stock unit and performance share unit awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.
Pensions and Other Postretirement Benefit Plans
Net periodic benefit cost for pension and other postretirement benefit plans totaled $56 million in 2016, $253 million in 2015 and $169 million in 2014. Pension and other postretirement benefit plan information for financial reporting purposes is calculated using actuarial assumptions including a discount rate for plan benefit obligations and an expected rate of return on plan assets. The changes in net periodic benefit cost year over year for pension plans are largely attributable to changes in the discount rate affecting net amortization. The decrease in net periodic benefit cost for other postretirement benefit plans in 2016 as compared with 2015 is largely attributable to changes in retiree medical benefits approved by the Company terminatedin December 2015.
The Company reassesses its benefit plan assumptions on a regular basis. For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The discount rates for the Company’s U.S. pension and other postretirement benefit plans ranged from 3.40% to 4.30% at December 31, 2016, compared with a range of 3.80% to 4.80% at December 31, 2015.
The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term compound annualized returns of historical market data as well as actual returns on the Company’s plan assets. Using this reference information, the Company develops forward-looking return expectations for each asset category and a weighted-average expected long-term rate of return for a target portfolio allocated across these investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2017, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from 8.00% to 8.75%, as compared to a range of 7.30% to 8.75% in 2016.
The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other

postretirement benefit plans is allocated 40% to 60% in U.S. equities, 20% to 40% in international equities, 15% to 25% in fixed-income investments, and up to 5% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio, which approximates 13%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For non-U.S. pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.
Actuarial assumptions are based upon management’s best estimates and judgment. A reasonably possible change of plus (minus) 25 basis points in the discount rate assumption, with other assumptions held constant, would have an estimated $81 million favorable (unfavorable) impact on the Company’s current year net periodic benefit cost. A reasonably possible change of plus (minus) 25 basis points in the expected rate of return assumption, with other assumptions held constant, would have an estimated $46 million favorable (unfavorable) impact on Merck’s current year net periodic benefit cost. Required funding obligations for 2017 relating to the Company’s pension and other postretirement benefit plans are not expected to be material. The preceding hypothetical changes in the discount rate and expected rate of return assumptions would not impact the Company’s funding requirements.
Net loss amounts, which reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions, are recorded as a component of AOCI. Expected returns for pension plans are based on a calculated market-related value of assets. Under this methodology, asset gains/losses resulting from actual returns that differ from the Company’s expected returns are recognized in the market-related value of assets ratably over a five-year period. Also, net loss amounts in AOCI in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees.
Restructuring Costs
Restructuring costs have been recorded in connection with restructuring programs designed to streamline the Company’s cost structure. As a result, the Company has made estimates and judgments regarding its future plans, including future termination benefits and other exit costs to be incurred when the restructuring actions take place. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. In connection with these actions, management also assesses the recoverability of long-lived assets employed in the business. In certain instances, asset lives have been shortened based on changes in the expected useful lives of the affected assets. Severance and other related costs are reflected within Restructuring costs. Asset-related charges are reflected within Materials and production costs, Marketing and administrative expenses and Research and development expenses depending upon the nature of the asset.
Impairments of Long-Lived Assets
The Company assesses changes in economic, regulatory and legal conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and other intangible assets.
The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows approach.
Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired and is assigned to reporting units. The Company tests its goodwill for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Some of the factors considered in the assessment include general macroeconomic conditions, conditions specific to the industry and market, cost factors which could have a significant effect on earnings or cash flows, the overall financial performance of the reporting unit, and whether there have been sustained declines in the Company’s share price. Additionally, the Company evaluates

the extent to which the fair value exceeded the carrying value of the reporting unit at the last date a valuation was performed. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Other acquired intangible assets (excluding IPR&D) are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives. When events or circumstances warrant a review, the Company will assess recoverability from future operations using pretax undiscounted cash flows derived from the lowest appropriate asset groupings. Impairments are recognized in operating results to the extent that the carrying value of the intangible asset exceeds its fair value, which is determined based on the net present value of estimated future cash flows.
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the project. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. For impairment testing purposes, the Company may combine separately recorded IPR&D intangible assets into one unit of account based on the relevant facts and circumstances. Generally, the Company will combine IPR&D intangible assets for testing purposes if they operate as a single asset and are essentially inseparable. If the fair value is less than the carrying amount, an impairment loss is recognized within the Company’s operating results.
The judgments made in evaluating impairment of long-lived intangibles can materially affect the Company’s results of operations.
Impairments of Investments
The Company reviews its investments for impairments based on the determination of whether the decline in market value of the investment below the carrying value is other-than-temporary. The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in OCI.
Taxes on Income
The Company’s effective tax rate is based on pretax income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the Company’s quarterly operating results. In the event that there is a significant unusual or one-time item recognized, or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item. The Company considers the resolution of prior year tax matters to be such items. Significant judgment is required in determining the Company’s tax provision and in evaluating its tax positions. The recognition and measurement of a tax position is based on management’s best judgment given the facts, circumstances and information available at the reporting date. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, the Company may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period (see Note 15 to the consolidated financial statements.)

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which the Company has already recorded the tax benefit in the financial statements. The Company establishes valuation allowances for its deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred or expense for which the Company has already taken a deduction on the tax return, but has not yet recognized as expense in the financial statements. At December 31, 2016, foreign earnings of $63.1 billion have been retained indefinitely by subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued amended accounting guidance on revenue recognition that will be applied to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.
In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease).  Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.

In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
Cautionary Factors That May Affect Future Results
This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors, including risk factors, described in the Company’s filings with the Securities and Exchange Commission, especially on this Form 10-K and Forms 10-Q and 8-K. In Item 1A. “Risk Factors” of this annual report on Form 10-K the Company discusses in more detail various important risk factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties.
Item 7a.Quantitative and Qualitative Disclosures about Market Risk.
The information required by this Item is incorporated by reference to the discussion under “Financial Instruments Market Risk Disclosures” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 8.Financial Statements and Supplementary Data.                
(a)Financial Statements
The consolidated balance sheet of Merck & Co., Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2016, the notes to consolidated financial statements, and the report dated February 28, 2017 of PricewaterhouseCoopers LLP, independent registered public accounting firm, are as follows:
Consolidated Statement of Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
 2016 2015 2014
Sales$39,807
 $39,498
 $42,237
Costs, Expenses and Other     
Materials and production13,891
 14,934
 16,768
Marketing and administrative9,762
 10,313
 11,606
Research and development10,124
 6,704
 7,180
Restructuring costs651
 619
 1,013
Other (income) expense, net720
 1,527
 (11,613)
 35,148
 34,097
 24,954
Income Before Taxes4,659
 5,401
 17,283
Taxes on Income718
 942
 5,349
Net Income3,941
 4,459
 11,934
Less: Net Income Attributable to Noncontrolling Interests21
 17
 14
Net Income Attributable to Merck & Co., Inc.$3,920
 $4,442
 $11,920
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders$1.42
 $1.58
 $4.12
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders$1.41
 $1.56
 $4.07
Consolidated Statement of Comprehensive Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
 2016 2015 2014
Net Income Attributable to Merck & Co., Inc.$3,920
 $4,442
 $11,920
Other Comprehensive Income (Loss) Net of Taxes:     
Net unrealized (loss) gain on derivatives, net of reclassifications(66) (126) 398
Net unrealized (loss) gain on investments, net of reclassifications(44) (70) 57
Benefit plan net (loss) gain and prior service (cost) credit, net of amortization(799) 579
 (2,077)
Cumulative translation adjustment(169) (208) (504)
 (1,078) 175
 (2,126)
Comprehensive Income Attributable to Merck & Co., Inc.$2,842
 $4,617
 $9,794
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Balance Sheet
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions except per share amounts)
 2016 2015
Assets   
Current Assets   
Cash and cash equivalents$6,515
 $8,524
Short-term investments7,826
 4,903
Accounts receivable (net of allowance for doubtful accounts of $195 in 2016
and $165 in 2015) (excludes accounts receivable of $10 in 2015
classified in Other assets)
7,018
 6,484
Inventories (excludes inventories of $1,117 in 2016 and $1,569
in 2015 classified in Other assets - see Note 6)
4,866
 4,700
Other current assets4,389
 5,140
Total current assets30,614
 29,751
Investments11,416
 13,039
Property, Plant and Equipment (at cost)   
Land412
 490
Buildings11,439
 12,154
Machinery, equipment and office furnishings14,053
 14,261
Construction in progress1,871
 1,525
 27,775
 28,430
Less: accumulated depreciation15,749
 15,923
 12,026
 12,507
Goodwill18,162
 17,723
Other Intangibles, Net17,305
 22,602
Other Assets5,854
 6,055
 $95,377
 $101,677
Liabilities and Equity   
Current Liabilities   
Loans payable and current portion of long-term debt$568
 $2,583
Trade accounts payable2,807
 2,533
Accrued and other current liabilities10,274
 11,216
Income taxes payable2,239
 1,560
Dividends payable1,316
 1,309
Total current liabilities17,204
 19,201
Long-Term Debt24,274
 23,829
Deferred Income Taxes5,077
 6,535
Other Noncurrent Liabilities8,514
 7,345
Merck & Co., Inc. Stockholders’ Equity   
Common stock, $0.50 par value
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2016 and 2015
1,788
 1,788
Other paid-in capital39,939
 40,222
Retained earnings44,133
 45,348
Accumulated other comprehensive loss(5,226) (4,148)
 80,634
 83,210
Less treasury stock, at cost:
828,372,200 shares in 2016 and 795,975,449 shares in 2015
40,546
 38,534
Total Merck & Co., Inc. stockholders’ equity40,088
 44,676
Noncontrolling Interests220
 91
Total equity40,308
 44,767
 $95,377
 $101,677
The accompanying notes are an integral part of this consolidated financial statement.

Consolidated Statement of Equity
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
 
Common
Stock
 
Other
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Non-
controlling
Interests
 Total
Balance January 1, 2014
$1,788
 $40,508
 $39,257
 $(2,197) $(29,591) $2,561
 $52,326
Net income attributable to Merck & Co., Inc.—
 —
 11,920
 —
 —
 —
 11,920
Other comprehensive loss, net of tax—
 —
 —
 (2,126) —
 —
 (2,126)
Cash dividends declared on common stock ($1.77 per share)—
 —
 (5,156) —
 —
 —
 (5,156)
Treasury stock shares purchased—
 —
 —
 —
 (7,703) —
 (7,703)
AstraZeneca option exercise—
 —
 —
 —
 —
 (2,400) (2,400)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 14
 14
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (77) (77)
Share-based compensation plans and other—
 (85) —
 —
 2,032
 46
 1,993
Balance December 31, 20141,788
 40,423
 46,021
 (4,323) (35,262) 144
 48,791
Net income attributable to Merck & Co., Inc.—
 —
 4,442
 —
 —
 —
 4,442
Other comprehensive income, net of tax—
 —
 —
 175
 —
 —
 175
Cash dividends declared on common stock ($1.81 per share)—
 —
 (5,115) —
 —
 —
 (5,115)
Treasury stock shares purchased—
 —
 —
 —
 (4,186) —
 (4,186)
Changes in noncontrolling ownership interests—
 (20) —
 —
 —
 (55) (75)
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 17
 17
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (15) (15)
Share-based compensation plans and other—
 (181) —
 —
 914
 —
 733
Balance December 31, 20151,788
 40,222
 45,348
 (4,148) (38,534) 91
 44,767
Net income attributable to Merck & Co., Inc.—
 —
 3,920
 —
 —
 —
 3,920
Other comprehensive loss, net of tax—
 —
 —
 (1,078) —
 —
 (1,078)
Cash dividends declared on common stock ($1.85 per share)—
 —
 (5,135) —
 —
 —
 (5,135)
Treasury stock shares purchased—
 —
 —
 —
 (3,434) —
 (3,434)
Changes in noncontrolling ownership interests—
 —
 —
 —
 —
 124
 124
Net income attributable to noncontrolling interests—
 —
 —
 —
 —
 21
 21
Distributions attributable to noncontrolling interests—
 —
 —
 —
 —
 (16) (16)
Share-based compensation plans and other—
 (283) —
 —
 1,422
 —
 1,139
Balance December 31, 2016$1,788
 $39,939
 $44,133
 $(5,226) $(40,546) $220
 $40,308
The accompanying notes are an integral part of this consolidated financial statement.


Consolidated Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
 2016 2015 2014
Cash Flows from Operating Activities     
Net income$3,941
 $4,459
 $11,934
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization5,441
 6,375
 6,691
Intangible asset impairment charges3,948
 162
 1,222
Charge related to the settlement of worldwide Keytruda patent litigation
625
 —
 —
Foreign currency devaluation related to Venezuela—
 876
 —
Net charge related to the settlement of Vioxx shareholder class action litigation
—
 680
 —
Gain on divestiture of Merck Consumer Care business—
 —
 (11,209)
Gain on AstraZeneca option exercise—
 —
 (741)
Loss on extinguishment of debt—
 —
 628
Equity income from affiliates(86) (205) (257)
Dividends and distributions from equity method affiliates16
 50
 185
Deferred income taxes(1,521) (764) (2,600)
Share-based compensation300
 299
 278
Other313
 874
 34
Net changes in assets and liabilities:     
Accounts receivable(619) (480) (554)
Inventories206
 805
 79
Trade accounts payable278
 (37) 593
Accrued and other current liabilities(2,018) (8) 1,635
Income taxes payable124
 (266) (21)
Noncurrent liabilities(809) (277) 190
Other237
 (5) (98)
Net Cash Provided by Operating Activities10,376
 12,538
 7,989
Cash Flows from Investing Activities     
Capital expenditures(1,614) (1,283) (1,317)
Purchases of securities and other investments(15,651) (16,681) (24,944)
Proceeds from sales of securities and other investments14,353
 20,413
 15,114
Divestiture of Merck Consumer Care business, net of cash divested—
 —
 13,951
Dispositions of other businesses, net of cash divested—
 316
 1,169
Proceeds from AstraZeneca option exercise—
 —
 419
Acquisition of Cubist Pharmaceuticals, Inc., net of cash acquired—
 (7,598) —
Acquisition of Idenix Pharmaceuticals, Inc., net of cash acquired—
 —
 (3,700)
Acquisitions of other businesses, net of cash acquired(780) (146) (181)
Acquisition of Bayer AG collaboration rights—
 —
 (1,000)
Cash inflows from net investment hedges29
 139
 195
Other453
 82
 (80)
Net Cash Used in Investing Activities(3,210) (4,758) (374)
Cash Flows from Financing Activities     
Net change in short-term borrowings—
 (1,540) (460)
Payments on debt(2,386) (2,906) (6,617)
Proceeds from issuance of debt1,079
 7,938
 3,146
Purchases of treasury stock(3,434) (4,186) (7,703)
Dividends paid to stockholders(5,124) (5,117) (5,170)
Other dividends paid—
 —
 (77)
Proceeds from exercise of stock options939
 485
 1,560
Other(118) (61) 79
Net Cash Used in Financing Activities(9,044) (5,387) (15,242)
Effect of Exchange Rate Changes on Cash and Cash Equivalents(131) (1,310) (553)
Net (Decrease) Increase in Cash and Cash Equivalents(2,009) 1,083
 (8,180)
Cash and Cash Equivalents at Beginning of Year8,524
 7,441
 15,621
Cash and Cash Equivalents at End of Year$6,515
 $8,524
 $7,441
The accompanying notes are an integral part of this consolidated financial statement.

Notes to Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1.    Nature of Operations
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 and animal health products. The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable 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. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD (SPMSD) joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets that were previously part of the joint venture.
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. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products (see Note 3).
2.    Summary of Accounting Policies
Principles of Consolidation — The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as Noncontrolling interests in equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the Company and a third party that are under shared control, are carried on the equity basis.
Acquisitions — In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. If the Company determines the assets acquired do not meet the

definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded.
Foreign Currency Translation — The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in Accumulated other comprehensive income (loss) (AOCI) and reflected as a separate component of equity. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in Other (income) expense, net.
Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.
Inventories — Inventories are valued at the lower of cost or market. The cost of a substantial majority of domestic pharmaceutical and vaccine inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product launches that are considered to have a high probability of regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process.
Investments — Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair values of the Company’s investments are determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are considered temporary are reported net of tax in Other Comprehensive Income (OCI). For declines in the fair value of equity securities that are considered other-than-temporary, impairment losses are charged to Other (income) expense, net. The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in Other (income) expense, net, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in OCI. Realized gains and losses for both debt and equity securities are included in Other (income) expense, net.
Revenue Recognition — Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically upon delivery. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts if collection of accounts receivable is expected to be in excess of one year. Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates are recorded as current liabilities. The accrued balances relative to the provisions for chargebacks and rebates included in Accounts receivable and Accrued and other current liabilities were $196 million and $2.7 billion, respectively, at December 31, 2016 and $145 million and $2.7 billion, respectively, at December 31, 2015.

The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (SEC) Interpretation, Commission Guidance Regarding Accounting for Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile.
Depreciation — Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated tax methods are used. The estimated useful lives primarily range from 25 to 45 years for Buildings, and from 3 to 15 years for Machinery, equipment and office furnishings. Depreciation expense was $1.6 billion in 2016, $1.6 billion in 2015 and $2.5 billion in 2014.
Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion expenses of $2.1 billion, $2.1 billion and $2.3 billion in 2016, 2015 and 2014, respectively.
Software Capitalization — The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including external direct costs of material and services, and payroll costs for employees directly involved with the software development. Capitalized software costs are included in Property, plant and equipment and amortized beginning when the software project is substantially complete and the asset is ready for its intended use. Capitalized software costs associated with projects that are being amortized over 6 to 10 years (including the Company’s on-going multi-year implementation of an enterprise-wide resource planning system) were $452 million and $421 million, net of accumulated amortization at December 31, 2016 and 2015, respectively. All other capitalized software costs are being amortized over periods ranging from 3 to 5 years. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred.
Goodwill — Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Acquired Intangibles — Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives ranging from 2 to 20 years (see Note 7). The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.
Acquired In-Process Research and Development — Acquired in-process research and development (IPR&D) that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.

Contingent Consideration — Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
Research and Development — Research and development is expensed as incurred. Upfront and milestone payments due to third parties in connection with research and development collaborations prior to regulatory approval are expensed as incurred. Payments due to third parties upon or subsequent to regulatory approval are capitalized and amortized over the shorter of the remaining license or product patent life. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expenses when the specific milestone has been achieved. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment charges in all periods. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration.
Share-Based Compensation — The Company expenses all share-based payments to employees over the requisite service period based on the grant-date fair value of the awards.
Restructuring Costs — The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee termination costs are accrued when the restructuring actions are probable and estimable. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.
Contingencies and Legal Defense Costs — The Company records accruals for contingencies and legal defense costs expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Taxes on Income — Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. The Company recognizes interest and penalties associated with uncertain tax positions as a component of Taxes on income in the Consolidated Statement of Income.
Use of Estimates — The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP) and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities, primarily IPR&D, other intangible assets and contingent consideration, as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and

goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Reclassifications — Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Recently Adopted Accounting Standards — In the first quarter of 2016, the Company adopted accounting guidance issued by the Financial Accounting Standards Board (FASB) in April of 2015, which requires debt issuance costs to be presented as a direct deduction from the carrying amount of that debt on the balance sheet as opposed to being presented as a deferred charge. Approximately $100 million of debt issuance costs were reclassified in the first quarter of 2016 as a result of the adoption of the new standard. Prior period amounts have been recast to conform to the new presentation.
In the second quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB in March of 2016 intended to simplify the accounting and reporting for employee share-based payment transactions. Among other provisions, the new standard requires that excess tax benefits and deficiencies that arise upon vesting or exercise of share-based payments be recognized in the income statement (as opposed to previous guidance under which tax effects were recorded to Other paid-in-capital in certain instances). This aspect of the new guidance, which was required to be adopted prospectively, resulted in the recognition of $79 million of excess tax benefits in Taxes on income in 2016 arising from share-based payments. The new guidance also amended the presentation of certain share-based payment items in the statement of cash flows. Cash flows related to excess income tax benefits are now classified as an operating activity (formerly included as a financing activity). The Company elected to adopt this aspect of the new guidance prospectively. The standard also clarified that cash payments made to taxing authorities on the employees’ behalf for shares withheld should be presented as a financing activity. This aspect of the guidance was adopted retrospectively; accordingly, the Company reclassified $117 million and $129 million of such payments from operating activities to financing activities in the Consolidated Statement of Cash Flows for the years ended December 31, 2015 and 2014, respectively, to conform to the current presentation. The Company has elected to continue to estimate the impact of forfeitures when determining the amount of compensation cost to be recognized each period rather than account for them as they occur.
In the fourth quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB on January 5, 2017 intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business. To be considered a business, the assets in the transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Entities are permitted to apply the updated guidance to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. Accordingly, the Company elected to adopt this guidance prospectively as of October 1, 2016.
Recently Issued Accounting Standards — In May 2014, the FASB issued amended accounting guidance on revenue recognition that will be applied to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.

In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease).  Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.


3.    Acquisitions, Divestitures, Research Collaborations and License Agreements
The Company continues to acquire businesses and establish external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.
2016 Transactions
In July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the P2X3 receptor for the treatment of common, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is a selective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 2b clinical trial for the treatment of refractory, chronic cough as well as in a Phase 2 clinical trial in idiopathic pulmonary fibrosis with cough. Total consideration transferred of $510 million included cash paid for outstanding Afferent shares of $487 million, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a total of up to an additional $750 million contingent upon the attainment of certain clinical development and commercial milestones for multiple indications and candidates, including MK-7264. This transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The Company determined the fair value of the contingent consideration was $223 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment using an appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized an intangible asset for in-process research and development (IPR&D) of $832 million, net deferred tax liabilities of $258 million, and other net assets of $29 million (primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets acquired of $130 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated based upon the asset’s probability-adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The net cash flows were then discounted to present value using a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.
Also in July 2016, Merck, through its wholly owned subsidiary Healthcare Services & Solutions, LLC, acquired a majority ownership interest in The StayWell Company LLC (StayWell), a portfolio company of Vestar Capital Partners (Vestar). StayWell is a health engagement company that helps its clients engage and educate people to improve health and business results. Under the terms of the transaction, Merck paid $150 million for a majority ownership interest. Additionally, Merck provided StayWell with a $150 million intercompany loan to pay down preexisting third-party debt. Merck has an option to buy, and Vestar has an option to require Merck to buy, some or all of Vestar’s remaining ownership interest at fair value beginning three years from the acquisition date. This transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $238 million, deferred tax liabilities of $84 million, other net liabilities of $5 million and noncontrolling interest of $124 million. The excess of the consideration transferred over the fair value of net assets acquired of $275 million was recorded as goodwill and is largely attributable to anticipated synergies expected to arise after the acquisition. The goodwill was allocated to the Healthcare Services segment and is not deductible for tax purposes. The intangible assets recognized primarily relate to customer relationships, which are being amortized over a 10-year useful life, and medical information and solutions content, which are being amortized over a five-year useful life.
Additionally, in July 2016, Merck announced it had executed an agreement to acquire a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil. Vallée has an extensive portfolio of products spanning parasiticides, anti-infectives and vaccines that include products for livestock, horses, and companion animals. Under the terms of the agreement, Merck will acquire approximately 93% of the shares of Vallée for approximately $400 million, based on exchange rates at the time of the announcement. This agreement is subject to regulatory review and certain closing conditions.

In June 2016, Merck and Moderna Therapeutics (Moderna) entered into a strategic collaboration and license agreement to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based personalized cancer vaccines in combination with Merck’s Keytruda. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of $200 million, which was recorded in Research and development expenses. Following human proof of concept studies, Merck has the right to elect to make an additional payment to Moderna. If Merck exercises this right, the two companies will then equally share cost and profits under a worldwide collaboration for the development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines in the United States. The agreement entails exclusivity around combinations with Keytruda. Moderna and Merck will each have the ability to combine mRNA-based personalized cancer vaccines with other (non-PD-1) agents.
In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a privately held UK-based drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition provides Merck with IOmet’s preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The transaction was accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of $150 million and future additional milestone payments of up to $250 million that are contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair value of the contingent consideration was $94 million at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment utilizing a discount rate of 10.5%. Merck recognized intangible assets for IPR&D of $155 million and net deferred tax assets of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of $57 million was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. The assets’ probability-adjusted future net cash flows were then discounted to present value also using a discount rate of 10.5%. Actual cash flows are likely to be different than those assumed.

2015 Transactions
In December 2015, the Company divested its remaining ophthalmics portfolio in international markets to Mundipharma Ophthalmology Products Limited. Merck received consideration of approximately $170 million and recognized a gain of $147 million recorded in Other (income) expense, net in 2015.
In July 2015, Merck acquired cCAM Biotherapeutics Ltd. (cCAM), a privately held biopharmaceutical company focused on the discovery and development of novel cancer immunotherapies. Total purchase consideration in the transaction included an upfront payment of $96 million in cash and future additional payments of up to $510 million associated with the attainment of certain clinical development, regulatory and commercial milestones. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $180 million related to CM-24, a monoclonal antibody, as well as a liability for contingent consideration of $105 million, goodwill of $14 million and other net assets of $7 million. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue development of the pipeline program. Accordingly, the Company recorded an IPR&D impairment charge of $180 million related to CM-24 and reversed the related liability for contingent consideration, which had a fair value of $116 million at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in Research and development expenses in 2016.
Also in July 2015, Merck and Allergan plc (Allergan) entered into an agreement pursuant to which Allergan acquired the exclusive worldwide rights to MK-1602 and MK-8031, Merck’s investigational small molecule oral calcitonin gene-related peptide (CGRP) receptor antagonists, which are being developed for the treatment and prevention of migraine. Under the terms of the agreement, Allergan acquired these rights for upfront payments of $250 million, of which $125 million was paid in August 2015 upon closing of the transaction and the remaining $125 million was paid in April of 2016. The Company recorded a gain of $250 million within Other (income) expense, net in 2015 related to the transaction. Allergan is fully responsible for development of the CGRP programs, as well as manufacturing and commercialization upon approval and launch of the products. Under the agreement, Merck is entitled to receive potential development and commercial milestone payments and royalties at tiered double-digit rates based on commercialization

of the programs. During 2016, Merck recognized gains of $100 million within Other (income) expense, net resulting from payments by Allergan for the achievement of research and development milestones.
In February 2015, Merck and NGM Biopharmaceuticals, Inc. (NGM), a privately held biotechnology company, entered into a multi-year collaboration to research, discover, develop and commercialize novel biologic therapies across a wide range of therapeutic areas. Under the terms of the agreement, Merck made an upfront payment to NGM of $94 million, which was included in Research and development expenses, and purchased a 15% equity stake in NGM for $106 million. Merck committed up to $250 million to fund all of NGM’s efforts under the initial five-year term of the collaboration, with the potential for additional funding if certain conditions are met. Prior to Merck initiating a Phase 3 study for a licensed program, NGM may elect to either receive milestone and royalty payments or, in certain cases, to co-fund development and participate in a global cost and revenue share arrangement of up to 50%. The agreement also provides NGM with the option to participate in the co-promotion of any co-funded program in the United States. Merck has the option to extend the research agreement for two additional two-year terms.
In January 2015, Merck acquired Cubist Pharmaceuticals, Inc. (Cubist), a leader in the development of therapies to treat serious infections caused by a broad range of bacteria. Total consideration transferred of $8.3 billion included cash paid for outstanding Cubist shares of $7.8 billion, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Cubist. Share-based compensation payments to settle non-vested equity awards attributable to postcombination service were recognized as transaction expense in 2015. In addition, the Company assumed all of the outstanding convertible debt of Cubist, which had a fair value of approximately $1.9 billion at the acquisition date. Merck redeemed this debt in February 2015. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Cubist is as follows:
Estimated fair value at January 21, 2015 
Cash and cash equivalents$733
Accounts receivable123
Inventories216
Other current assets55
Property, plant and equipment151
Identifiable intangible assets: 
Products and product rights (11 year weighted-average useful life)6,923
IPR&D50
Other noncurrent assets184
Current liabilities (1)
(233)
Deferred income tax liabilities(2,519)
Long-term debt(1,900)
Other noncurrent liabilities (1)
(122)
Total identifiable net assets3,661
Goodwill (2)
4,670
Consideration transferred$8,331
(1)
Included in current liabilities and other noncurrent liabilities is contingent consideration of $73 million and $50 million, respectively.
(2)
The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Pharmaceutical segment. The goodwill is not deductible for tax purposes.

The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach through which fair value is estimated based on market participant expectations of each asset’s discounted projected net cash flows. The Company’s estimates of projected net cash flows considered historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the extent and timing of potential new product introductions by the Company’s competitors; and the life of

each asset’s underlying patent. The net cash flows were then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product were then discounted to present value utilizing a discount rate of 8%. Actual cash flows are likely to be different than those assumed.
The Company recorded the fair value of incomplete research project surotomycin (MK-4261) which, at the time of acquisition, had not reached technological feasibility and had no alternative future use. During the second quarter of 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and an IPR&D impairment charge (see Note 7).
In connection with the Cubist acquisition, liabilities were recorded for potential future consideration that is contingent upon the achievement of future sales-based milestones. The fair value of contingent consideration liabilities was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and a risk-adjusted discount rate of 8% used to present value the probability-weighted cash flows. Changes in the inputs could result in a different fair value measurement.
This transaction closed on January 21, 2015; accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after that date. During 2015, the Company incurred $324 million of transaction costs directly related to the acquisition of Cubist including share-based compensation costs, severance costs, and legal and advisory fees which are reflected in Marketing and administrative expenses.
The following unaudited supplemental pro forma data presents consolidated information as if the acquisition of Cubist had been completed on January 1, 2014:
Years Ended December 312015 2014
Sales$39,584
 $43,437
Net income attributable to Merck & Co., Inc.4,640
 10,887
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders1.65
 3.76
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders1.63
 3.72
The unaudited supplemental pro forma data reflects the historical information of Merck and Cubist adjusted to include additional amortization expense based on the fair value of assets acquired, additional interest expense that would have been incurred on borrowings used to fund the acquisition, transaction costs associated with the acquisition, and the related tax effects of these adjustments. The pro forma data should not be considered indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2014, nor are they indicative of future results.
2014 Transactions
In December 2014, Merck acquired OncoEthix, a privately held biotechnology company specializing in oncology drug development. Total purchase consideration in the transaction included an upfront cash payment of $110 million and future additional milestone payments of up to $265 million that were contingent upon certain clinical and regulatory milestones being achieved. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $143 million related to MK-8628 (formerly OTX015), an investigational, novel oral BET (bromodomain) inhibitor, as well as a liability for contingent consideration of $43 million and other net assets of $10 million. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue the development of MK-8628. Accordingly, the Company recorded an IPR&D impairment charge of $143 million related to MK-8628 and reversed the related liability for contingent consideration, which had a fair value of $40 million at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in Research and development expenses in 2016.
On October 1, 2014, the Company completed the sale of its Merck Consumer Care (MCC) business to Bayer AG (Bayer) for $14.2 billion ($14.0 billion net of cash divested), less customary closing adjustments as well as certain contingent amounts held back that were payable upon the manufacturing site transfer in Canada and regulatory approval

in Korea. Under the terms of the agreement, Bayer acquired Merck’s existing over-the-counter business, including the global trademark and prescription rights for Claritin and Afrin. The Company recognized a pretax gain from the sale of MCC of $11.2 billion recorded in Other (income) expense, net in 2014.
Also on October 1, 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat), which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies will equally share costs and profits from the collaboration and implement a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development at Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. In return for these broad collaboration rights, Merck made an upfront payment to Bayer of $1.0 billion with the potential for additional milestone payments of up to $1.1 billion upon the achievement of agreed-upon sales goals. Under the agreement, Bayer will lead commercialization of Adempas in the Americas, while Merck will lead commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. The Company determined that Merck’s payment to access Bayer’s compounds constituted an acquisition of an asset. Of the $1.0 billion consideration paid by Merck, $915 million of fair value related to Adempas and was capitalized as an intangible asset subject to amortization over its estimated useful life of 12 years, and the remaining $85 million of fair value related to the vericiguat compound in clinical development and was expensed within Research and development expenses. The fair values of Adempas and vericiguat were determined using an income approach. The probability-adjusted future net cash flows were then discounted to present value using a discount rate of 10.0% for Adempas and 10.5% for vericiguat. During the second quarter of 2016, the Company determined it was probable that, in 2017, Adempas sales would exceed the threshold triggering a $350 million milestone payment from Merck to Bayer. Accordingly, in the second quarter of 2016, the Company recorded a $350 million liability and a corresponding intangible asset and also recognized $50 million of cumulative amortization expense within Materials and production costs. The remaining intangible asset at June 30, 2016 of $300 million is being amortized over its then-remaining estimated useful life of 10.5 years as supported by projected future cash flows, subject to impairment testing. The remaining potential future milestone payments of $775 million have not yet been accrued as they are not deemed by the Company to be probable at this time.
In August 2014, Merck completed the acquisition of Idenix Pharmaceuticals, Inc. (Idenix) for approximately $3.9 billion in cash ($3.7 billion net of cash acquired). Idenix was a biopharmaceutical company engaged in the discovery and development of medicines for the treatment of human viral diseases, whose primary focus was on the development of next-generation oral antiviral therapeutics to treat hepatitis C virus (HCV) infection. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of $3.2 billion related to MK-3682 (formerly IDX21437), uprifosbuvir, as well as net deferred tax liabilities of $951 million and other net liabilities of $12 million. Uprifosbuvir is a nucleotide prodrug in clinical development being evaluated for the treatment of HCV infection. The excess of the consideration transferred over the fair value of net assets acquired of $1.5 billion was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The asset’s probability-adjusted future net cash flows were then discounted to present value using a discount rate of 11.5%. During 2016, the Company recorded a $2.9 billion IPR&D impairment charge related to uprifosbuvir that resulted from recent changes to the product profile taken together with changes to the Company’s expectations for pricing and the market opportunity (see Note 7).
In May 2014, Merck entered into an agreement to sell certain ophthalmic products to Santen Pharmaceutical Co., Ltd. (Santen) in Japan and markets in Europe and Asia Pacific. The agreement provided for upfront payments from Santen and additional payments based on defined sales milestones. Santen will also purchase supply of ophthalmology products covered by the agreement for a two- to five-year period. The transaction closed in most markets on July 1, 2014 and in the remaining markets on October 1, 2014. The Company received $565 million of upfront payments from Santen, net of certain adjustments, and recognized gains of $480 million on the transactions in 2014 included in Other (income) expense, net.

In March 2014, Merck sold its Sirna Therapeutics, Inc. (Sirna) subsidiary to Alnylam Pharmaceuticals, Inc. (Alnylam) for consideration of $25 million and 2,520,044 shares of Alnylam common stock. Merck is eligible to receive future payments associated with the achievement of certain regulatory and commercial milestones, as well as royalties on future sales. Merck recorded a gain of $204 million in Other (income) expense, net in 2014 related to this transaction. The excess of Merck’s tax basis in its investment in Sirna over the value received resulted in an approximate $300 million tax benefit recorded in 2014.
In January 2014, Merck sold the U.S. marketing rights to Saphris, an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults to Forest Laboratories, Inc. (Forest). Under the terms of the agreement, Forest made upfront payments of $232 million, which were recorded in Sales in 2014, and will make additional payments to Merck based on defined sales milestones. In addition, as part of this transaction, Merck agreed to supply product to Forest (subsequently acquired by Allergan) until patent expiry.
Remicade/Simponi
In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (Centocor), a Johnson & Johnson (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 has marketing rights to both products throughout Europe, Russia and Turkey. Remicade lost market exclusivity in major European markets in February 2015 and the Company no longer has market exclusivity in any of its marketing territories. The Company continues to have market exclusivity for Simponi in all of its marketing territories. All profits derived from Merck’s distribution of the two products in these countries are equally divided between Merck and J&J.
4.    Restructuring
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations.
The Company recorded total pretax costs of $1.1 billion in 2016, $1.1 billion in 2015 and $2.0 billion in 2014 related to restructuring program activities. Since inception of the programs through December 31, 2016, Merck has recorded total pretax accumulated costs of approximately $12.6 billion and eliminated approximately 40,900 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company expects to substantially complete the remaining actions under these programs by the end of 2017 and incur approximately $700 million of additional pretax costs. The Company estimates that approximately two-thirds of the cumulative pretax costs will result in 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.
For segment reporting, restructuring charges are unallocated expenses.

The following table summarizes the charges related to restructuring program activities by type of cost:
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
Year Ended December 31, 2016       
Materials and production$—
 $77
 $104
 $181
Marketing and administrative—
 8
 87
 95
Research and development—
 142
 —
 142
Restructuring costs216
 —
 435
 651
 $216
 $227
 $626
 $1,069
Year Ended December 31, 2015       
Materials and production$—
 $78
 $283
 $361
Marketing and administrative—
 59
 19
 78
Research and development—
 37
 15
 52
Restructuring costs208
 —
 411
 619
 $208

$174

$728

$1,110
Year Ended December 31, 2014       
Materials and production$—
 $429
 $53
 $482
Marketing and administrative—
 198
 2
 200
Research and development—
 273
 10
 283
Restructuring costs674
 —
 339
 1,013
 $674

$900

$404

$1,978
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. Positions eliminated under restructuring program activities were approximately 2,625 in 2016, 3,770 in 2015 and 6,085 in 2014. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were sufficient to recover the respective book values, Merck recorded accelerated depreciation of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2016, 2015 and 2014 includes $409 million, $550 million and $240 million, respectively, of asset abandonment, shut-down and other related costs. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 13) and share-based compensation. Other activity also reflects net pretax losses resulting from sales of facilities and related assets of $151 million in 2016, $117 million in 2015 and $133 million in 2014.

The following table summarizes the charges and spending relating to restructuring program activities:
 
Separation
Costs
 
Accelerated
Depreciation
 Other Total
Restructuring reserves January 1, 2015$1,031
 $—
 $20
 $1,051
Expenses208
 174
 728
 1,110
(Payments) receipts, net(647) —
 (435) (1,082)
Non-cash activity—
 (174) (260) (434)
Restructuring reserves December 31, 2015592
 —
 53
 645
Expenses216
 227
 626
 1,069
(Payments) receipts, net(413) —
 (347) (760)
Non-cash activity—
 (227) (186) (413)
Restructuring reserves December 31, 2016 (1)
$395
 $—
 $146
 $541
(1)
The remaining cash outlays are expected to be substantially completed by the end of 2017.
5.    Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.

Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than two years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts, and purchased collar options.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or OCI, depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the effective portion of the unrealized gains or losses on these contracts is recorded in AOCI and reclassified into Sales when the hedged anticipated revenue is recognized. The hedge relationship is highly effective and hedge ineffectiveness has been de minimis. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in Sales each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.

The Company manages operating activities and net asset positions at the local level in order to mitigate the effect of exchange on monetary assets and liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.
The Company may also use forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates that are recorded in Other (income) expense, net. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within OCI, and remains in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within OCI. Included in the cumulative translation adjustment are pretax gains of $193 million in 2016, $304 million in 2015 and $294 million in 2014 from the euro-denominated notes.

Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.
In May 2016, four interest rate swaps with notional amounts of $250 million each matured. These swaps effectively converted the Company’s $1.0 billion, 0.70% fixed-rate notes due 2016 to variable rate debt. At December 31, 2016, the Company was a party to 26 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes. These swaps effectively converted certain of its fixed-rate notes to floating-rate instruments. as detailed in the table below.
 2016
Debt InstrumentPar Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
1.30% notes due 20181,000
 4
 1,000
5.00% notes due 20191,250
 3
 550
1.85% notes due 20201,250
 5
 1,250
3.875% notes due 20211,150
 5
 1,150
2.40% notes due 20221,000
 4
 1,000
2.35% notes due 20221,250
 5
 1,250

The interest rate swap contracts wereare designated hedges of the fair value changes in the notes attributable to changes in the benchmark London Interbank Offered Rate (LIBOR) swap rate. The fair value changes in the notes attributable to changes in the LIBOR swap rate. As a result ofrate are recorded in interest expense and offset by the fair value changes in the swap terminations, the Company received $288 million in cash, which included $43 million in accrued interest. The corresponding $245 million basis adjustment of the debt associated with the terminated interest rate swap contracts was deferred and is being amortized as a reduction of interest expense over the respective term of the notes.contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.

90

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments as of December 31:
   2013 2012
   
Fair Value of
Derivative
 
U.S. Dollar
Notional
 
Fair Value of
Derivative
 
U.S. Dollar
Notional
 Balance Sheet Caption Asset Liability Asset Liability 
Derivatives Designated as Hedging Instruments             
Interest rate swap contracts (non-current)Other assets $13
 $—
 $1,550
 $—
 $—
 $—
Interest rate swap contracts (non-current)Other noncurrent liabilities —
 25
 2,000
 —
 —
 —
Foreign exchange contracts (current)Deferred income taxes and other current assets 493
 —
 4,427
 281
 —
 6,646
Foreign exchange contracts (non-current)Other assets 515
 —
 6,676
 387
 —
 5,989
Foreign exchange contracts (current)Accrued and other current liabilities —
 19
 1,659
 —
 13
 938
   $1,021
 $44
 $16,312
 $668
 $13
 $13,573
Derivatives Not Designated as Hedging Instruments             
Foreign exchange contracts (current)Deferred income taxes and other current assets $69
 $—
 $5,705
 $55
 $—
 $4,548
Foreign exchange contracts (non-current)Other assets —
 —
 —
 8
 —
 232
Foreign exchange contracts (current)Accrued and other current liabilities —
 140
 7,892
 —
 216
 8,203
   $69
 $140
 $13,597
 $63
 $216
 $12,983
   $1,090
 $184
 $29,909
 $731
 $229
 $26,556
   2016 2015
   
Fair Value of
Derivative
 
U.S. Dollar
Notional
 
Fair Value of
Derivative
 
U.S. Dollar
Notional
 Balance Sheet Caption Asset Liability Asset Liability 
Derivatives Designated as Hedging Instruments             
Interest rate swap contractsOther assets $20
 $—
 $2,700
 $42
 $—
 $2,700
Interest rate swap contractsAccrued and other current liabilities —
 —
 —
 —
 1
 1,000
Interest rate swap contractsOther noncurrent liabilities —
 29
 3,500
 —
 23
 3,500
Foreign exchange contractsOther current assets 616
 —
 6,063
 579
 —
 4,171
Foreign exchange contractsOther assets 129
 —
 2,075
 386
 —
 4,136
Foreign exchange contractsAccrued and other current liabilities —
 1
 48
 —
 1
 77
Foreign exchange contractsOther noncurrent liabilities —
 1
 12
 —
 —
 —
   $765

$31

$14,398

$1,007

$25

$15,584
Derivatives Not Designated as Hedging Instruments             
Foreign exchange contractsOther current assets $230
 $—
 $8,210
 $212
 $—
 $8,783
Foreign exchange contractsOther assets —
 —
 —
 18
 —
 179
Foreign exchange contractsAccrued and other current liabilities —
 103
 2,931
 —
 37
 2,508
Foreign exchange contractsOther noncurrent liabilities —
 —
 —
 —
 1
 6
   $230
 $103
 $11,141
 $230
 $38
 $11,476
   $995
 $134
 $25,539
 $1,237
 $63
 $27,060

91

As noted above, the Company records its derivatives on a gross basis in the Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see Concentrations of Credit Risk below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes at December 31:
2013 20122016 2015
Asset Liability Asset LiabilityAsset Liability Asset Liability
Gross amounts recognized in the consolidated balance sheet$1,090
 $184
 $731
 $229
$995
 $134
 $1,237
 $63
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet(147) (147) (195) (195)(131) (131) (59) (59)
Cash collateral (received) posted(652) —
 (305) —
(529) —
 (862) —
Net amounts$291
 $37
 $231
 $34
$335
 $3
 $316
 $4
The table below provides information on the location and pretax gain or loss amounts for derivatives that are: (i) designated in a fair value hedging relationship, (ii) designated in a foreign currency cash flow hedging relationship, (iii) designated in a foreign currency net investment hedging relationship and (iv) not designated in a hedging relationship:
 
Years Ended December 312013 2012 20112016 2015 2014
Derivatives designated in a fair value hedging relationship          
Interest rate swap contracts          
Amount of loss (gain) recognized in Other (income) expense, net on derivatives (1)
$12
 $—
 $(196)$28
 $(14) $(17)
Amount of (gain) loss recognized in Other (income) expense, net on hedged item (1)
(14) —
 196
(29) 7
 14
Derivatives designated in foreign currency cash flow hedging relationships          
Foreign exchange contracts          
Amount of loss reclassified from AOCI to Sales
45
 50
 85
Amount of (gain) loss recognized in OCI on derivatives
(306) 204
 143
Amount of gain reclassified from AOCI to Sales
(311) (724) (143)
Amount of gain recognized in OCI on derivatives
(210) (526) (775)
Derivatives designated in foreign currency net investment hedging relationships          
Foreign exchange contracts          
Amount of gain recognized in Other (income) expense, net on derivatives (2)
(10) (20) (10)(1) (4) (6)
Amount of (gain) loss recognized in OCI on derivatives
(363) (208) 122
Amount of loss (gain) recognized in OCI on derivatives
2
 (10) (192)
Derivatives not designated in a hedging relationship          
Foreign exchange contracts          
Amount of loss (gain) recognized in Other (income) expense, net on derivatives (3)
183
 382
 (113)132
 (461) (516)
Amount of loss recognized in Sales
8
 30
 —
Amount of (gain) loss recognized in Sales
—
 (1) 15
(1) 
There was $2$1 million, $7 million and $3 million of ineffectiveness on the hedge during 2013.2016, 2015 and 2014, respectively.
(2) 
There was no ineffectiveness on the hedge. Represents the amount excluded from hedge effectiveness testing.
(3) 
These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.
At December 31, 2013,2016, the Company estimates $66462 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from AOCI to Sales. The amount ultimately reclassified to Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.

92

Investments in Debt and Equity Securities
Information on available-for-sale investments in debt and equity securities at December 31 is as follows:
 
2013 20122016 2015
Fair
Value
 
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Amortized
Cost
 Gross Unrealized
Fair
Value
 
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Amortized
Cost
 Gross Unrealized
Gains Losses Gains LossesGains Losses Gains Losses
Corporate notes and bonds$7,054
 $7,037
 $32
 $(15) $5,063
 $5,013
 $52
 $(2)$10,577
 $10,601
 $15
 $(39) $10,259
 $10,299
 $7
 $(47)
Commercial paper4,330
 4,330
 —
 —
 2,977
 2,977
 —
 —
U.S. government and agency securities2,232
 2,244
 1
 (13) 1,761
 1,767
 —
 (6)
Asset-backed securities1,300
 1,303
 1
 (4) 837
 835
 3
 (1)1,376
 1,380
 1
 (5) 1,284
 1,290
 —
 (6)
U.S. government and agency securities1,236
 1,239
 1
 (4) 1,206
 1,204
 2
 —
Commercial paper1,206
 1,206
 —
 —
 2,150
 2,150
 —
 —
Mortgage-backed securities476
 479
 2
 (5) 435
 436
 2
 (3)796
 801
 1
 (6) 694
 697
 1
 (4)
Foreign government bonds125
 126
 —
 (1) 108
 107
 1
 —
519
 521
 —
 (2) 607
 586
 22
 (1)
Equity securities471
 397
 74
 —
 403
 370
 33
 —
349
 281
 71
 (3) 534
 409
 125
 —
$11,868
 $11,787
 $110
 $(29) $10,202
 $10,115
 $93
 $(6)$20,179
 $20,158
 $89
 $(68) $18,116
 $18,025
 $155
 $(64)
Available-for-sale debt securities included in Short-term investments totaled $1.97.8 billion at December 31, 2013.2016. Of the remaining debt securities, $8.810.2 billion mature within five years. At December 31, 20132016 and 2012,2015, there were no debt securities pledged as collateral.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instrumentsassets or liabilities for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.


93

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis at December 31 are summarized below:
Fair Value Measurements Using Fair Value Measurements UsingFair Value Measurements Using Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
2013 20122016 2015
Assets                              
Investments                              
Corporate notes and bonds$—
 $7,054
 $—
 $7,054
 $—
 $5,063
 $—
 $5,063
$—
 $10,389
 $—
 $10,389
 $—
 $10,259
 $—
 $10,259
Commercial paper—
 4,330
 —
 4,330
 —
 2,977
 —
 2,977
U.S. government and agency securities29
 1,890
 —
 1,919
 —
 1,761
 —
 1,761
Asset-backed securities (1)
—
 1,300
 —
 1,300
 —
 837
 —
 837
—
 1,257
 —
 1,257
 —
 1,284
 —
 1,284
U.S. government and agency securities—
 1,236
 —
 1,236
 —
 1,206
 —
 1,206
Commercial paper—
 1,206
 —
 1,206
 —
 2,150
 —
 2,150
Mortgage-backed securities (1)
—
 476
 —
 476
 —
 435
 —
 435
—
 628
 —
 628
 —
 694
 —
 694
Foreign government bonds—
 125
 —
 125
 —
 108
 —
 108
—
 518
 —
 518
 —
 607
 —
 607
Equity securities238
 —
 —
 238
 196
 —
 —
 196
201
 —
 —
 201
 360
 —
 —
 360
238
 11,397
 —
 11,635
 196
 9,799
 —
 9,995
230
 19,012
 —
 19,242
 360
 17,582
 —
 17,942
Other assets(2)                              
Securities held for employee compensation186
 47
 —
 233
 169
 38
 —
 207
Derivative assets (2)
               
U.S. government and agency securities—
 313
 —
 313
 —
 —
 —
 —
Corporate notes and bonds—
 188
 —
 188
 —
 —
 —
 —
Mortgage-backed securities (1)
—
 168
 —
 168
 —
 —
 —
 —
Asset-backed securities (1)
—
 119
 —
 119
 —
 —
 —
 —
Foreign government bonds—
 1
 —
 1
 —
 —
 —
 —
Equity securities148
 —
 —
 148
 155
 19
 —
 174
148

789

—

937

155

19

—

174
Derivative assets (3)
               
Purchased currency options—
 868
 —
 868
 —
 546
 —
 546
—
 644
 —
 644
 —
 1,041
 —
 1,041
Forward exchange contracts—
 209
 —
 209
 —
 185
 —
 185
—
 331
 —
 331
 —
 154
 —
 154
Interest rate swaps—
 13
 —
 13
 —
 —
 —
 —
—
 20
 —
 20
 —
 42
 —
 42
—
 1,090
 —
 1,090
 —
 731
 —
 731
—
 995
 —
 995
 —
 1,237
 —
 1,237
Total assets$424
 $12,534
 $—
 $12,958
 $365
 $10,568
 $—
 $10,933
$378

$20,796

$—

$21,174

$515

$18,838

$—

$19,353
Liabilities                              
Other liabilities               
Contingent consideration$—
 $—
 $891
 $891
 $—
 $—
 $590
 $590
Derivative liabilities (2)
                              
Forward exchange contracts$—
 $134
 $—
 $134
 $—
 $216
 $—
 $216
—
 93
 —
 93
 —
 38
 —
 38
Interest rate swaps—
 29
 —
 29
 —
 24
 —
 24
Written currency options—
 25
 —
 25
 —
 13
 —
 13
—
 12
 —
 12
 —
 1
 —
 1
Interest rate swaps—
 25
 —
 25
 —
 —
 —
 —
—
 134
 —
 134
 —
 63
 —
 63
Total liabilities$—
 $184
 $—
 $184
 $—
 $229
 $—
 $229
$—
 $134
 $891
 $1,025
 $—
 $63
 $590
 $653
(1) 
Primarily all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card autoand student loan and home equity receivables, with weighted-average lives of primarily 5 years or less. Mortgage-backed securities represent AAA-rated securities issued or unconditionally guaranteed as to payment of principal and interest by U.S. government agencies.
(2)
The increase in investments included in Other assets reflects certain assets previously restricted for retiree benefits that became available to fund certain other health and welfare benefits during 2016 (see Note 13).
(3) 
The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.
There were no transfers between Level 1 and Level 2 during 2013.2016. As of December 31, 2013,2016, Cash and cash equivalents of $15.66.5 billion included $14.75.4 billion of cash equivalents (considered Level 2 in the fair value hierarchy).

Contingent Consideration
Summarized information about the changes in liabilities for contingent consideration is as follows:
 2016 2015
Fair value January 1$590
 $428
Changes in fair value (1)
(407) (16)
Additions733
 228
Payments(25) (50)
Fair value December 31$891
 $590
(1) Recorded in Research and development expenses and Materials and production costs.
The Company haschanges in fair value in 2016 were largely attributable to the reversal of liabilities related to programs obtained in connection with the acquisitions of cCAM, OncoEthix and SmartCells (see Note 7). The additions to contingent consideration (considered Level 3in 2016 relate to the termination of the SPMSD joint venture (see Note 8) and the acquisitions of IOmet and Afferent (see Note 3). The additions to contingent consideration in 2015 relate to the acquisitions of Cubist and cCAM (see Note 3). The payments of contingent consideration in 2016 relate to the first commercial sale of Zerbaxa in the fair value hierarchy) associated with business combinations,European Union and in 2015 relate to the fair valuesfirst commercial sale of which were $69 million and $49 million at December 31, 2013 and 2012, respectively.Zerbaxa in the United States.

Other Fair Value Measurements
Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
The estimated fair value of loans payable and long-term debt (including current portion) at December 31, 2013,2016, was $25.525.7 billion compared with a carrying value of $25.1$24.8 billion and at December 31, 2012,2015, was $22.827.0 billion compared with a carrying value of $20.6$26.4 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.

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Concentrations of Credit Risk
On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines. Approximately one-third of the Company’s cash and cash equivalents are invested in five highly rated money market funds.
The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business, taking into consideration global economic conditions and the ongoing sovereign debt issues in certain European countries. The Company continues to monitorAs of December 31, 2016, the credit and economic conditions within Greece, Italy, Spain and Portugal, among other members of the EU. These economic conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collectCompany’s total net accounts receivable outstanding. As such, time value of money discounts have been recordedoutstanding for those customers for which collection of accounts receivable is expected to be in excess ofmore than one year were approximately one$140 million year. At December 31, 2013 and 2012, Other assets included $275 million and $473 million, respectively, of accounts receivable not expected to be collected within one year.. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.
As of December 31, 2013, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $900 million. Of this amount, hospital and public sector receivables were approximately $600 million in the aggregate, of which approximately 9%, 41%, 40% and 10% related to Greece, Italy, Spain and Portugal, respectively. As of December 31, 2013, the Company’s total accounts receivable outstanding for more than one year were approximately $200 million, of which approximately 50% related to accounts receivable in Greece, Italy, Spain and Portugal, mostly comprised of hospital and public sector receivables.
During 2013, the Company completed non-recourse factorings of approximately $210 million of hospital and public sector receivables in Spain. During 2012, the Company collected approximately $500 million of accounts receivable in connection with the Spanish government’s debt stabilization/stimulus plan. In addition, the Company completed non-recourse factorings of approximately $230 million in 2012 of hospital and public sector accounts receivable in Italy.
Additionally, the Company continues to expand in the emerging markets. Payment terms in these markets tend to be longer, resulting in an increase in accounts receivable balances in certain of these markets.
The Company’s customers with the largest accounts receivable balances are: McKesson Corporation, AmerisourceBergen Corporation, Cardinal Health, Inc., McKesson Corporation, Zuellig Pharma Ltd. (Asia Pacific), and Alliance Healthcare,AAH Pharmaceuticals Ltd (UK) which represented, in aggregate, approximately one-fourth40% of total accounts receivable at December 31, 2013.2016. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. As

of December 31, 20132016 and 2012,2015, the Company had received cash collateral of $652529 million and $305862 million, respectively, from various counterparties and the obligation to return such collateral is recorded in Accrued and other current liabilities. The Company had not advanced any cash collateral to counterparties as of December 31, 20132016 or 2012.2015.


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6.    Inventories
Inventories at December 31 consisted of:
2013 20122016 2015
Finished goods$1,738
 $1,924
$1,304
 $1,343
Raw materials and work in process5,894
 5,921
4,222
 4,374
Supplies225
 244
155
 168
Total (approximates current cost)7,857
 8,089
5,681
 5,885
Increase to LIFO costs73
 52
302
 384
$7,930
 $8,141
$5,983
 $6,269
Recognized as:      
Inventories$6,226
 $6,535
$4,866
 $4,700
Other assets1,704
 1,606
1,117
 1,569
Inventories valued under the LIFO method comprised approximately $2.3 billion and $2.12.4 billion of inventories at December 31, 20132016 and 20122015, respectively. Amounts recognized as Other assets are comprised almost entirely of raw materials and work in process inventories. At December 31, 20132016 and 20122015, these amounts included $1.51.0 billion and $1.41.5 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included $17780 million and $19663 million at December 31, 20132016 and 20122015, respectively, of inventories produced in preparation for product launches.
7.    Goodwill and Other Intangibles
The following table summarizes goodwill activity by segment:
 
Pharmaceutical
 All Other
 Total
Pharmaceutical
 All Other
 Total
Goodwill balance January 1, 2012$10,107
 $2,048
 $12,155
Other (1)
(21) —
 (21)
Goodwill balance December 31, 201210,086
 2,048
 12,134
Balance January 1, 2015$11,108
 $1,884
 $12,992
Acquisitions103
 188
 291
4,684
 29
 4,713
Divestitures(45) —
 (45)(18) —
 (18)
Impairments—
 (47) (47)
Other (1)
(79) —
 (79)88
 (5) 83
Goodwill balance December 31, 2013$10,065
 $2,236
 $12,301
Balance December 31, 2015 (2)
15,862
 1,861
 17,723
Acquisitions207
 275
 482
Impairments—
 (47) (47)
Other (1)
6
 (2) 4
Balance December 31, 2016 (2)
$16,075
 $2,087
 $18,162
(1) Other includes cumulative translation adjustments on goodwill balances and certain other adjustments.
The(2) Accumulated goodwill impairment losses at December 31, 2016 and 2015 were $187 million and $140 million, respectively.
In 2016, the additions to goodwill in the Pharmaceutical segment resulted primarily from the acquisitions of Afferent and IOmet (see Note 3), as well as from the termination of the SPMSD joint venture, which was treated as a step-acquisition for accounting purposes (see Note 8). The addition to goodwill within other non-reportable segments in 2016 relates to the acquisition of StayWell, which is part of the Healthcare Services segment (see Note 3). In 2015, the additions to goodwill in 2013the Pharmaceutical segment resulted primarily from the formationacquisition of the Supera joint venture (see Note 4)Cubist and the reductions resulted from the divestiture of the Company’s API manufacturingremaining ophthalmics business and related branded productsin international markets (see Note 3).
In July 2013, the Company acquired the remaining shares of Physicians Interactive, a provider of on-line and mobile clinical resources and solutions for health care professionals in which Merck had an existing 24% ownership interest, for $97 million. In November 2013, Merck acquired Health Management Resources Corporation, a leader in medical weight management, for $87 million. These transactions collectively resulted in the addition of approximately $175 million The impairments of goodwill during 2013 includedwithin other non-reportable segments in other segments. Pro forma financial information has not been included for these transactions because2016 and 2015 relate to certain businesses within the historical financial results are not significant when compared with the Company’s financial results.Healthcare Services segment.

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Other intangibles at December 31 consisted of:
2013 20122016 2015
Gross
Carrying
Amount
 
Accumulated
Amortization
 Net 
Gross
Carrying
Amount
 
Accumulated
Amortization
 Net
Gross
Carrying
Amount
 
Accumulated
Amortization
 Net 
Gross
Carrying
Amount
 
Accumulated
Amortization
 Net
Products and product rights$41,691
 $21,216
 $20,475
 $41,932
 $16,678
 $25,254
$46,269
 $31,919
 $14,350
 $45,949
 $28,514
 $17,435
In-process research and development1,856
 —
 1,856
 2,393
 —
 2,393
IPR&D1,653
 —
 1,653
 4,226
 —
 4,226
Tradenames1,632
 310
 1,322
 1,521
 236
 1,285
215
 89
 126
 198
 79
 119
Other958
 810
 148
 896
 745
 151
1,947
 771
 1,176
 1,418
 596
 822
$46,137
 $22,336
 $23,801
 $46,742
 $17,659
 $29,083
$50,084
 $32,779
 $17,305
 $51,791
 $29,189
 $22,602
Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives. The increase in intangible assets for products and product rights in 2016 primarily relates to the recognition of intangible assets in connection with the termination of the SPMSD joint venture (see Note 8). Some of the Company’s more significant acquired intangibles related to marketed products (included in product and product rights above) at December 31, 20132016 include ZetiaZerbaxa, $3.3 billion;$4.7 billion; Vytorin, $2.6 billion; Nasonex, $1.3 billion, Claritin Zetia, $1.5 billion; Sivextro, $955 million; NuvaRingVytorin, $867938 million; Implanon/Nexplanon $587 million; Dificid, $561 million; Gardasil/Gardasil 9, $468 million; NuvaRing, $319 million; and Nasonex, $308 million. The Company recognized an intangible asset related to Adempas as well as $1.3 billiona result of the formation of a collaboration with Bayer in 2014 (see Note 3) that had a carrying value of $872 million at December 31, 2016 reflected in “Other” in the aggregate related to several products marketed for the treatment of chronic hepatitis C (Victrelis, PegIntron and Rebetol).table above.
During 20132016, 2015 and 2011,2014, the Company recorded impairment charges related to marketed products and other intangibles of $486$347 million, $45 million and $118 million,$1.1 billion, respectively, within Material and production costs. OfIn 2016, the amount recorded in 2013, $330 million resulted from lowerCompany lowered its cash flow projections for Saphris/Sycrest,Zontivity, due toa product for the reduction of thrombotic cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease, following several business decisions that reduced sales expectations in international markets andfor Zontivity in the United States. These revisions to cash flows indicated that the Saphris/Sycrest intangible asset value was not recoverable on an undiscounted cash flows basis.States and Europe. The Company utilized market participant assumptions and considered several different scenarios to determine its best estimate of the fair value of the intangible asset related to Saphris/SycrestZontivity that, when compared with its related carrying value, resulted in an impairment charge of $252 million. Also during 2016, the Company wrote-off $95 million that had been capitalized in connection with in-licensed products Grastek and Ragwitek, allergy immunotherapy tablets that, for business reasons, the Company has determined it will return to the licensor. The charges in 2015 primarily relate to the impairment charge noted above. The remaining $156of customer relationship and tradename intangibles for certain businesses within in the Healthcare Services segment. Of the amount recorded in 2014, $793 million related to PegIntron,$244 million related to Victrelis and $35 million related to Rebetol, all of impairment chargeswhich are products for the treatment of chronic HCV infection. During 2014, developments in 2013 resulted from lowerthe competitive HCV treatment market led to market share losses that were greater than the Company had predicted causing changes in cash flow projections for RebetolPegIntron, Victrelis due to reduced expectations in Japan and Europe. These revisions to cash flows indicated that the Rebetol that indicated the intangible asset value wasvalues were not recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair valuevalues of the intangible assetassets related to RebetolPegIntron, Victrelis and Rebetol that, when compared with itstheir related carrying value,values, resulted in the impairment chargecharges noted above.
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects that the Company acquires through business combinations which, at the time of acquisition, have not reached technological feasibility. Amounts capitalized as IPR&D are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a separate determination as to the then useful life of the assetsasset and begin amortization. During 2013, 20122016, 2015 and 2011, $3462014, $8 million, $78280 million and $666654 million, respectively, of IPR&D was reclassified to products and product rights upon receipt of marketing approval in a major market.
During 2013,2016, the Company recorded $279 million$3.6 billion of IPR&D impairment charges within Research and development expenses. Of this amount, $181 million related$2.9 billion relates to the write-off of the intangible asset associated with preladenant as a result of the discontinuation of the clinical development program for this compound. In addition,uprifosbuvir, a nucleotide prodrug in clinical development being evaluated for the treatment of HCV. The Company recorded impairment charges resulting fromdetermined that recent changes in cash flow assumptions for certain compounds,to the product profile, as well as changes to Merck’s expectations for pricing and the market opportunity, taken together constituted a triggering event that required the Company to evaluate the uprifosbuvir intangible asset for impairment. Utilizing market participant assumptions, and considering different scenarios, the Company concluded

that its best estimate of the current fair value of the intangible asset related to uprifosbuvir was $240 million, resulting in the recognition of the pretax impairment charge noted above. The IPR&D impairment charges in 2016 also include charges of $180 million and $143 million related to the discontinuation of programs obtained in connection with the acquisitions of cCAM and OncoEthix, respectively, resulting from unfavorable efficacy data. An additional $72 million relates to programs obtained in connection with the SmartCells acquisition following a decision to terminate the lead compound due to a lack of efficacy and to pursue a back-up compound which reduced projected future cash flows. The IPR&D impairment charges in 2016 also include $112 million related to an in-licensed program for house dust mite allergies that, for business reasons, will be returned to the licensor. The remaining IPR&D impairment charges for 2016 primarily relate to deprioritized pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use in the period. During 2012, the Company recorded $200 million of IPR&D impairment charges primarily for pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use during the period. During 2011, the Company recorded $587 million of IPR&D impairment charges primarily for pipeline programs that were abandoned and determined to have no alternative use, as well as for expected delays in the launch timing or changes in the cash flow assumptions for certain compounds. In addition, the impairment charges in 2011 related to pipeline programs that had previously been deprioritized and were either deemed to have no alternative use during the period, including a $79 million impairment charge for an investigational candidate for contraception. The discontinuation or were out-licensed todelay of certain of these clinical development programs resulted in a third party for consideration that was less thanreduction of the related asset’s carrying value.liabilities for contingent consideration (see Note 3).

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TableDuring 2015, the Company recorded $63 million of ContentsIPR&D impairment charges, of which $50 million related to the surotomycin clinical development program. During 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above.
During 2014, the Company recorded $49 million of IPR&D impairment charges primarily as a result of changes in cash flow assumptions for certain compounds obtained in connection with the Company’s joint venture with Supera Farma Laboratorios S.A. (Supera), as well as for the discontinuation of certain Animal Health programs.

All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates.
The Company may recognize additional non-cash impairment charges in the future related to other marketed products or pipeline programs and such charges could be material.
Aggregate amortization expense primarily recorded within Materials and production costs was $4.8$3.8 billion in 2013,2016, $5.04.8 billion in 20122015 and $5.14.2 billion in 2011.2014. The estimated aggregate amortization expense for each of the next five years is as follows: 2014, $4.3 billion; 2015, $4.1 billion; 2016, $3.4 billion; 2017, $3.13.2 billion; 2018, $1.62.8 billion; 2019, $1.4 billion; 2020, $1.2 billion; 2021, $1.1 billion.
8.    Joint Ventures and Other Equity Method Affiliates
Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates including SPMSD (until termination on December 31, 2016), certain investment funds, as well as AZLP (until the termination of the Company’s relationship with AZLP on June 30, 2014). Equity income from affiliates was $86 million in 2016, $205 million in 2015 and was$257 million in 2014 and is included in Other (income) expense, net (see Note 14).
Investments in affiliates accounted for using the equity method totaled $715 million at December 31, 2016 and $702 million at December 31, 2015. These amounts are reported in Other assets. Amounts due from the above joint ventures included in Other current assets were $1 million at December 31, 2016 and $34 million at December 31, 2015.
Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture (SPMSD) to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.0 billion for 2016, $923 million for 2015 and $1.1 billion for 2014.
On December 31, 2016, Merck and Sanofi Pasteur (Sanofi) terminated SPMSD and ended their joint vaccines operations in Europe. Under the terms of the termination, Merck acquired Sanofi’s 50% interest in SPMSD in exchange for consideration of $657 million comprised of cash, as well as future royalties of 11.5% on net sales of all Merck products through December 31, 2024, which the following:Company determined had a fair value of $416 million on the date of

termination. The Company accounted for this transaction as a step acquisition, which required that Merck remeasure its ownership interest (previously accounted for as an equity method investment) to fair value at the acquisition date. Merck in turn sold to Sanofi its intellectual property rights held by SPMSD in exchange for consideration of $596 million comprised of cash and future royalties of 11.5% on net sales of all Sanofi products through December 31, 2024, which the Company determined had a fair value of $302 million on the date of termination. Excluded from this arrangement are potential future sales of Vaxelis (a jointly developed investigational pediatric hexavalent combination vaccine that was approved by the European Commission in February 2016). The European marketing rights for Vaxelis were transferred to a separate equally-owned joint venture between Sanofi and Merck (MCM).
The net impact of the termination of the SPMSD joint venture is as follows:
Years Ended December 312013 2012 2011
AstraZeneca LP$352
 $621
 $574
Other (1)
52
 21
 36
 $404
 $642
 $610
Products and product rights (8 year useful life)$936
Accounts receivable133
Income taxes payable(221)
Deferred income tax liabilities(175)
Other, net34
Goodwill (1)
20
Net assets acquired727
Consideration payable to Sanofi, net(378)
Derecognition of Merck’s previously held equity investment in SPMSD(183)
Increase in net assets166
Merck’s share of restructuring costs related to the termination(77)
Net gain on termination of SPMSD joint venture (2)
$89
(1)Primarily reflects results The goodwill was allocated to the Pharmaceutical segment and is not deductible for tax purposes.
(2) Recorded in Other (income) expense, net.
The estimated fair values of identifiable intangible assets related to products and product rights were determined using an income approach through which fair value is estimated based on market participant expectations of each asset’s projected net cash flows. The projected net cash flows were then discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed. Of the amount recorded for products and product rights, $468 million relates to Gardasil/Gardasil 9.
The fair value of liabilities for contingent consideration related to Merck’s future royalty payments to Sanofi of $416 million (reflected in the consideration payable to Sanofi, net, in the table above) was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and a risk-adjusted discount rate of 8% used to present value the cash flows. Changes in the inputs could result in a different fair value measurement.
Based on an existing accounting policy election, Merck has not recorded the $302 million estimated fair value of contingent future royalties to be received from Sanofi Pasteur MSDon the sale of Sanofi products, but rather will recognize such amounts in future periods as sales occur and Johnson & Johnson°Merck Consumer Pharmaceuticalsthe royalties are earned.
The Company (which was disposedincurred $24 million of on September 29, 2011).transaction costs related to the termination of SPMSD included in Marketing and administrative expenses in 2016.

Pro forma financial information for this transaction has not been presented as the results are not significant when compared with the Company’s financial results.
AstraZeneca LP
In 1982, Merck entered into an agreement with Astra AB (“Astra”)(Astra) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (“AMI”)(AMI), in which Merck and Astra each owned a 50% share. This joint venture, formed in 1994, developed and marketed most of Astra’s new prescription medicines in the United States including Prilosec, the first of a class of medications known as proton pump inhibitors, which slows the production of acid from the cells of the stomach lining.
States. In 1998, Merck and Astra completed thea restructuring of the ownership and operations of the joint venture whereby Merck acquired Astra’s interest in AMI, renamed KBI Inc. (“KBI”)(KBI), and contributed KBI’s

operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the “Partnership”)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”)(AZLP) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights. In connection with the 1998 restructuring of AMI, Merck assumed $2.4 billion par value preferred stock with a dividend rate of 5% per annum, which was carried by KBI and included in Noncontrolling interests.
While maintaining a 1% limited partner interest in AZLP, Merck has consent and protective rights intended to preserve its business and economic interests, including restrictions on the power of the general partner to make certain distributions or dispositions. Furthermore, in limited events of default, additional rights will be granted to the Company, including powers to direct the actions of, or remove and replace, the Partnership’s chief executive officer and chief financial officer. Merck earns ongoingearned revenue based on sales of KBI products and such revenue was $920463 million, $915 million and $1.2 billion in 2013, 2012 and 2011, respectively,2014 primarily relating to sales of Nexium, as well as Prilosec. In addition, Merck earnsearned certain Partnership returns from AZLP of $192 million in 2014, which arewere recorded in Equityequity income from affiliates, as reflected in the table above. Such returns include a priority return provided for in the Partnership Agreement, a preferential return representing Merck’s share of undistributed AZLP GAAP earnings, and a variable return related to the Company’s 1% limited partner interest.affiliates.
InOn June 30, 2014, AstraZeneca has theexercised its option to purchase Merck’s interest in KBI basedfor $419 million in part on the value of Merck’s interest in Nexium and Prilosec. AstraZeneca’s option is exercisable between March 1, 2014 and April 30, 2014. If AstraZeneca chooses to exercisecash. Of this option, the closing date is expected to be June 30, 2014. Under the amended agreement, AstraZeneca will make a payment to Merck upon closing ofamount, $327 million, reflecting reflected an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price, which is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018, was deferred and recognized as income of $5 million, $182 million and $140 million, during 2016, 2015 and 2014, respectively, in Other (income) expense, net as the contingency was eliminated as sales occurred. Once the deferred income amount was fully amortized, in the first quarter of 2016, the Company began recognizing income and a corresponding receivable for amounts that will be due to Merck from AstraZeneca based on the sales performance of Nexium and Prilosec subject to the true-up in June 2018. The Company recognized $93 million of such income in 2016 included in Other (income) expense, net.
The remaining exercise price will also include an additional amount equal to

98

$91 million primarily represents a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. TheMerck recognized the $91 million as a gain in 2014 within Other (income) expense, net. As a result of AstraZeneca’s option exercise, the Company’s remaining interest in AZLP was redeemed. Accordingly, the Company believes that it is likely thatalso recognized a non-cash gain of approximately $650 million in 2014 within Other (income) expense, net resulting from the retirement of the $2.4 billion of KBI preferred stock, the elimination of the Company’s $1.4 billion investment in AZLP and a $340 million reduction of goodwill. This transaction resulted in a net tax benefit of $517 million in 2014 primarily reflecting the reversal of deferred taxes on the AZLP investment balance.
As a result of AstraZeneca will exerciseexercising its option, in 2014.as of July 1, 2014, the Company no longer records equity income from AZLP and supply sales to AZLP have terminated.
Summarized financial information for AZLP is as follows:
Years Ended December 312013 2012 2011
Sales$4,611
 $4,694
 $4,659
Materials and production costs2,222
 2,177
 2,023
Other expense, net1,175
 1,312
 1,392
Income before taxes (1)
$1,214
 $1,205
 $1,244
December 312013 2012
Current assets$4,832
 $3,662
Noncurrent assets182
 206
Current liabilities3,958
 3,145
(1)
Merck’s partnership returns from AZLP are generally contractually determined as noted above and are not based on a percentage of income from AZLP, other than with respect to Merck’s 1% limited partnership interest.
Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.2 billion for 2013, $1.1 billion for 2012 and $1.1 billion for 2011.
Johnson & Johnson°Merck Consumer Pharmaceuticals Company
In 2011, Merck sold its 50% interest in the Johnson & Johnson°Merck Consumer Pharmaceuticals Company (“JJMCP”) joint venture to J&J. The venture between Merck and J&J was formed in 1989 to develop, manufacture, market and distribute certain over-the-counter consumer products in the United States and Canada. Merck received a one-time payment of $175 million and recognized a pretax gain of $136 million in 2011 reflected in Other (income) expense, net. The partnership assets also included a manufacturing facility. Sales of products marketed by the joint venture were $62 million for the period from January 1, 2011 until the September 29, 2011 divestiture date.
Investments in affiliates accounted for using the equity method, including the above joint ventures, totaled $1.6 billion at December 31, 2013 and $1.3 billion at December 31, 2012. These amounts are reported in Other assets. Amounts due from the above joint ventures included in Deferred income taxes and other current assets were $277 million at December 31, 2013 and $302 million at December 31, 2012.
Summarized information for those affiliates (excluding AZLP disclosed separately above) is as follows:
Years Ended December 312013 2012 
2011(1)
Sales$1,326
 $1,295
 $1,331
Materials and production costs581
 573
 584
Other expense, net691
 705
 642
Income before taxes54
 17
 105
December 312013 2012
Current assets$1,486
 $971
Noncurrent assets149
 112
Current liabilities456
 480
Noncurrent liabilities154
 97
Year Ended December 31
2014 (1)
Sales$2,205
Materials and production costs1,044
Other expense, net604
Income before taxes (2)
557
(1) Includes information forresults through the JJMCP joint venture until its divestitureJune 30, 2014 termination date.
(2) Merck’s partnership returns from AZLP were generally contractually determined as noted above and were not based on September 29, 2011.a percentage of income from AZLP, other than with respect to Merck’s 1% limited partnership interest.



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9.    Loans Payable, Long-Term Debt and Other Commitments
Loans payable at December 31, 20132016 included $2.1 billion$300 million of notes due in 2014, $1.6 billion of commercial paper, $402 million of short-term foreign borrowings2017 and $370267 million of long-dated notes that are subject to repayment at the option of the holder. Loans payable at December 31, 20122015 included $1.8$2.3 billion of notes due in 2013,2016, $1.7 billion of commercial paper, $45410 million of short-term foreign borrowings and $328225 million of long-dated notes that are subject to repayment at the option of the holders. The weighted-average interest rate of the commercial paper borrowings was 0.09%0.40% and 0.15%0.07% atfor the years ended December 31, 20132016 and 2012,2015, respectively.

Long-term debt at December 31 consisted of:
2013 20122016 2015
2.75% notes due 2025$2,487
 $2,485
3.70% notes due 20451,972
 1,971
2.80% notes due 2023$1,749
 $—
1,743
 1,742
6.50% notes due 20331,306
 1,310
5.00% notes due 20191,293
 1,294
1,273
 1,283
1.85% notes due 20201,238
 1,239
4.15% notes due 20431,246
 —
1,236
 1,236
2.35% notes due 20221,228
 1,233
3.875% notes due 20211,148
 1,147
1,152
 1,158
6.55% notes due 20371,143
 1,146
6.00% notes due 20171,095
 1,112
4.00% notes due 20151,029
 1,049
4.75% notes due 20151,023
 1,044
1.125% euro-denominated notes due 20211,035
 1,091
1.875% euro-denominated notes due 20261,028
 1,084
2.40% notes due 20221,000
 1,000
1,003
 1,011
Floating-rate borrowing due 20181,000
 —
999
 998
1.10% notes due 2018998
 998
999
 998
0.70% notes due 2016997
 —
1.30% notes due 2018975
 —
985
 985
2.25% notes due 2016866
 874
6.50% notes due 2033806
 809
Floating-rate notes due 2020698
 698
6.55% notes due 2037594
 596
0.50% euro-denominated notes due 2024516
 —
1.375% euro-denominated notes due 2036512
 —
2.50% euro-denominated notes due 2034511
 538
3.60% notes due 2042489
 489
5.85% notes due 2039749
 749
415
 415
Floating-rate borrowing due 2016500
 —
6.40% debentures due 2028499
 499
5.75% notes due 2036498
 498
369
 369
5.95% debentures due 2028498
 498
355
 354
3.60% notes due 2042492
 492
6.40% debentures due 2028325
 325
6.30% debentures due 2026249
 248
152
 152
5.375% euro-denominated notes due 2014—
 2,058
Floating-rate notes due 2017—
 300
Other186
 238
154
 270
$20,539
 $16,254
$24,274
 $23,829
Other (as presented in the table above) included $119147 million and $165223 million at December 31, 20132016 and 2012,2015, respectively, of borrowings at variable rates averaging 0.0%that resulted in effective interest rates of 0.89% and zero for 20132016 and 0.1% for 2012.2015, respectively. Other also included foreign borrowings of $64 million and $7043 million at December 31, 2013 and 2012, respectively,2015 at varying rates up to 4.5% and 8.5%, respectively.4.75%.
With the exception of the 6.3%6.30% debentures due 2026, the notes listed in the table above are redeemable in whole or in part, at Merck’s option at any time, at varying redemption prices.
In May 2013,November 2016, the Company completed an underwritten public offeringissued €1.0 billion principal amount of$6.5 billion senior unsecured notes consisting of $1.0 billion aggregate€500 million principal amount of 0.70%0.50% notes due in 2016, $5002024 and €500 million aggregate principal amount of floating rate1.375% notes due in 2016, $1.02036. The Company intends to use the net proceeds of the offering of $1.1 billion aggregate for general corporate purposes, including without limitation, the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities.
In October 2014, the Company issued €2.5 billion principal amount of 1.30%senior unsecured notes. The net proceeds of the offering of $3.1 billion were used in part to repay debt that was validly tendered in connection with tender offers launched by the Company for certain outstanding notes dueand debentures. The Company paid $2.5 billion in 2018, $1.0aggregate consideration (applicable purchase price together with accrued interest) to redeem $1.8 billion aggregate principal

amount of debt. In November 2014, Merck redeemed an additional $2.0 billion principal amount of floating rate notes duesenior unsecured notes. The Company recorded a pretax loss of $628 million in 2018, $1.75 billion aggregate principal amount of 2.80% notes due2014 in 2023 and $1.25 billion aggregate principal amount of 4.15% notes due in 2043. Interest on the notes is payable semi-annually. The notes of each series are redeemable in whole or in part at any time at the Company’s option at varying redemption prices. A substantial portion of the net proceeds from the notes were used to repurchase the Company’s common stock pursuant to an accelerated share repurchase agreement in May 2013 (see Note 11).connection with these transactions.

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Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp. (“MSD”)(MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.
Certain of the Company’s borrowings require that Merck comply with financial covenants including a requirement that the Total Debt to Capitalization Ratio (as defined in the applicable agreements) not exceed 60%. At December 31, 2013,2016, the Company was in compliance with these covenants.
The aggregate maturities of long-term debt for each of the next five years are as follows: 2014, $2.1 billion; 2015, $2.1 billion; 2016, $2.4 billion; 2017, $1.1 billion301 million; 2018, $3.0 billion; 2019, $1.3 billion; 2020, $1.9 billion; 2021, $2.2 billion.
In May 2012,June 2016, the Company terminated its existing credit facility and entered into a new $4.06.0 billion, five-year credit facility maturingthat matures in May 2017.June 2021. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.
Rental expense under operating leases, net of sublease income, was $367292 million in 2013,2016, $396303 million in 20122015 and $411350 million in 2011.2014. The minimum aggregate rental commitments under noncancellable leases are as follows: 2014, $259 million; 2015, $208 million; 2016, $132 million; 2017, $91200 million; 2018, $64141 million; 2019, $122 million; 2020, $88 million; 2021, $63 million and thereafter, $144140 million. The Company has no significant capital leases.
10.    Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters such as antitrust actions andincluding environmental matters. Except for the Vioxx Litigation (as defined below) for which a separate assessment is provided in this Note, inIn the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial position, results of operations or cash flows.
Given the nature of the litigation discussed below including the Vioxx Litigation, and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.
The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.
The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certainmost product liabilities effective August 1, 2004.

Vioxx Litigation
Product Liability Lawsuits
As previously disclosed, Merck iswas a defendant in approximately 90 federal and statea number of putative class action lawsuits (the “Vioxx Product Liability Lawsuits”) alleging personaleconomic injury or economic loss as a result of the purchase or use of Vioxx. Most, all but one of the remaining cases are coordinated in a multidistrict litigation in the U.S. District Court for the Eastern District of Louisiana (the “Vioxx MDL”) before Judge Eldon E. Fallon.
Merck has reached a resolution, approved by Judge Fallon, of all remaining federal court putative class actions that were brought on behalf of individual purchasers or users of Vioxx seeking reimbursement for alleged economic loss.which have been settled. Under the settlement, Merck willagreed to pay up to $23 million to payresolve all properly documented claims submitted

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by class members, approved attorneys’ fees and expenses, and approved settlement notice costs and certain other administrative expenses. The court entered an order approving the settlement on January 6, 2014. The period for members to submit claims under the settlement is still pending.
Merck also settled a Missouri state court class action of plaintiffs who sought reimbursement for out-of-pocket costs relating to Vioxx. The Company established a reserve of $39 million in 2012 in connection
review process has been completed with that settlement agreement, which is the minimum amount that the Company paying approximately $700,000. The amount of attorneys’ fees to be paid is requiredyet to pay under the agreement. The settlement was approved, and final judgment in the action has been entered. The court-approved process for class members to submit claims under the settlement closed in October 2013.
In Indiana, plaintiffs filed a motion to certify a class of Indiana Vioxx purchasers in a case pending before the Circuit Court of Marion County, Indiana. That case has been dormant for several years. In April 2010, a Kentucky state court denied Merck’s motion for summary judgment and certified a class of Kentucky plaintiffs seeking reimbursement for out-of-pocket costs relating to Vioxx. The trial court subsequently entered an amended class certification order in January 2011. The matter was settled on a named-plaintiff-only basis in December 2013.be determined.
Merck is also a defendant in a lawsuit (together with the above-referenced lawsuits, brought by state Attorneys General of four states — Alaska, Mississippi, Montana and Utah. All of these actions are pending in the Vioxx MDL proceeding. These actions allegeProduct Liability Lawsuits) brought by the Attorney General of Utah. The lawsuit is pending in Utah state court. Utah alleges that Merck misrepresented the safety of Vioxx. These suits seek recovery and seeks damages and penalties under the Utah False Claims Act. No trial date has been set. Merck recently reached agreements with the Attorneys General in Alaska and Montana to settle their state consumer protection act cases against the Company for expenditures$15.25 million and $16.7 million, respectively. As a result, Alaska’s action was dismissed with prejudice on Vioxx by government-funded health care programs, such as Medicaid, and/or penalties for alleged Consumer Fraud Act violations. In November 2013, the Circuit Court of Franklin County, Kentucky approved a settlement in anSeptember 30, 2016, and Montana’s action filed by the Kentucky Attorney General, under which Merck agreed to pay Kentucky $25 million to resolve its lawsuit and the related appeals.was dismissed with prejudice on October 6, 2016.

Shareholder Lawsuits
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, various putative class actions and individual lawsuits under federal securities laws and state laws have beenwere filed against Merck and various currentcertain former employees alleging that the defendants violated federal securities laws by making alleged material misstatements and former officers and directors (the “omissions with respect to the cardiovascular safety of Vioxx (Vioxx Securities Lawsuits”)Lawsuits). The Vioxx Securities Lawsuits arewere coordinated in a multidistrict litigation in the U.S. District Court for the District of New Jersey before Judge Stanley R. Chesler, and have been consolidated for all purposes. In August 2011, Judge Chesler granted in part and denied in part Merck’s motion to dismissChesler. As previously disclosed, Merck reached a resolution of the Fifth Amended Class Action Complaint in the consolidated securities action. Among other things, the claims based on statements made on or after the voluntary withdrawal of Vioxx on September 30, 2004, have been dismissed. In October 2011, defendants answered the Fifth Amendedsecurities class action for which a reserve was recorded in 2015 and under which Merck created a settlement fund in 2016 of $830 million (the Settlement Class Action Complaint. In April 2012, plaintiffs filed a motionFund) and agreed to pay an additional amount for class certificationapproved attorneys’ fees and in January 2013, Judge Chesler granted that motion. In March 2013, plaintiffs filed a motion for leaveexpenses up to amend their complaint to add certain allegations to expand the class period. In May 2013,$232 million (the Fee/Expense Fund). On June 28, 2016, the court denied plaintiffs’ motionapproved the settlement and awarded attorneys’ fees and expenses in the amount of $222 million; the remaining amount of the Fee/Expense Fund will be added to the Settlement Class Fund. The Company paid the total settlement amount into escrow in April 2016. After available funds under certain insurance policies, Merck’s net cash payment for leavethe settlement and fees was approximately $680 million. The settlement covers all claims relating to amend their complaintVioxx by settlement class members who purchased Merck securities between May 21, 1999, and October 29, 2004. The settlement is not an admission of wrongdoing and, as part of the settlement agreement, defendants continue to expanddeny the class period, but granted plaintiffs’ leave to amend their complaint to add certain allegations within the existing class period. In June 2013, plaintiffs filed their Sixth Amended Class Action Complaint. In July 2013, defendants answered the Sixth Amended Class Action Complaint. Discovery has been completed and is now closed. Under the court’s scheduling order, dispositive motions were filed on January 17, 2014.allegations.
As previously disclosed, severalIn addition, Merck reached a resolution of the above referenced individual securities lawsuits filed by foreign and domestic institutional investors, also are consolidated with the Vioxx Securities Lawsuits. In October 2011, plaintiffs filed amended complaints in each of the pending individual securities lawsuits. Also in October 2011, a new individual securities lawsuit (the “KBC Lawsuit”) was filed in the District of New Jersey by several foreign institutional investors; that case iswhich were also consolidated with the Vioxx Securities Lawsuits. In January 2012, defendants filed motions to dismiss in one

Insurance
As a result of the individual lawsuits (the “ABP Lawsuit”). Briefing onpreviously disclosed insurance arbitration, the motions to dismiss was completedCompany’s insurers paid insurance proceeds of approximately $380 million in March 2012. In August 2012, Judge Chesler granted in part and denied in partconnection with the motions to dismisssettlement of the ABP Lawsuit. Among other things, certain alleged misstatements and omissions were dismissed as inactionable and all state law claims were dismissed in full. In September 2012, defendants answered the complaints in all individual actions other than the KBC Lawsuit; on the same day, defendants moved to dismiss the complaint in the KBC Lawsuit on statute of limitations grounds. In December 2012, Judge Chesler denied the motion to dismiss the KBC Lawsuit and, in January 2013, defendants answered the complaint in the KBC Lawsuit. Discovery has been completed and is now closed. Under the court’s scheduling order, dispositive motions were filed on January 24, 2014.


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Insurance
class action. The Company also has Directors and Officers insurance coverage applicable to the Vioxx Securities Lawsuits with remaining stated upper limits of approximately $165$145 million,, which is currently being used to partially fund the Company’s legal fees. As a result of the previously disclosed insurance arbitration, additional insurance coverage for these claims should also be available, if needed, under upper-level excess policies that provide coverage for a variety of risks.Company has not received. There are disputes with the insurers about the availability of some or all of the Company’s Directors and Officers insurance coverage for these claims and there are likely to be additional disputes.claims. The amounts actually recovered under the Directors and Officers policies discussed in this paragraph may be less than the stated upper limits.

International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, Merck has been named as a defendant in litigation relating to Vioxx in Brazil Canada,and Europe and Israel (collectively, the “Vioxx International Lawsuits”). As previously disclosed, the Company has entered into an agreement to resolve all claims related to Vioxx in Canada pursuant to which the Company will pay a minimum of approximately $21 million but not more than an aggregate maximum of approximately $36 millionLawsuits). The agreement has been approved by courtslitigation in Canada’s provinces.these jurisdictions is generally in procedural stages and Merck expects that the litigation may continue for a number of years.

Reserves
The Company has an immaterial reserve with respect to certain Vioxx Product Liability Lawsuits. The Company has established no other liability reserves for, and believes that it has meritorious defenses to, the remaining Vioxx Product Liability Lawsuits Vioxx Securities Lawsuits and Vioxx International Lawsuits (collectively, the “Vioxx Litigation”) and will vigorously defend against them. In view of the inherent difficulty of predicting the outcome of litigation, particularly where there are many claimants and the claimants seek indeterminate damages, the Company is unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the remaining Vioxx Litigation. The Company has established a reserve with respect to the Canadian settlement, certain other Vioxx Product Liability Lawsuits and other immaterial settlements related to certain Vioxx International Lawsuits. The Company also has an immaterial remaining reserve relating to the previously disclosed Vioxx investigation for the non-participating states with which litigation is continuing. The Company has established no other liability reserves with respect to the Vioxx Litigation. Unfavorable outcomes in the Vioxx Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations.

Other Product Liability Litigation
Fosamax
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Fosamax (the “(Fosamax Litigation”)Litigation). As of December 31, 2013,2016, approximately 5,4154,230 cases which include approximately 5,680 plaintiff groups, had beenare filed and were pending against

Merck in either federal or state court, including one case which seeks class action certification, as well as damages and/or medical monitoring.court. In approximately 1,14020 of these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw (“ONJ”)(ONJ), generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use of Fosamax. In addition, plaintiffs in approximately 4,2754,210 of these actions generally allege that they sustained femur fractures and/or other bone injuries (“Femur Fractures”)(Femur Fractures) in association with the use of Fosamax.

Cases Alleging ONJ and/or Other Jaw Related Injuries
In August 2006, the Judicial Panel on Multidistrict Litigation (JPML) ordered that certain Fosamax product liability cases pending in federal courts nationwide should be transferred and consolidated into one multidistrict litigation (Fosamax ONJ MDL) for coordinated pre-trial proceedings.
In December 2013, Merck reached an agreement in principle with the Plaintiffs’ Steering Committee (PSC) in the Fosamax ONJ MDL (as defined below) to resolve pending ONJ cases not on appeal in the Fosamax ONJ MDL and in the state courts for an aggregate amount of $27.7 million. Merck and the PSC subsequently formalized the terms of this agreement in a Master Settlement Agreement (ONJ Master Settlement Agreement) that was executed in April 2014 and included over 1,200 plaintiffs. In July 2014, Merck elected to proceed with the ONJ Master Settlement Agreement at a reduced funding level of $27.3 million whichsince the Company recorded as liability in the fourth quarter of 2013. All of plaintiffs’ counsel have advised the Company that they intend to participate in the settlement plan. As a condition to the settlement, 100% of the state and federal ONJ plaintiffs must also agree to participate in the settlement plan by March 31, 2014. If 100% participation is not achieved,level was approximately 95%. Merck has until May 15, 2014, to determine whether it will terminatefully funded the ONJ Master Settlement Agreement and the escrow agent under the agreement waive the 100% participation requirement, or agreehas been making settlement payments to a lesser funding amount for the settlement fund. This tentative settlementqualifying plaintiffs. The ONJ Master Settlement Agreement has no effect on the cases alleging Femur Fractures discussed below.

Cases AllegingDiscovery is currently ongoing in some of the approximately 20 remaining ONJ and/or Other Jaw Related Injuries
In August 2006, the Judicial Panel on Multidistrict Litigation (“JPML”) orderedcases that certain Fosamax product liability casesare pending in various federal courts nationwide should be transferred and consolidated into one multidistrict litigation

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(the “Fosamax ONJ MDL”) for coordinated pre-trial proceedings. The Fosamax ONJ MDL has been transferred to Judge John Keenan in the U.S. District Court for the Southern District of New York. As a result of the JPML order, approximately 855 of the cases are before Judge Keenan. In the first Fosamax ONJ MDL trial, Boles v. Merck, the Fosamax ONJ MDL court declared a mistrial because the eight person jury could not reach a unanimous verdict. The Boles case was retried in June 2010 and resulted in a verdict in favor of the plaintiff in the amount of $8 million. Merck filed post-trial motions seeking judgment as a matter of law or, in the alternative, a new trial. In October 2010, the court denied Merck’s post-trial motions but sua sponte ordered a remittitur reducing the verdict to $1.5 million. Plaintiff rejected the remittitur ordered by the court and requested a new trial on damages. Plaintiff and Merck subsequently entered into a confidential stipulation as to the amount of plaintiff’s damages that enabled Merck to appeal the underlying judgment, and Merck filed its appeal in the Boles case in October 2012. Prior to 2013, three other cases were tried to verdict in the Fosamax ONJ MDL. Defense verdicts in favor of Merck were returned in each of those three cases. Plaintiffs have filed an appeal in two of the cases – Graves v. Merck and Secrest v. Merck. In January 2013, the U.S. Court of Appeals for the Second Circuit affirmed the judgment in Merck’s favor in Secrest. Plaintiff in the Secrest case subsequently filed a petition for a writ of certiorari with the U.S. Supreme Court, which was denied in June 2013.
In February 2011, Judge Keenan ordered that two further bellwether trials be conducted in the Fosamax ONJ MDL. Spano v. Merck and Jellema v. Merck were selected by the court to be tried in 2012, but each case was dismissed by the plaintiffs. In March 2012, the court selected Scheinberg v. Merck as the next case to be tried. Trial in the Scheinberg case began in January 2013 and, in February 2013, the jury returned a mixed verdict, finding in favor of Merck on plaintiff’s design defect claim and finding in favor of plaintiff on her failure to warn claim, and awarded her $285 thousand in compensatory damages. Merck’s post-trial motion for judgment as a matter of law in the Scheinberg case was denied in July 2013,state courts and the Company has filed an appeal with the U.S. Court of Appeals for the Second Circuit.
In November 2012, Judge Keenan issued an order requiring plaintiffs who do not allege certain types of specific injuriesintends to provide expert reports in support of their claims. The deadlines for submission ofdefend against these reports were staggered throughout the first half of 2013. To date, the claims of approximately 425 plaintiffs subject to the order have been dismissed with prejudice. In August 2013, Judge Keenan denied Merck’s request to extend his order to additional groups of plaintiffs and also decided to start winding down the Fosamax ONJ MDL by the remand/transfer of the remaining cases back to their proper venues at a rate of 200 cases per month beginning November 1, 2013. That date was subsequently changed at plaintiffs’ request to December 1, 2013, and was later suspended indefinitely.
In addition, in July 2008, an application was made by the Atlantic County Superior Court of New Jersey requesting that all of the Fosamax cases pending in New Jersey be considered for mass tort designation and centralized management before one judge in New Jersey. In October 2008, the New Jersey Supreme Court ordered that all pending and future actions filed in New Jersey arising out of the use of Fosamax and seeking damages for existing dental and jaw-related injuries, including ONJ, but not solely seeking medical monitoring, be designated as a mass tort for centralized management purposes before Judge Carol E. Higbee in Atlantic County Superior Court. As of December 31, 2013, approximately 280 ONJ cases were pending against Merck in Atlantic County, New Jersey. In July 2009, Judge Higbee entered a Case Management Order (and various amendments thereto) setting forth a schedule that contemplates completing fact and expert discovery in an initial group of cases to be reviewed for trial. In February 2011, the jury in Rosenberg v. Merck, the first trial in the New Jersey coordinated proceeding, returned a verdict in Merck’s favor. In April 2012, the jury in Sessner v. Merck, the second case tried in New Jersey, also returned a verdict in Merck’s favor. Plaintiffs have filed an appeal in both cases. In March 2013, the New Jersey Appellate Division affirmed the judgment in Merck’s favor in the Rosenberg case.lawsuits.

Cases Alleging Femur Fractures
In March 2011, Merck submitted a Motion to Transfer to the JPML seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. The Motion to Transfer was granted in May 2011, and all federal cases involving allegations of Femur Fracture have been or will be transferred to a multidistrict litigation in the District of New Jersey (the “Fosamax(Femur Fracture MDL). In the only bellwether case tried to date in the Femur Fracture MDL”). As a result of the JPML order, approximately 1,105 cases were pending in the Fosamax Femur Fracture MDL, as of December 31, 2013. A Case Management Order was entered requiring the parties to review 40 cases (later reduced to 33 cases). Judge Joel Pisano selected four cases from that group to be tried as the initial bellwether cases in the Fosamax Femur Fracture MDL. The first bellwether case, Glynn v. Merck, began on April 8, 2013, and the jury returned a verdict in Merck’s

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favor on April 29, 2013; favor. In addition, in addition, on June 27, 2013, Judge Pisanothe Femur Fracture MDL court granted Merck’s motion for judgment as a matter of law in the Glynn case and held that the plaintiff’s failure to warn claim was preempted by federal law. Judge Pisano set a May 5, 2014, trial date for
In August 2013, the bellwether trial of a case in which the alleged injury took place after January 31, 2011. Following the completion of fact discovery, the court selected Sweet v. Merck as the next Fosamax Femur Fracture MDL case to be tried on May 5, 2014, but plaintiffs subsequently dismissed that case. As a result, the May 2014 trial date was withdrawn and the court is expected to set an October 1, 2014 trial date for the next bellwether trial in the Fosamax Femur Fracture MDL.
In addition, Judge Pisano entered an order in August 2013 requiring plaintiffs in theFosamax Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the Glynn case. Plaintiffs filed their responsesPursuant to the show cause order, atin March 2014, the endFemur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of September 2013those cases are appealing that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). The Femur Fracture MDL court has since dismissed without prejudice another approximately 540 cases pending plaintiffs’ appeal of the preemption ruling to the Third Circuit. On June 30, 2016, the Third Circuit heard oral argument on plaintiffs’ appeal of the preemption ruling and the parties are awaiting the decision.
In addition, in June 2014, the Femur Fracture MDL court granted Merck summary judgment in the Gaynorv. Merck case and found that Merck’s updates in January 2011 to the Fosamax label regarding atypical femur fractures were adequate as a matter of law and that Merck adequately communicated those changes. The plaintiffs in Gaynor have appealed the court’s decision to the Third Circuit. In August 2014, Merck filed its replya motion requesting that the court enter a further order requiring all plaintiffs in the Femur Fracture MDL who claim that the 2011 Fosamax label is inadequate and the proximate cause of their alleged injuries to those responses at the end of October 2013. A hearingshow cause why their cases should not be dismissed based on the court’s preemption decision and its ruling in the Gaynor case. In November 2014, the court granted Merck’s motion and entered the requested show cause order was heldorder.
As of December 31, 2016, seven cases were pending in the Femur Fracture MDL, excluding the 515 cases dismissed with prejudice on January 29, 2014preemption grounds that are pending appeal and a final ruling from the court is pending.540 cases dismissed without prejudice that are also pending the aforementioned appeal.

As of December 31, 2013,2016, approximately 2,6552,860 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge HigbeeJessica Mayer in Atlantic County Superior Court.Middlesex County. The parties selected an initial group of 30 cases to be reviewed through fact discovery. The first trialTwo additional groups of the New Jersey state Femur Fracture50 cases Su v. Merck, began in early March 2013, but a mistrial was declared later in March 2013 after the plaintiff suffered a serious medical issue unrelated to her use of Fosamax that prevented her from proceeding with the trial. The next trial, Unanski v. Merck, was seteach to be tried beginningreviewed through fact discovery were selected in November 2013 but was continued and is now set for trial, potentially along with one or two other cases (Love v. Merck and Caravello v. Merck), beginning on March 17, 2014. An additional2014, respectively. A further group of 5025 cases to be reviewed through fact discovery was selected by Merck in November 2013.July 2015, and Merck has continued to select additional cases to be reviewed through fact discovery during 2016.
As of December 31, 2013,2016, approximately 510280 cases alleging Femur Fractures have been filed and are pending in California state court. A petition was filed seeking to coordinate all Femur Fracture cases filed in California state court before a single judge in Orange County, California. The petition was granted and Judge Steven PerkThierry Colaw is nowcurrently presiding over the coordinated proceedings. In November 2013,March 2014, the court ordereddirected that a group of 10 discovery pool cases be reviewed through fact discovery commence.and subsequently scheduled the Galper v. Merck case, which plaintiffs selected, as the first trial. The Galper trial began in February 2015 and the jury returned a verdict in Merck’s favor in April 2015, and plaintiff has appealed that verdict to the California appellate court. Oral argument on plaintiff’s appeal in Galper was held on November 17, 2016 and the parties are expectedawaiting a decision. The next Femur Fracture trial in California that was scheduled to select the first round of cases to be includedbegin in April 2016 was stayed at plaintiffs’ request and a bellwether discovery pool in May 2014.new trial date has not been set.
Additionally, there are sevenfive Femur Fracture cases pending in other state courts.
Discovery is ongoing in theFosamax Femur Fracture MDL and in state courts where Femur Fracture cases are pending and the Company intends to defend against these lawsuits.

Januvia/Janumet
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Januvia and/or Janumet. As of December 31, 2013,2016, approximately 165 cases were1,195 product user claims have been served on and are pending against, Merck alleging generally that use of Januvia and/or Janumet caused the development of pancreatic cancer.cancer and other injuries. These complaints were filed in several different state and federal courts.
Most of the claims are pendingwere filed in a consolidated multidistrict litigation proceeding in the U.S. District Court for the Southern District of California called “In re Incretin-Based Therapies Products Liability Litigation.” That proceedingLitigation” (MDL). The MDL includes federal lawsuits alleging pancreatic cancer due to use of the following medicines: Januvia, Janumet, Byetta and Victoza, the latter two of which are products manufactured by other pharmaceutical companies. The majority of claims not filed in the MDL were filed in the Superior Court of California, County of Los Angeles (California State Court). As of December 31, 2016, eight product users have claims pending against Merck in state courts other than the California State Court.
In November 2015, the MDL and California State Court - in separate opinions - granted summary judgment to defendants on grounds of preemption. Of the approximately 1,195 served product user claims, these rulings resulted in the dismissal of approximately 1,100 product user claims.
Plaintiffs are appealing the MDL and California State Court preemption rulings.
In addition to the casesclaims noted above, the Company has agreed, as of December 31, 2013,2016, to toll the statute of limitations for twoapproximately 50 additional claims. The Company intends to defendcontinue defending against these lawsuits.

NuvaRing
As previously disclosed, beginning in May 2007, a number of complaints were filed in various jurisdictions asserting claims against the Company’s subsidiaries Organon USA, Inc., Organon Pharmaceuticals USA, Inc., Organon International (collectively, “Organon”), and the Company arising from Organon’s marketing and sale of NuvaRing (the “NuvaRing Litigation”), a combined hormonal contraceptive vaginal ring. The plaintiffs contend that Organon and Schering-Plough, among other things, failed to adequately design and manufacture NuvaRing and failed to adequately warn of the alleged increased risk of venous thromboembolism (“VTE”) posed by NuvaRing, and/or downplayed the risk of VTE. The plaintiffs seek damages for injuries allegedly sustained from their product use, including some alleged deaths, heart attacks and strokes. The majority of the cases are currently pending in a federal multidistrict litigation (the “NuvaRing MDL”) venued in Missouri and in a coordinated proceeding in New Jersey state court.

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As of December 31, 2013, there were approximately 1,880 filed NuvaRing cases, and approximately 1,405 unfiled claims that were identified in response to census orders issued in the NuvaRing MDL and New Jersey proceedings. Of the filed cases, approximately 1,660 are or will be pending in the NuvaRing MDL in the U.S. District Court for the Eastern District of Missouri before Judge Rodney Sippel, and approximately 210 are pending in coordinated proceedings in the Bergen County Superior Court of New Jersey before Judge Brian R. Martinotti. Proceedings in the NuvaRing MDL and New Jersey are stayed until May 31, 2014. Seven additional cases are pending in various other state courts, including cases in a coordinated state proceeding in the San Francisco Superior Court in California before Judge John E. Munter. Certain state court cases are scheduled for trial in 2014.
Merck and negotiating plaintiffs’ counsel have agreed to a settlement of the NuvaRing Litigation that is intended to resolve at least 95% of cases filed as of February 7, 2014, and unfiled claims under retainer by counsel prior to that date. Merck has agreed to a lump total settlement of $100 million, provided there is participation in the settlement of at least 95% of plaintiffs and eligible claimants overall and in certain categories. The Company has certain insurance coverage available to it, which is currently being used to partially fund the Company’s legal fees. This insurance coverage will also be used to fund the settlement. Accordingly, at December 31, 2013, the Company’s consolidated balance sheet includes a current liability for the settlement amount and a corresponding current asset reflecting anticipated insurance recoveries.

Propecia/Proscar
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving Propecia and/or Proscar. As of December 31, 2013,2016, approximately 1,1401,330 lawsuits involving a total of approximately 1,390have been filed by plaintiffs (in a few instances spouses are joined as plaintiffs in the suits) who allege that they have experienced persistent sexual side effects following cessation of treatment with Propecia and/or Proscar have been filed against Merck.. Approximately 2050 of the plaintiffs also allege that Propecia or Proscar has caused or can cause prostate cancer, testicular cancer or male breast cancer. The lawsuits have been filed in various federal courts and in state court in New Jersey. The federal lawsuits have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge John GleesonBrian Cogan of the Eastern District of New York. The matters pending in state court in New Jersey have been consolidated before Judge Jessica Mayer in Middlesex County. In addition, there is one matter pending in federalstate court in MassachusettsCalifornia, one matter pending in state court in New York, and one matter pending in state court in St. Louis, Missouri.Ohio. The Company intends to defend against these lawsuits.

Vytorin/ZetiaLitigation
As previously disclosed, in April 2008, a Merck shareholder filed a putative class action lawsuit in federal court which was consolidated in the District of New Jersey under the caption, In re Merck & Co., Inc. Vytorin/Zetia Securities Litigation. The complaint alleged that Merck and other defendants delayed releasing unfavorable results of the ENHANCE clinical trial regarding the efficacy of Vytorin and that Merck made false and misleading statements about expected earnings knowing that, once the results of the ENHANCE study were released, sales of Vytorin would decline and Merck’s earnings would suffer. In February 2013, Merck announced an agreement in principle with plaintiffs to settle this matter for $215 million. The settlement agreement was executed by the parties in June 2013, and approved by the court in October 2013. The settlement was reflected in the Company’s 2012 financial results as discussed below.
There was a similar consolidated securities class action lawsuit pending in the District of New Jersey against Schering-Plough and other defendants under the caption, In re Schering-Plough Corporation/ENHANCE Securities Litigation. In February 2013, Merck announced an agreement in principle with plaintiffs to settle this matter for $473 million. The settlement agreement was executed in June 2013, and approved by the court in October 2013. The settlement was reflected in the Company’s 2012 financial results and, together with the settlement described in the preceding paragraph (collectively, the “ENHANCE Litigation”), resulted in an aggregate charge of $493 million after taking into account anticipated insurance recoveries of $195 million. In the second quarter of 2013, the Company paid $480 million into a settlement fund. The Company’s insurers subsequently paid the remaining $208 million, which reflects an additional $13 million of insurance recoveries not previously recognized.
On November 14, 2013, two complaints were filed in the District of New Jersey against Merck as successor to Schering-Plough, and other defendants, by certain institutional investors who “opted-out” of the ENHANCE securities class action against Schering-Plough. In addition, on January 14, 2014, two complaints were filed in the District of New Jersey against Merck and other defendants by certain institutional investors who “opted-out” of the Vytorin/Zetia

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securities class action against Merck. The “opt-out” complaints contain allegations similar to those made by plaintiffs in the settled class actions against Schering-Plough and Merck. The Company intends to move to dismiss these complaints and otherwise to defend itself in the litigation.

Governmental Proceedings
As previously disclosed, Merck has received a Civil Investigative Demand (“CID”) issued by the U.S. Department of Justice (the “DOJ”) addressed to Inspire, a company acquired by Merck in May 2011. The CID advises that it relates to a False Claims Act investigation concerning allegations that Inspire caused the submission of false claims to federal health benefits programs for the drug AzaSite by marketing it for the treatment of indications not approved by the U.S. Food and Drug Administration (the “FDA”). The Company is cooperating with the DOJ in its investigation.
As previously disclosed, the Company has received a subpoenacivil investigative demand from the U.S. Attorney’s Office for the EasternSouthern District of California in 2010 requestingNew York that requests information in a civil federal health care investigation relating to the Company’s marketingcontracts with, services from and selling activitiespayments to pharmacy benefit managers with respect to IntegrilinMaxalt and AveloxLevitra from January 20031, 2006 to June 2010. In December 2012, the U.S. District Court for the Eastern District of California unsealed a complaint that a former employee of the Company had filed against it in 2009 under the federal False Claims Act and the False Claims Acts of various states. The complaint alleges that the Company caused false claims to be made to federal and state health care programs by promoting Integrilin for unapproved indications and providing unlawful payments and benefits to physicians and others to increase the utilization of Integrilin and Avelox. The federal government and the states under whose statutes the suit was filed each had the right, after investigating these allegations, to intervene in this suit and assume responsibility for its direction, but each of them has notified the court that they decline to intervene.present. The Company intends to defend against this lawsuit.is cooperating with the investigation.
As previously disclosed, on June 21, 2012, the U.S. District Court for the Eastern District of Pennsylvania unsealed a complaint that has been filed against the Company under the federal False Claims Act by two former employees alleging, among other things, that the Company defrauded the U.S. government by falsifying data in connection with a clinical study conducted on the mumps component of the Company’s M-M-R II vaccine. The complaint alleges the fraud took place between 1999 and 2001. The U.S. government had the right to participate in and take over the prosecution of this lawsuit, but has notified the court that it declined to exercise that right. The two former employees are pursuing the lawsuit without the involvement of the U.S. government. In addition, a putative class action lawsuit has been filed against the Company in the Eastern District of Pennsylvania on behalf of direct purchasers of the M‑M‑R II vaccine which is predicated on the allegations in the False Claims Act complaint and charges that the Company misrepresented the efficacy of the M-M-R II vaccine in violation of federal antitrust laws and various state consumer protection laws. The Company intends to defend against these lawsuits.
The Company has received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services on behalf of the U.S. Attorney’s Office for the District of Maryland and the Civil Division of the DOJ whichU.S. Department of Justice (DOJ) that requests information relating to the Company’s marketing of Singulair and Dulera Inhalation Aerosol and certain of its other marketing activities from January 1, 2006 to the present. The Company is cooperating with the investigation.
As previously disclosed, the Company had received a civil investigative demand from the U.S. Attorney’s Office, Eastern District of Pennsylvania that requested information relating to the Company’s contracting and pricing of Dulera Inhalation Aerosol with certain pharmacy benefit managers and Medicare Part D plans. The Company cooperated with the investigation and, in August 2016, the Company learned that the underlying qui tam complaint had been unsealed and voluntarily dismissed with prejudice as to the relator and without prejudice as to the government. The DOJ informed the Company that the matter is inactive and that there is no current investigation.
As previously disclosed, the Company has received letters from the DOJ and the SEC that seek information about activities in a number of countries and reference the Foreign Corrupt Practices Act. The Company has cooperated with the agencies in their requests and believes that this inquiry is part of a broader review of pharmaceutical industry practices in foreign countries. TheAs previously disclosed, the Company has been advised by the DOJ that, based on the information that it has received, it has closed its inquiry into this matter as it relates to the Company. InThe Company has also recently been advised by the future,SEC that it has closed its inquiry into this matter as it relates to the Company may receive additional requests for information from either or both ofCompany.
As previously disclosed, the DOJ and the SEC.
The Company’s subsidiaries in China have received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.


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Commercial Litigation
AWP Litigation
As previously disclosed,From time to time, the Company and/or certainreceives inquiries and is the subject of its subsidiaries have been named as defendantspreliminary investigation activities from Competition Authorities in cases brought by various states alleging manipulation by pharmaceutical manufacturers of Average Wholesale Prices (“AWP”), which are sometimes used by public and private payors in calculating provider reimbursement levels. The outcomemarkets outside the United States. Certain of these lawsuits could include substantial damages,inquiries or activities may lead to the impositioncommencement of substantial fines and penalties and injunctive or administrative remedies.
Since the start of 2012,formal proceedings. Should those proceedings be determined adversely to the Company, has settled AWP cases brought by the states of Alabama, Alaska, Kansas, Illinois, Kentucky, Louisiana, Oklahoma, Mississippi,monetary fines and/or remedial undertakings may be required.

Commercial and Wisconsin. A subsidiary of the Company continues to be a defendant in a case brought by one state, Utah.
The Company has also been reinstated as a defendant in a putative class action in New Jersey Superior Court which alleges on behalf of third-party payers and individuals that manufacturers inflated drug prices by manipulation of AWPs and other means. This case was originally dismissed against the Company without prejudice in 2007. The Company intends to defend against this lawsuit.

Other Litigation
K-DUR Antitrust Litigation
As previously disclosed, in June 1997 and January 1998, Schering-Plough Corporation (Schering-Plough) settled patent litigation with Upsher-Smith, Inc. (“Upsher-Smith”)(Upsher-Smith) and ESI Lederle, Inc. (“Lederle”)(Lederle), respectively, relating to generic versions of K-DUR, Schering-Plough’s long-acting potassium chloride product supplement used by cardiac patients, for which Lederle and Upsher-Smith had filed Abbreviated New Drug Applications (“ANDAs”)(ANDAs). Following the commencement of an administrative proceeding by the U.S. Federal Trade Commission (the “FTC”) in 2001 alleging anti-competitive effects from those settlements (which has beenwas resolved in Schering-Plough’s favor), putative class and non-class action suits were filed on behalf of direct and indirect purchasers of K-DUR against Schering-Plough, Upsher-Smith and Lederle and were consolidated in a multi-districtmultidistrict litigation in the U.S. District Court for the District of New Jersey. These suits claimed violations of federal and state antitrust laws, as well as other state statutory and common law causes of action, and sought unspecified damages. In April 2008, the indirect purchasers voluntarily dismissed their case. In March 2010,February 2016, the District Court granteddenied the Company’s motion for summary judgment relating to all of the direct purchasers’ claims concerning the settlement with Upsher-Smith and granted the Company’s motion for summary judgment relating to all of the direct purchasers’ claims concerning the settlement with Lederle. In anticipation of trial, the parties filed motions to exclude certain expert opinions and other evidence, and defendants filed a motion for summary judgment.

In February 2017, Merck and Upsher-Smith reached a settlement in principle with the class of direct purchasers and the opt-outs to the defendants onclass. Merck will contribute approximately $80 million in the remaining lawsuitsaggregate towards the overall settlement. Formal settlement agreements with the class and dismissed the matter in its entirety. In July 2012,opt-outs have yet to be executed and the Third Circuit Court of Appeals reversedsettlement with the District Court’s grant of summary judgment and remanded the case for further proceedings. At the same time, the Third Circuit upheld a December 2008 decisionclass is subject to approval by the District Court to certify certain direct purchaser plaintiffs’ claims as a class action.Court.
In August 2012, the Company filed a petition for certiorari with the U.S. Supreme Court seeking review of the Third Circuit’s decision. In June 2013, the Supreme Court granted that petition, vacated the judgment of the Third Circuit, and remanded the case for further consideration in light of its recent decision in FTC v. Actavis, Inc. That decision held that whether a so-called “reverse payment” — i.e., a payment from the holder of a pharmaceutical patent to a party challenging the patent made in connection with a settlement of their dispute — violates the antitrust laws should be determined on the basis of a “rule of reason” analysis. In September 2013, the Third Circuit returned the case to the District Court for further proceedings in accordance with the Actavis standard.

Coupon Litigation
In 2012, as previously disclosed, a number of private health plans filed separate putative class action lawsuits against the Company alleging that Merck’s coupon programs injured health insurers by reducing beneficiary co-payment amounts and, thereby, allegedly causing beneficiaries to purchase higher-priced drugs than they otherwise would have purchased and increasing the insurers’ reimbursement costs. The actions, which were assigned to a District Judge in the U.S. District Court for the District of New Jersey, sought damages and injunctive relief barring the Company from issuing coupons that would reduce beneficiary co-pays on behalf of putative nationwide classes of health insurers. Similar actions relating to manufacturer coupon programs have been filed against several other pharmaceutical manufacturers in a variety of federal courts. On April 29, 2013, the District Court dismissed all the actions against Merck without prejudice on the grounds that plaintiffs had failed to demonstrate their standing to sue. Plaintiffs subsequently filed a consolidated amended complaint, and Merck has filed a motion to dismiss that complaint.


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Sales Force Litigation
OnAs previously disclosed, in May 9, 2013, Ms. Kelli Smith filed a complaint against the Company in the United StatesU.S. District Court for the District of New Jersey ofon behalf of herself and a putative class of female sales representatives and a putative sub-class of female sales representatives with children, claiming (a) discriminatory policies and practices in selection, promotion and advancement, (b) disparate pay, (c) differential treatment, (d) hostile work environment and (e) retaliation under federal and state discrimination laws. On November 27, 2013, the Company filed a motion to dismiss the class claims. Plaintiffs sought and were granted leave to file an amended complaint. OnIn January 16, 2014, plaintiffs filed an amended complaint adding four additional named plaintiffs. In October 2014, the court denied the Company’s motion to dismiss or strike the class claims as premature. In September 2015, plaintiffs filed additional motions, including a motion for conditional certification under the Equal Pay Act; a motion to amend the pleadings seeking to add ERISA and constructive discharge claims and a Company subsidiary as a named defendant; and a motion for equitable relief. Merck filed papers in opposition to the motions. On April 27, 2016, the court granted plaintiff’s motion for conditional certification but denied plaintiffs’ motions to extend the liability period for their Equal Pay Act claims back to June 2009. As a result, the liability period will date back to April 2012, at the earliest. On April 29, 2016, the Magistrate Judge granted plaintiffs’ request to amend the complaint to add the following: (i) a Company subsidiary as a corporate defendant; (ii) an ERISA claim and (iii) an individual constructive discharge claim for one of the named plaintiffs. Approximately 700 individuals have opted-in to this action; the opt-in period has closed.
Qui Tam Litigation
As previously disclosed, on June 21, 2012, the U.S. District Court for the Eastern District of Pennsylvania unsealed a complaint that has been filed against the Company under the federal False Claims Act by two former employees alleging, among other things, that the Company defrauded the U.S. government by falsifying data in connection with a clinical study conducted on the mumps component of the Company’s M-M-R II vaccine. The complaint alleges the fraud took place between 1999 and 2001. The U.S. government had the right to participate in and take over the prosecution of this lawsuit, but notified the court that it declined to exercise that right. The two former employees are pursuing the lawsuit without the involvement of the U.S. government. In addition, as previously disclosed, two putative class action lawsuits on behalf of direct purchasers of the M‑M‑R II vaccine, which charge that the Company intendsmisrepresented the efficacy of the M-M-R II vaccine in violation of federal antitrust laws and various state consumer protection laws, are pending in the Eastern District of Pennsylvania. In September 2014, the court denied Merck’s motion to re-filedismiss the False Claims Act suit and granted in part and denied in part its motion to dismiss the class allegationsthen-pending antitrust suit. As a result, both the False Claims Act suit and the antitrust suits have proceeded into discovery. The Company intends to otherwise defend itself.against these lawsuits.
Merck KGaA Litigation
In January 2016, to protect its long-established brand rights in the United States, the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), operating as the EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit against the Company in France, the United Kingdom (UK), Germany, Switzerland, Mexico, and India alleging breach of the parties’ co-existence agreement, unfair competition and/or trademark infringement. In December 2015, the Paris Court of First Instance issued a judgment finding that certain activities by the Company directed towards France did not constitute trademark infringement and unfair competition while other activities were found to infringe. The Company and KGaA have both appealed the decision, and the appeal is scheduled to be heard in May 2017. In January 2016, the UK High Court issued a judgment finding that the Company had breached the co-existence agreement and infringed KGaA’s trademark rights as a result of certain activities directed towards the UK based on use of the word MERCK on promotional and information activity. As noted in the UK decision, this finding was not based on the Company’s use of the sign MERCK in connection with the sale of products or any material pharmaceutical business transacted in the UK. The Company and KGaA have both appealed this decision, and the appeal is scheduled to be heard in June 2017.


Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file ANDAs with the FDAU.S. Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Certain products of the Company (or products marketed via agreements with other companies) currently involved in such patent infringement litigation in the United States include: EmendCancidas for Injection, Integrilin, Nexium,, Invanz, Nasonex, Noxafil, and NuvaRing. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by generic companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through mergers and acquisitions, potentially significant intangible asset impairment charges.
EmendCancidas for Injection — In May 2012,February 2014, a patent infringement lawsuit was filed in the United States against Sandoz Inc. (“Sandoz”) inXellia Pharmaceuticals ApS (Xellia) with respect of Sandoz’sto Xellia’s application to the FDA seeking pre-patent expiry approval to market a generic version of EmendCancidas for Injection. The lawsuit automatically stays FDA approval of Sandoz’s application until July 2015 or until an adverse court decision, if any, whichever may occur earlier.. In June 2012,2015, the district court found that Xellia infringed the Company’s patent and ordered that Xellia’s application not be approved until the patent expires in September 2017 (including pediatric exclusivity). Xellia appealed this decision, and the appeal was heard in March 2016. In May 2016, the parties reached a settlement whereby Xellia can launch its generic version in August 2017, or earlier under certain conditions. In August 2014, a patent infringement lawsuit was filed in the United States against Accord Healthcare, Inc. US, Accord Healthcare, Inc. and Intas Pharmaceuticals Ltd (collectively, “Intas”)Fresenius Kabi USA, LLC (Fresenius) in respect of Intas’Fresenius’s application to the FDA seeking pre-patent expiry approval to market a generic version of EmendCancidas for Injection. The Company has agreed with Intas to stay. In December 2016, the lawsuit pending the outcome of the lawsuit with Sandoz.parties reached a settlement whereby Fresenius can launch its generic version in August 2017, or earlier under certain conditions.
IntegrilinInvanz — In February 2009,July 2014, a patent infringement lawsuit was filed (jointly with Millennium Pharmaceuticals, Inc.)in the United States against Hospira in respect of Hospira’s application to the FDA seeking pre-patent expiry approval to market a generic version of Invanz. The trial in this matter was held in April 2016 and, in October 2016, the district court ruled that the patent is valid and infringed. In August 2015, a patent infringement lawsuit was filed in the United States against Savior Lifetec Corporation (Savior) in respect of Savior’s application to the FDA seeking pre-patent expiry approval to market a generic version of Invanz. The lawsuit automatically stays FDA approval of Savior’s application until November 2017 or until an adverse court decision, if any, whichever may occur earlier.
Nasonex — In July 2014, a patent infringement lawsuit was filed in the United States against Teva Parenteral Medicines,Pharmaceuticals USA, Inc. (“TPM”)(Teva Pharma) in respect of TPM’sTeva Pharma’s application to the FDA seeking pre-patent expiry approval to market a generic version of Nasonex. The trial in this matter was held in June 2016. In November 2016, the district court ruled that the patent was valid but not infringed. The Company has appealed this decision. In March 2015, a patent infringement lawsuit was filed in the United States against Amneal Pharmaceuticals LLC (Amneal) in respect of Amneal’s application to the FDA seeking pre-patent expiry approval to market a generic version of Nasonex. The trial in this matter was held in June 2016. In January 2017, the district court ruled that the patent was valid but not infringed. The Company has appealed this decision.
A previous decision, issued in June 2013, held that the Merck patent in the Teva Pharma and Amneal lawsuits covering mometasone furoate monohydrate was valid, but that it was not infringed by Apotex Corp.’s proposed product. In April 2015, a patent infringement lawsuit was filed against Apotex Inc. and Apotex Corp. (Apotex) in respect of Apotex’s now-launched product that the Company believes differs from the generic version in the previous lawsuit.
Noxafil — In August 2015, the Company filed a lawsuit against Actavis Laboratories Fl, Inc. (Actavis) in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Integrilin.Noxafil. The lawsuit automatically stays FDA approval of Actavis’s application until December 2017 or until an adverse court decision, if any, whichever may occur earlier. The trial in this matter is currently scheduled to begin in July 2017. In October 2011,March 2016, the parties entered intoCompany filed a settlement agreement allowing TPM to sell a generic version of Integrilin beginning June 2, 2015. In November 2012, a patent infringement lawsuit was filed against APP Pharmaceuticals,Roxane Laboratories, Inc. and Fresenius Kabi USA Inc. (collectively, “APP”)(Roxane) in the United States in respect of APP’sthat company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Integrilin. In March 2013, the parties entered into a settlement agreement allowing APP to sell a generic version of Integrilin beginning June 2, 2015. In September 2013, a patent infringement lawsuit was filed against Ben Venue Laboratories d/b/a Bedford Laboratories (“Bedford”) in respect of Bedford’s application to the FDA seeking pre-patent expiry approval to sell a generic version of Integrilin.Noxafil. The lawsuit automatically stays FDA approval of Bedford’sRoxane’s application until February 2016August 2018 or until an adverse court decision, if any, whichever may occur earlier.
Nexium— Patent infringement lawsuits were brought (jointly with AstraZeneca) In February 2016, the Company filed a lawsuit against Par Sterile Products LLC, Par Pharmaceutical, Inc., Par Pharmaceutical Companies, Inc. and Par Pharmaceutical Holdings, Inc. (collectively, Par) in the United States against the following generic companies: Ranbaxy Laboratories Ltd., IVAX Pharmaceuticals, Inc. (later acquired by Teva Pharmaceuticals, Inc.), Dr. Reddy’s Laboratories, Sandoz, Lupin Ltd., Hetero Drugs Limited Unit III and Torrent Pharmaceuticals Ltd. in response to each genericrespect of that company’s application to the FDA seeking pre-patentpre-

patent expiry approval to sell a generic version of Nexium. Settlements have beenNoxafil. In October 2016, the parties reached in each of these lawsuits, the terms of which provide that the respective generic company may bring a settlement whereby Par can launch its generic version of esomeprazole product to market on May 27, 2014. In addition, a patent infringement lawsuit was also filed (jointly with AstraZeneca) in February 2010 in the United States against Sun Pharma Global Fze (“Sun Pharma”) in respect of its application to the FDA seeking pre-patent expiry approval to sell a generic version of Nexium IV, which lawsuit was settled with an agreement which provided that Sun Pharma was entitled to bring its generic esomeprazole IV product to market in the United States on January 1, 2014. A patent infringement lawsuit was also filed (jointly with AstraZeneca) in the United States against Hanmi USA, Inc. (“Hanmi”) related to its application to the FDA seeking pre-patent expiry approval to sell a different salt of esomeprazole

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than is found in Nexium (the “Hanmi Product”). In a May 2013 agreement, Hanmi conceded the validity and enforceability of the patents in the lawsuit. The parties also agreed that the Hanmi Product would not infringe those patents2023, or earlier under the District Court’s December 2012 claim interpretation order, which AstraZeneca and KBI appealed. On December 19, 2013, the Court of Appeals for the Federal Circuit denied the appeal and affirmed the District Court’s claim interpretation order. Hanmi has launched its esomeprazole product at risk. The Company continues to believe the court’s order was incorrect and is considering its options for further review. Finally, additional patent infringement lawsuits have been filed (jointly with AstraZeneca) in the United States against Mylan Laboratories Limited (“Mylan Labs”) and Actavis, Inc./Watson Pharma Company (collectively, “Actavis/Watson”) related to their applications to the FDA seeking pre-patent expiry approval to sell generic versions of Nexium. The Mylan Labs and Actavis/Watson applications to the FDA remain stayed until August 2014 and October 2015, respectively, or until earlier adverse court decisions, if any, whichever may occur earlier.certain conditions.
NuvaRing — In December 2013, the Company filed a lawsuit against Warner Chilcott Company LLC (“Warner Chilcott”)a subsidiary of Allergan plc in the United States in respect of Warner Chilcott’sthat company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of NuvaRing. The trial in this matter was held in January 2016. In August 2016, the district court ruled that the patent was invalid and the Company has appealed this decision. In September 2015, the Company filed a lawsuit against Teva Pharma in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of NuvaRing. Based on its ruling in the Allergan plc matter, the district court dismissed the Company’s lawsuit in December 2016. The Company has appealed this decision.
The Company had been involved in ongoing litigation in Canada with Apotex concerning the Company’s patents related to lovastatin, alendronate, and norfloxacin. All of the litigation has now been either settled or concluded. As a consequence of the conclusion of all of this litigation, in 2016, the Company recorded a net gain of $117 million included in Other (income) expense, net (see Note 14).

Anti-PD-1 Antibody Patent Oppositions and Litigation
As previously disclosed, Ono Pharmaceutical Co. (“Ono”)(Ono) has a European patent (EP 1 537 878) (’878) that broadly claims the use of an anti-PD-1 antibody, such as the Company’s immunotherapy, MK-3475,Keytruda, for the treatment of cancer. Ono has previously licensed its commercial rights to an anti-PD-1 antibody to Bristol-Myers Squibb (“BMS”)(BMS) in certain markets. The Company believes that this patent is invalidBMS and has filed an opposition in theOno also own European Patent Office (the “EPO”) seeking its revocation. The Opposition Division of the EPO has scheduled a hearing in June 2014. The hearing panel has issued a preliminary opinionEP 2 161 336 (’336) that, the claims in the patent are valid. The hearing panel usually renders a decision, which is subject to further appeal, at the close of a hearing. If the patent survives these proceedings with similar breadth, Merck can file actions seeking to revoke the patent in each relevant national court in Europe. Onoas granted, broadly claimed anti-PD-1 antibodies that could file patent infringement actions againstinclude Keytruda.
As previously disclosed, the Company in each relevant national court in Europe at or around the time the company launches MK-3475 (if approved). If a national court determines that the Company infringed a valid claim in Ono’s patent, Ono may be entitled to monetary damages, including royalties on future sales of MK-3475, and potentially could seek an injunction to prevent the Company from marketing MK-3475 in that country. In addition, Ono and BMS have similar and other patents and applications, which the Company is closely monitoring, pendingOno were engaged in worldwide litigation, including in the United States, Japanover the validity and other countries. Theinfringement of the ‘878 patent, the ‘336 patent and their equivalents.
In January 2017, the Company is confidentannounced that it had entered into a settlement and license agreement with BMS and Ono resolving the worldwide patent infringement litigation related to the use of an anti-PD-1 antibody for the treatment of cancer, such as Keytruda. Under the settlement and license agreement, the Company made a one-time payment of $625 million (which was recorded as an expense in the Company’s 2016 financial results) to BMS and will be ablepay royalties on the worldwide sales of Keytruda for a non-exclusive license to market MK-3475Keytruda in any countrymarket in which it is approvedapproved. For global net sales of Keytruda, the Company will pay royalties as follows:
•6.5% of net sales occurring from January 1, 2017 through and including December 31, 2023; and
•2.5% of net sales occurring from January 1, 2024 through and including December 31, 2026.
The parties also agreed to dismiss all claims worldwide in the relevant legal proceedings.
In October 2015, PDL Biopharma (PDL) filed a lawsuit in the United States against the Company alleging that the manufacture of Keytruda infringed US Patent No. 5,693,761 (’761 patent), which expired in December 2014. This patent claims platform technology used in the creation and manufacture of recombinant antibodies and PDL is seeking damages for pre-expiry infringement of the ’761 patent.
In July 2016, the Company filed a declaratory judgment action in the United States against Genentech and City of Hope seeking a ruling that US Patent No. 7,923,221 (the Cabilly III patent), which claims platform technology used in the creation and manufacture of recombinant antibodies, is invalid and that it willKeytruda and bezlotoxumab do not be prevented from doing soinfringe the Cabilly III patent. In July 2016, the Company also filed a petition in the USPTO for Inter Partes Review (IPR) of certain claims of US Patent No. 6,331,415 (the Cabilly II patent), which claims platform technology used in the creation and manufacture of recombinant antibodies and is also owned by Genentech and City of Hope, as being invalid. In December 2016, the USPTO denied the petition but allowed the Company to join an IPR filed previously by another party.
Gilead Patent Litigation and Opposition
In August 2013, Gilead Sciences, Inc. (Gilead) filed a lawsuit in the U.S. District Court for the Northern District of California seeking a declaration that two Company patents were invalid and not infringed by the Ono patent or any pending patent.sale of their two sofosbuvir containing products, Solvadi and Harvoni. The Company filed a counterclaim that the sale of these

Environmental Litigationproducts did infringe these two patents and sought a reasonable royalty for the past, present and future sales of these products. In March 2016, at the conclusion of a jury trial, the patents were found to be not invalid and infringed. The jury awarded the Company $200 million as a royalty for sales of these products up to December 2015. After the conclusion of the jury trial, the court held a bench trial on the equitable defenses raised by Gilead. In June 2016, the court found for Gilead and determined that Merck could not collect the jury award and that the patents were unenforceable with respect to Gilead. The Company has appealed the court’s decision. Gilead has also asked the court to overturn the jury’s decision on validity. The court held a hearing on Gilead’s motion in August 2016, and the court subsequently rejected Gilead’s request. The Company will pay 20%, net of legal fees, of damages or royalties, if any, that it receives to Ionis Pharmaceuticals, Inc.
As previously disclosed, Merck was involved inThe Company, through its Idenix Pharmaceuticals, Inc. subsidiary, has pending litigation against it related to alleged injuries causedGilead in the United States, the UK, Norway, Canada, Germany, France, and Australia based on different patent estates that would also be infringed by alleged emissions fromGilead’s sales of these two products. Gilead has opposed the siteEuropean patent at the EPO. Trial in the United States was held in December 2016 and the jury returned a verdict for the Company, awarding damages of $2.54 billion. The Company is currently briefing post-trial motions, including on the issues of enhanced damages and future royalties. Gilead is briefing post-trial motions for judgment as a former Merck subsidiarymatter of law. In the UK, Australia and Canada, the Company was initially unsuccessful and those cases are currently under appeal. In Norway, the patent was held invalid and no further appeal was filed. The EPO opposition division revoked the European patent, and the Company has appealed this decision. The cases in Merced, California. Also as previously disclosed,France and Germany have been stayed pending the parties to that litigation reached an agreement in 2013 intended to resolvefinal decision of the litigation, subject to sufficient plaintiff participation, which was obtained. The parties have now finalized the settlement and this litigation was dismissed with prejudice on January 16, 2014 as to all plaintiffs.EPO.

Other Litigation
There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial position, results of operations or cash flows either individually or in the aggregate.

Legal Defense Reserves
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and

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outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of December 31, 20132016 and December 31, 20122015 of approximately $160185 million and $260245 million, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.

Environmental Matters
As previously disclosed, Merck’s facilities in Oss, the Netherlands, were inspected by the Province of Brabant (the Province) pursuant to the Dutch Hazards of Major Accidents Decree and the sites’ environmental permits. The Province issued penalties for alleged violations of regulations governing preventing and managing accidents with hazardous substances, and the government also issued a fine for alleged environmental violations at one of the Oss facilities, which together totaled $235 thousand. The Company was subsequently advised that a criminal investigation had been initiated based upon certain of the issues that formed the basis of the administrative enforcement action by the Province. The Company intends to defend itself against any enforcement action that may result from this investigation.
In May 2015, the Environmental Protection Agency conducted an air compliance evaluation of the Company’s pharmaceutical manufacturing facility in Elkton, Virginia. As a result of the investigation, the Company

was recently issued a Notice of Noncompliance and Show Cause Notification relating to certain federally enforceable requirements applicable to the Elkton facility. The Company is attempting to resolve these alleged violations by way of settlement but will defend itself if settlement cannot be reached.
The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. These proceedings seek to require the operators of hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company’s potential liability varies greatly from site to site. For some sites the potential liability is de minimis and for others the final costs of cleanup have not yet been determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial position, results of operations, liquidity or capital resources of the Company. The Company has taken an active role in identifying and providingaccruing for these costs and such amounts do not include any reduction for anticipated recoveries of cleanup costs from former site owners or operators or other recalcitrant potentially responsible parties.
In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $21383 million and $145109 million at December 31, 20132016 and 2012,2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these 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 $8464 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
11.    Equity
The Merck certificate of incorporation authorizes 6,500,000,000 shares of common stock and 20,000,000 shares of preferred stock.

Capital Stock
A summary of common stock and treasury stock transactions (shares in millions) is as follows:
2013 2012 20112016 2015 2014
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
 
Common
Stock
 
Treasury
Stock
Balance January 13,577
 550
 3,577
 536
 3,577
 495
3,577
 796
 3,577
 739
 3,577
 650
Purchases of treasury stock (1)
—
 139
 —
 62
 —
 58
—
 60
 —
 75
 —
 134
Issuances (2)
—
 (39) —
 (48) —
 (17)
Issuances (1)
—
 (28) —
 (18) —
 (45)
Balance December 313,577
 650
 3,577
 550
 3,577
 536
3,577
 828
 3,577
 796
 3,577
 739
(1)
Purchases of treasury stock in 2013 include 105 million shares purchased pursuant to an accelerated share repurchase agreement as discussed below.
(2)  
Issuances primarily reflect activity under share-based compensation plans.

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On May 20, 2013, Merck entered into an accelerated share repurchase (“ASR”) agreement with Goldman, Sachs & Co. (“Goldman Sachs”). Under the ASR, Merck agreed to purchase $5.0 billion of Merck’s common stock, in total, with an initial delivery of approximately 99.5 million shares of Merck’s common stock, based on current market price, made by Goldman Sachs to Merck, and payment of $5.0 billion made by Merck to Goldman Sachs, on May 21, 2013. Upon settlement of the ASR on October 31, 2013, Merck received an additional 5.5 million shares as determined by the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program bringing the total shares received by Merck under this program to 105 million. The ASR was entered into pursuant to a share repurchase program announced on May 1, 2013.

Noncontrolling Interests
In connection with the 1998 restructuring of AMI, Merck assumed $2.4 billion par value preferred stock with a dividend rate of 5% per annum, which is carried by KBI and included in Noncontrolling interests. If AstraZeneca exercises its option to acquire Merck’s interest in AZLP (see Note 8) this preferred stock obligation will be retired.
12.    Share-Based Compensation Plans
The Company has share-based compensation plans under which the Company grants restricted stock units (“RSUs”)(RSUs) and performance share units (“PSUs”)(PSUs) to certain management level employees. In addition, employees, non-employee directors andThe Company also issues RSUs to employees of certain of the Company’s equity method investeesinvestees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. These plans were approved by the Company’s shareholders.

At December 31, 2013,2016, 143125 million shares collectively were authorized for future grants under the Company’s share-based compensation plans. These awards are settled primarily with treasury shares.
Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. These awards generally vest one-third each year over a three-year period, with a contractual term of 7-10 years. RSUs are stock awards that are granted to employees and entitle the holder to shares of common stock as the awards vest. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s stock price. PSUs are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against a pre-set objective or set of objectives. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. For RSUs and certain PSUs, granted before December 31, 2009 employees participate in dividends on the same basis as common shares and such dividends are nonforfeitable by the holder. For RSUs and PSUs issued on or after January 1, 2010, dividends declared during the vesting period are payable to the employees only upon vesting. Over the PSU performance period, the number of shares of stock that are expected to be issued will be adjusted based on the probability of achievement of a performance target and final compensation expense will be recognized based on the ultimate number of shares issued. RSU and PSU distributions will be in shares of Company stock after the end of the vesting or performance period, generally three years, subject to the terms applicable to such awards.
Total pretax share-based compensation cost recorded in 2013, 20122016, 2015 and 20112014 was $276300 million, $335299 million and $369278 million, respectively, with related income tax benefits of $8492 million, $10593 million and $11886 million, respectively.
The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its options. The Black-Scholes model requires several assumptions including expected dividend yield, risk-free interest rate, volatility, and term of the options. The expected dividend yield is based on historical patterns of dividend payments. The risk-free rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated using a blend of historical and implied volatility. The historical component is based on historical monthly price changes. The implied volatility is obtained from market data on the Company’s traded options. The expected life represents the amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior.

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The weighted average exercise price of options granted in 2013, 20122016, 2015 and 20112014 was $45.0154.63, $39.5159.73 and $36.4758.14 per option, respectively. The weighted average fair value of options granted in 2013, 20122016, 2015 and 20112014 was $6.215.89, $5.476.46 and $5.396.79 per option, respectively, and were determined using the following assumptions:
Years Ended December 312013 2012 20112016 2015 2014
Expected dividend yield4.2% 4.4% 4.3%3.8% 4.1% 4.3%
Risk-free interest rate1.2% 1.3% 2.5%1.4% 1.7% 2.0%
Expected volatility25.0% 25.2% 23.4%19.6% 19.9% 22.0%
Expected life (years)7.0
 7.0
 7.0
6.2
 6.2
 6.4
Summarized information relative to stock option plan activity (options in thousands) is as follows:
Number
of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Number
of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Outstanding January 1, 2013165,941
 $39.46
  
Outstanding January 1, 201664,668
 $41.64
  
Granted5,703
 45.01
  6,220
 54.63
  
Exercised(33,278) 36.37
  (23,846) 39.39
  
Forfeited(22,561) 49.01
    (1,951) 45.14
    
Outstanding December 31, 2013115,805
 $38.75
 3.79 $1,320
Exercisable December 31, 2013101,600
 $38.48
 3.25 $1,187
Outstanding December 31, 201645,091
 $44.47
 4.42 $654
Exercisable December 31, 201634,311
 $40.87
 3.12 $619

Additional information pertaining to stock option plans is provided in the table below:
Years Ended December 312013 2012 20112016 2015 2014
Total intrinsic value of stock options exercised$374
 $528
 $125
$444
 $332
 $626
Fair value of stock options vested42
 80
 189
28
 30
 35
Cash received from the exercise of stock options1,210
 1,310
 321
939
 485
 1,560
A summary of nonvested RSU and PSU activity (shares in thousands) is as follows:
 RSUs PSUs RSUs PSUs
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested January 1, 2013 22,743
 $36.38
 1,648
 $33.78
Nonvested January 1, 2016 13,400
 $53.73
 1,884
 $55.33
Granted 6,394
 45.04
 963
 38.25
 5,617
 54.67
 733
 57.38
Vested (8,705) 34.10
 (839) 34.17
 (4,956) 45.06
 (786) 48.18
Forfeited (1,298) 40.02
 (99) 36.71
 (795) 56.65
 (87) 58.82
Nonvested December 31, 2013 19,134
 $40.07
 1,673
 $35.98
Nonvested December 31, 2016 13,266
 $57.19
 1,744
 $59.24
At December 31, 2013,2016, there was $374443 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of 1.9 years. For segment reporting, share-based compensation costs are unallocated expenses.



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13.    Pension and Other Postretirement Benefit Plans
The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. As a result of plan design changes approved in 2011, beginning on January 1, 2013, active participants in Merck’s primary U.S. defined benefit pension plans are accruing pension benefits using new cash balance formulas based on age, service, pay and interest. However, during a transition period from January 1, 2013 through December 31, 2019, participants will earn the greater of the benefit as calculated under the employee’s legacy final average pay formula or their new cash balance formula. For all years of service after December 31, 2019, participants will earn future benefits under only the cash balance formula. In addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans.

Net Periodic Benefit Cost
The net periodic benefit cost for pension and other postretirement benefit plans consisted of the following components:
Pension Benefits      
Pension Benefits Other Postretirement BenefitsU.S. International Other Postretirement Benefits
Years Ended December 312013 2012 2011 2013 2012 20112016 2015 2014 2016 2015 2014 2016 2015 2014
Service cost$682
 $555
 $619
 $102
 $82
 $110
$282
 $307
 $300
 $238
 $251
 $266
 $54
 $80
 $78
Interest cost665
 661
 718
 107
 121
 141
456
 434
 425
 204
 206
 269
 82
 110
 115
Expected return on plan assets(1,097) (970) (972) (126) (136) (142)(831) (819) (782) (382) (379) (416) (107) (143) (139)
Net amortization336
 185
 201
 (50) (35) (17)64
 158
 74
 76
 104
 59
 (103) (59) (71)
Termination benefits58
 27
 59
 50
 18
 29
23
 22
 53
 4
 1
 11
 4
 7
 22
Curtailments(23) (10) (86) (11) (7) 1
5
 (12) (69) (1) (9) (4) (18) (19) (39)
Settlements23
 18
 4
 —
 —
 —
—
 1
 11
 6
 12
 6
 —
 —
 —
Net periodic benefit cost$644
 $466
 $543
 $72
 $43
 $122
Net periodic benefit (credit) cost$(1) $91
 $12
 $145
 $186
 $191
 $(88) $(24) $(34)
The increasechanges in net periodic benefit (credit) cost year over year for pension plans are largely attributable to changes in the discount rate affecting net amortization. The decrease in net periodic benefit cost for pension and other postretirement benefit plans in 20132016 as compared with 20122015 is largely attributable to a changechanges in retiree medical benefits approved by the discount rate. The net periodic benefit cost attributable to U.S. pension plans includedCompany in the above table was $348 million in 2013, $268 million in 2012 and $406 million in 2011.December 2015.
In connection with restructuring actions (see Note 3)4), termination charges were recorded in 2013, 20122016, 2015 and 20112014 on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments were recorded in 2013, 2012 and 2011 on pension and other

postretirement benefit plans.
In addition,plans and settlements were recorded in 2013, 2012 and 2011 on certain domesticU.S. and international pension plans.plans as reflected in the table above.


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Obligations and Funded Status
Summarized information about the changes in plan assets and benefit obligation,obligations, the funded status and the amounts recorded at December 31 is as follows:
Pension Benefits 
Other
Postretirement
Benefits
Pension Benefits 
Other
Postretirement
Benefits
U.S. International 
2013 2012 2013 20122016 2015 2016 2015 2016 2015
Fair value of plan assets January 1$15,349
 $12,481
 $1,760
 $1,628
$9,266
 $9,984
 $7,204
 $7,724
 $1,913
 $1,984
Actual return on plan assets2,524
 1,739
 199
 200
941
 (226) 898
 138
 138
 (34)
Company contributions645
 1,853
 73
 48
63
 66
 424
 163
 68
 63
Effects of exchange rate changes(84) 3
 —
 —
—
 —
 (546) (568) —
 (1)
Benefits paid(780) (673) (119) (115)(504) (523) (193) (196) (108) (99)
Settlements(236) (75) —
 —
—
 (35) (21) (66) —
 —
Assets no longer restricted to the payment of postretirement benefits (1)
—
 —
 —
 —
 (992) —
Other17
 21
 —
 (1)—
 —
 28
 9
 —
 —
Fair value of plan assets December 31$17,435
 $15,349
 $1,913
 $1,760
$9,766
 $9,266
 $7,794
 $7,204
 $1,019
 $1,913
Benefit obligation January 117,646
 14,416
 2,650
 2,529
$9,723
 $10,632
 $7,733
 $8,331
 $1,810
 $2,638
Service cost682
 555
 102
 82
282
 307
 238
 251
 54
 80
Interest cost665
 661
 107
 121
456
 434
 204
 206
 82
 110
Actuarial (gains) losses(1,689) 2,660
 (428) 88
Actuarial losses (gains) (2)
854
 (1,102) 938
 (127) 77
 (384)
Benefits paid(780) (673) (119) (115)(504) (523) (193) (196) (108) (99)
Effects of exchange rate changes(21) 67
 (5) —
—
 —
 (576) (647) 2
 (11)
Plan amendments(225) 2
 (38) (86)
Plan amendments (3)
—
 —
 —
 (1) —
 (531)
Curtailments(61) (17) —
 1
15
 (14) (15) (15) 1
 (3)
Termination benefits58
 27
 50
 18
23
 22
 4
 1
 4
 7
Settlements(236) (75) —
 —
—
 (35) (21) (66) —
 —
Other16
 23
 10
 12
—
 2
 60
 (4) —
 3
Benefit obligation December 31$16,055
 $17,646
 $2,329
 $2,650
$10,849
 $9,723
 $8,372
 $7,733
 $1,922
 $1,810
Funded status December 31$1,380
 $(2,297) $(416) $(890)$(1,083) $(457) $(578) $(529) $(903) $103
Recognized as:                  
Other assets$2,811
 $355
 $—
 $506
$—
 $179
 $451
 $567
 $—
 $359
Accrued and other current liabilities(53) (50) (8) (9)(50) (48) (7) (7) (11) (10)
Other noncurrent liabilities(1,378) (2,602) (408) (1,387)(1,033) (588) (1,022) (1,089) (892) (246)
The fair value(1) As a result of U.S. pensioncertain allowable administrative actions that occurred in June 2016, $992 million of plan assets includedpreviously restricted for the payment of other postretirement benefits became available to fund certain other health and welfare benefits.
(2) Actuarial losses in the preceding table was 2016 and actuarial gains in 2015 primarily reflect changes in discount rates.
$10.0 billion(3) and $8.7 billion atThe decline in other postretirement benefit obligations in 2015 resulting from plan amendments primarily reflects changes to Merck’s retiree medical benefits approved by the Company in December 31, 2013 and 2012, respectively, and the projected benefit obligation of U.S. pension plans was $8.7 billion and $10.0 billion, respectively. Approximately 46% and 44% of the Company’s pension projected benefit obligation at December 31, 2013 and 2012, respectively, relates2015. The changes provide that, beginning in 2017, Merck will provide access to international defined benefit plans, of which each individual plan is not significant relative to the total projected benefit obligation.retiree health insurance coverage that supplements government-sponsored Medicare through a private insurance marketplace.
At December 31, 20132016 and 2012,2015, the accumulated benefit obligation was $14.818.4 billion and $15.916.7 billion, respectively, for all pension plans, of which $8.010.5 billion and $9.09.4 billion, respectively, related to U.S. pension plans.
For
Information related to the funded status of selected pension plans with projected benefit obligations in excess of plan assets at December 31 2013 and 2012, the fair value of plan assets was $1.5 billion and $12.8 billion, respectively, and the benefit obligations were $3.0 billion and $15.5 billion, respectively. For those plans with accumulated benefit obligations in excess of plan assets at December 31, 2013 and 2012, the fair value of plan assets was $1.4 billion and $6.1 billion, respectively, and the accumulated benefit obligations were $2.5 billion and $7.7 billion, respectively.is as follows:

115
 U.S. International
 2016 2015 2016 2015
Pension plans with a projected benefit obligation in excess of plan assets       
Projected benefit obligation$10,849
 $1,310
 $5,486
 $5,093
Fair value of plan assets9,766
 674
 4,457
 3,996
Pension plans with an accumulated benefit obligation in excess of plan assets       
Accumulated benefit obligation$9,807
 $611
 $2,692
 $4,812
Fair value of plan assets9,057
 —
 1,898
 3,964
Table of Contents

Plan Assets
Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1 —  Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 —  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 —  Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation. At December 31, 20132016 and 2012,2015, $622435 million and $692423 million, respectively, or approximately 4%2% and 5%3%, respectively, of the Company’s pension investments at each year end, were categorized as Level 3 assets.
If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The fair values of the Company’s pension plan assets at December 31 by asset category are as follows:
Fair Value Measurements Using Fair Value Measurements UsingFair Value Measurements Using Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
2013 
  
 2012 
  
2016 
  
 2015 
  
U.S. Pension Plans               
Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Cash and cash equivalents$2
 $2
 $—
 $4
 $—
 $—
 $—
 $—
Investment funds               
Developed markets equities521
 —
 —
 521
 566
 —
 —
 566
Emerging markets equities104
 —
 —
 104
 87
 —
 —
 87
Equity securities               
Developed markets2,521
 —
 —
 2,521
 2,444
 —
 —
 2,444
Fixed income securities               
Government and agency obligations—
 475
 —
 475
 —
 391
 —
 391
Corporate obligations—
 660
 —
 660
 —
 679
 —
 679
Mortgage and asset-backed securities—
 239
 —
 239
 —
 236
 —
 236
Other investments—
 —
 18
 18
 —
 —
 23
 23
Net assets in fair value hierarchy$3,148
 $1,376

$18

$4,542

$3,097

$1,306

$23

$4,426
Investments measured at NAV practical expedient (1)
      5,224
       4,840
Plan assets at fair value      $9,766
       $9,266
International Pension Plans               
Assets
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Cash and cash equivalents$88
 $247
 $—
 $335
 $142
 $587
 $—
 $729
$42
 $11
 $—
 $53
 $63
 $4
 $—
 $67
Investment funds                     
       
Developed markets equities808
 7,643
 —
 8,451
 683
 5,986
 —
 6,669
187
 2,846
 —
 3,033
 184
 2,738
 —
 2,922
Emerging markets equities163
 1,036
 —
 1,199
 121
 771
 —
 892
24
 148
 —
 172
 21
 137
 —
 158
Government and agency obligations293
 1,180
 —
 1,473
 279
 720
 —
 999
123
 1,904
 —
 2,027
 305
 1,115
 —
 1,420
Corporate obligations188
 77
 —
 265
 166
 94
 —
 260
2
 282
 —
 284
 173
 103
 —
 276
Fixed income obligations17
 145
 —
 162
 14
 206
 —
 220
6
 3
 —
 9
 8
 3
 —
 11
Real estate (1)
4
 57
 49
 110
 4
 14
 141
 159
Real estate (2)
—
 3
 4
 7
 —
 3
 5
 8
Equity securities                     
       
Developed markets2,546
 —
 —
 2,546
 2,277
 —
 —
 2,277
565
 —
 —
 565
 496
 —
 —
 496
Fixed income securities                     
       
Government and agency obligations2
 1,096
 —
 1,098
 2
 1,052
 —
 1,054
2
 235
 —
 237
 2
 465
 —
 467
Corporate obligations—
 741
 —
 741
 —
 1,008
 —
 1,008
—
 92
 —
 92
 —
 161
 —
 161
Mortgage and asset-backed securities—
 299
 —
 299
 —
 269
 —
 269
—
 50
 —
 50
 —
 68
 —
 68
Other investments                     
       
Insurance contracts (2)
—
 128
 540
 668
 —
 117
 496
 613
Derivatives1
 —
 —
 1
 —
 162
 —
 162
Insurance contracts (3)
—
 59
 412
 471
 —
 57
 393
 450
Other—
 54
 33
 87
 —
 53
 55
 108
1
 4
 1
 6
 —
 3
 2
 5
Liabilities               
Derivatives$—
 $—
 $—
 $—
 $—
 $70
 $—
 $70
$4,110
 $12,703

$622

$17,435

$3,688

$10,969

$692

$15,349
Net assets in fair value hierarchy$952
 $5,637
 $417
 $7,006
 $1,252
 $4,857
 $400
 $6,509
Investments measured at NAV practical expedient (1)
      788
       695
Plan assets at fair value      $7,794
       $7,204
(1)
Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2016 and 2015.
(2) 
The plans’ Level 3 investments in real estate funds are generally valued by market appraisals of the underlying investments in the funds.
(2)(3) 
The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.

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The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3) for the Company’s pension plan assets:
2013 20122016 2015
Insurance
Contracts
 
Real
Estate
 Other Total 
Insurance
Contracts
 
Real
Estate
 Other Total
Insurance
Contracts
 
Real
Estate
 Other Total 
Insurance
Contracts
 
Real
Estate
 Other Total
U.S. Pension Plans               
Balance January 1$496
 $141
 $55
 $692
 $428
 $144
 $65
 $637
$—
 $—
 $23
 $23
 $—
 $—
 $28
 $28
Actual return on plan assets:                              
Relating to assets still held at December 3130
 —
 1
 31
 35
 20
 (2) 53
—
 —
 (3) (3) —
 —
 (3) (3)
Relating to assets sold during the year1
 (1) 3
 3
 1
 (12) 5
 (6)—
 —
 4
 4
 —
 —
 5
 5
Purchases18
 —
 3
 21
 21
 —
 4
 25
Sales(2) —
 (29) (31) (11) (1) (14) (26)
Transfers (out of) into Level 3(3) (91) —
 (94) 22
 (10) (3) 9
Purchases and sales, net—
 —
 (6) (6) —
 —
 (7) (7)
Balance December 31$540
 $49
 $33
 $622
 $496
 $141
 $55
 $692
$—

$—

$18

$18

$—

$—

$23

$23
International Pension Plans               
Balance January 1$393
 $5
 $2
 $400
 $394
 $23
 $2
 $419
Actual return on plan assets:               
Relating to assets still held at December 31(9) 1
 —
 (8) (28) (2) —
 (30)
Purchases and sales, net2
 (2) (1) (1) 2
 (16) —
 (14)
Transfers into Level 326
 —
 —
 26
 25
 —
 —
 25
Balance December 31$412

$4

$1

$417

$393

$5

$2

$400
The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows:
Fair Value Measurements Using Fair Value Measurements UsingFair Value Measurements Using Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total 
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
2013    2012   2016    2015   
Assets                              
Cash and cash equivalents$47
 $20
 $—
 $67
 $27
 $48
 $—
 $75
$125
 $—
 $—
 $125
 $65
 $—
 $—
 $65
Investment funds                              
Developed markets equities54
 667
 —
 721
 37
 501
 —
 538
48
 —
 —
 48
 53
 —
 —
 53
Emerging markets equities36
 95
 —
 131
 37
 75
 —
 112
10
 —
 —
 10
 29
 —
 —
 29
Fixed income obligations3
 14
 —
 17
 3
 23
 —
 26
Government and agency obligations1
 —
 —
 1
 2
 —
 —
 2
Equity securities                              
Developed markets199
 —
 —
 199
 139
 —
 —
 139
231
 —
 —
 231
 229
 —
 —
 229
Fixed income securities                              
Government and agency obligations—
 257
 —
 257
 —
 298
 —
 298
—
 43
 —
 43
 —
 339
 —
 339
Corporate obligations—
 281
 —
 281
 —
 310
 —
 310
—
 60
 —
 60
 —
 311
 —
 311
Mortgage and asset-backed securities—
 219
 —
 219
 —
 238
 —
 238
—
 22
 —
 22
 —
 218
 —
 218
Other fixed income obligations—
 21
 —
 21
 —
 24
 —
 24
$339
 $1,574
 $—
 $1,913
 $243
 $1,517
 $—
 $1,760
Net assets in fair value hierarchy$415
 $125
 $—
 $540
 $378
 $868
 $—
 $1,246
Investments measured at NAV practical expedient (1)
      479
       667
Plan assets at fair value      $1,019
       $1,913
(1)
Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2016 and 2015.
The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each

plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated 40% to 60% in U.S. equities, 20% to 40% in international equities, 15% to 25% in fixed-income investments, and up to 5% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio, which approximates 13%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For non-U.S.international pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.

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Expected Contributions
Contributions to theExpected contributions during 2017 are approximately $50 million for U.S. pension plans, approximately $160 million for international pension plans and approximately $25 million for other postretirement benefit plans during 2014 are expected to be approximately $250 million and $75 million, respectively.plans.

Expected Benefit Payments
Expected benefit payments are as follows:
 
Pension
Benefits
 
Other
Postretirement
Benefits
2014$651
 $119
2015663
 129
2016675
 134
2017699
 139
2018739
 145
2019 — 20234,440
 811
 U.S. Pension Benefits 
International Pension
Benefits
 
Other
Postretirement
Benefits
2017$561
 $186
 $101
2018588
 179
 104
2019629
 195
 106
2020638
 202
 111
2021655
 201
 115
2022 — 20263,596
 1,168
 641
Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.

Amounts Recognized in Other Comprehensive Income
Net loss amounts reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net loss amounts in excess of certain thresholds are amortized into net pension and other postretirementperiodic benefit cost over the average remaining service life of employees. The following amounts were reflected as components of OCI:
Pension Plans 
Other Postretirement
Benefit Plans
Pension Plans 
Other Postretirement
Benefit Plans
U.S. International 
Years Ended December 312013 2012 2011 2013 2012 20112016 2015 2014 2016 2015 2014 2016 2015 2014
Net gain (loss) arising during the period$3,189
 $(1,907) $(1,628) $499
 $(24) $106
Prior service credit (cost) arising during the period203
 (13) 783
 26
 78
 133
Net (loss) gain arising during the period$(743) $73
 $(2,085) $(380) $(66) $(779) $(45) $209
 $(223)
Prior service (cost) credit arising during the period(10) (13) (59) (2) (4) (8) (19) 511
 (42)
$3,392
 $(1,920) $(845) $525
 $54
 $239
$(753) $60
 $(2,144) $(382) $(70) $(787) $(64) $720
 $(265)
Net loss amortization included in benefit cost$407
 $256
 $196
 $23
 $31
 $38
$119
 $214
 $135
 $87
 $118
 $74
 $3
 $5
 $1
Prior service (credit) cost amortization included in benefit cost(71) (71) 5
 (73) (66) (55)(55) (56) (61) (11) (14) (15) (106) (64) (72)
$336
 $185
 $201
 $(50) $(35) $(17)$64
 $158
 $74
 $76
 $104
 $59
 $(103) $(59) $(71)
The estimated net loss (gain) and prior service cost (credit) amounts that will be amortized from AOCI into net pension and postretirementperiodic benefit cost during 20142017 are $214270 million and $(146)(64) million, respectively, for pension plans (of which $178 million and are $2$(53) million, respectively, relates to U.S. pension plans) and $(75)$1 million, and $(99) million, respectively, for other postretirement benefit plans.


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Actuarial Assumptions
The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining pension plan and U.S. pension and other postretirement benefit plan and international pension plan information are as follows:
Pension Plans 
U.S. Pension and Other
Postretirement Benefit Plans
U.S. Pension and Other
Postretirement Benefit Plans
 International Pension Plans
December 312013
 2012
 2011
 2013
 2012
 2011
2016
 2015
 2014
 2016
 2015
 2014
Net periodic benefit cost                      
Discount rate3.90% 4.70% 5.20% 4.10% 4.80% 5.40%4.70% 4.20% 4.90% 2.80% 2.70% 3.80%
Expected rate of return on plan assets7.50% 7.50% 7.50% 8.50% 8.70% 8.70%8.60% 8.50% 8.50% 5.60% 5.70% 6.00%
Salary growth rate4.20% 4.00% 4.20% 4.50% 4.50% 4.50%4.30% 4.40% 4.50% 2.90% 2.90% 3.10%
Benefit obligation                      
Discount rate4.50% 3.90% 4.70% 5.10% 4.10% 4.80%4.30% 4.80% 4.20% 2.20% 2.80% 2.70%
Salary growth rate4.00% 4.20% 4.00% 4.50% 4.50% 4.50%4.30% 4.30% 4.40% 2.90% 2.90% 2.90%
For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid and is determined on a plan basis. In developing the expected rate of return within each plan, long-term historical returns data are considered as well as actual returns on the plan assets and other capital markets experience. Using this reference information, the long-term return expectations for each asset category and a weighted average expected return for each plan’s target portfolio is developed, according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2014,2017, the Company’s expected rate of return will range from 7.30% to 8.75% compared to a range of 6.00% to 8.75% in 2013 for itsthe Company’s U.S. pension and other postretirement benefit plans.plans will range from 8.00% to 8.75%, as compared to a range of 7.30% to 8.75% in 2016.
The health care cost trend rate assumptions for other postretirement benefit plans are as follows:
December 312013 20122016 2015
Health care cost trend rate assumed for next year7.1% 7.5%7.4% 6.8%
Rate to which the cost trend rate is assumed to decline4.6% 5.0%4.5% 4.5%
Year that the trend rate reaches the ultimate trend rate2027
 2018
2032
 2027
A one percentage point change in the health care cost trend rate would have had the following effects:
One Percentage PointOne Percentage Point
Increase DecreaseIncrease Decrease
Effect on total service and interest cost components$38
 $(30)$12
 $(12)
Effect on benefit obligation316
 (262)138
 (114)

Savings Plans
The Company also maintains defined contribution savings plans in the United States. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in 2013, 20122016, 2015 and 20112014 were $138126 million, $146125 million and $166124 million, respectively.



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14.    Other (Income) Expense, Net
Other (income) expense, net, consisted of:
Years Ended December 312013 2012 20112016 2015 2014
Interest income$(264) $(232) $(145)$(328) $(289) $(266)
Interest expense801
 714
 695
693
 672
 732
Exchange losses290
 185
 143
174
 1,277
 180
Equity income from affiliates(86) (205) (257)
Other, net(12) 449
 253
267
 72
 (12,002)
$815
 $1,116
 $946
$720
 $1,527
 $(11,613)
The increasehigher exchange losses in interest income in 20122015 as compared with 2011 reflects the accretion of time value of money discounts2016 and 2014 were related primarily to certain accounts receivables, including accelerated accretion related to significant collections of accounts receivable in Spain (see Note 5). The increase in interest expense in 2013 as compared with 2012 is driven in part by the issuances of debt in September 2012 and May 2013. Exchange losses in 2013 reflect $140 million of losses due to a Venezuelan currency devaluation. In February 2013, the Venezuelan government devalued its currencyBolívar. During the second quarter of 2015, upon evaluation of evolving economic conditions in Venezuela and volatility in the country, combined with a decline in transactions that were settled at the then official (CENCOEX) rate of 6.30 VEF (Bolívar Fuertes) from 4.30 VEF per U.S. dollar, the Company determined it was unlikely that all outstanding net monetary assets would be settled at the CENCOEX rate. Accordingly, during the second quarter of 2015, the Company recorded a charge of $715 million to 6.30 VEF perdevalue its net monetary assets in Venezuela to an amount that represented the Company’s estimate of the U.S. dollar.dollar amount that would ultimately be collected. During the third quarter of 2015, the Company recorded additional exchange losses of $138 million in the aggregate reflecting the ongoing effect of translating transactions and net monetary assets consistent with the second quarter. In the fourth quarter of 2015, as a result of the further deterioration of economic conditions in Venezuela, and continued declines in transactions which were settled at the official rate, the Company began using the SIMADI rate to report its Venezuelan operations. The Company recognized losses due to exchange of approximately $140 million in 2013 resulting from the remeasurement of the localalso revalued its remaining net monetary assets and liabilities at the new rate.SIMADI rate (subsequently replaced with the DICOM rate), which resulted in an additional charge in the fourth quarter of 2015 of $161 million. Since January 2010, Venezuela has been designated hyperinflationary and, as a result, local foreign operations are remeasured in U.S. dollars with the impact recorded in results of operations.
The decline in equity income from affiliates in 2016 as compared with 2015 was driven primarily by lower equity income from certain research investment funds.
Other, net (as presented in the table above) in 2012 reflects2016 includes a $493charge of $625 million to settle worldwide patent litigation related to Keytruda (see Note 10), a gain of $117 million related to the settlement of other patent litigation (see Note 10), gains of $100 million resulting from the receipt of milestone payments for out-licensed migraine clinical development programs (see Note 3) and $98 million of income related to AstraZeneca’s option exercise (see Note 8).
Other, net in 2015 includes a $680 million net charge related to the settlement of the ENHANCE LitigationVioxx shareholder class action litigation (see Note 10). Other, net and an expense of $78 million for a contribution of investments in 2011 reflects a $500 million charge relatedequity securities to the resolution of the arbitration proceeding involving the Company’s rights to market Remicade and Simponi (see Note 4),Merck Foundation, partially offset by a $136$250 million gain on the disposition of the Company’s interest in the JJMCP joint venture (see Note 8), and a $127 million gain on the sale of certain manufacturing facilities and related assetsmigraine clinical development programs (see Note 4).3), a $147 million gain on the divestiture of Merck’s remaining ophthalmics business in international markets (see Note 3), and the recognition of $182 million of deferred income related to AstraZeneca’s option exercise.
Other, net in 2014 includes an $11.2 billion gain on the divestiture of MCC (see Note 3), a gain of $741 million related to AstraZeneca’s option exercise, a $480 million gain on the divestiture of certain ophthalmic products in several international markets (see Note 3), a gain of $204 million related to the sale of Sirna (see Note 3) and the recognition of $140 million of deferred income related to AstraZeneca’s option exercise, partially offset by a $628 million loss on extinguishment of debt (see Note 9) and a $93 million goodwill impairment charge related to the Company’s joint venture with Supera.
Interest paid was $922686 million in 2013,2016, $808653 million in 20122015 and $600852 million in 2011. Interest paid for 2011 is net of 2014.$288 million received by the Company from the termination of certain interest rate swap contracts during the year (see Note 5).



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15.    Taxes on Income
A reconciliation between the effective tax rate and the U.S. statutory rate is as follows:
2013 2012 20112016 2015 2014
Amount Tax Rate Amount Tax Rate Amount Tax RateAmount Tax Rate Amount Tax Rate Amount Tax Rate
U.S. statutory rate applied to income before taxes$1,941
 35.0 % $3,059
 35.0 % $2,567
 35.0 %$1,631
 35.0 % $1,890
 35.0 % $6,049
 35.0 %
Differential arising from:                      
Foreign earnings(1,316) (23.7) (1,955) (22.4) (2,220) (30.3)(1,593) (34.2) (2,105) (39.0) (1,367) (7.9)
Unremitted foreign earnings(30) (0.6) 260
 4.8
 (209) (1.2)
Tax settlements(497) (9.0) (113) (1.3) (721) (9.8)—
 —
 (417) (7.7) (89) (0.5)
The American Taxpayer Relief Act of 2012(269) (4.8) —
 —
 —
 —
Unremitted foreign earnings(81) (1.5) (11) (0.1) (86) (1.2)
Tax rate changes(10) (0.2) 57
 0.6
 (295) (4.0)
Amortization of purchase accounting adjustments934
 16.8
 905
 10.3
 875
 11.9
AstraZeneca option exercise—
 —
 —
 —
 (774) (4.5)
Sale of Sirna Therapeutics, Inc.—
 —
 —
 —
 (357) (2.1)
Impact of purchase accounting adjustments, including amortization623
 13.4
 797
 14.8
 1,013
 5.9
Foreign currency devaluation related to Venezuela—
 —
 321
 5.9
 —
 —
State taxes173
 3.7
 159
 2.9
 7
 —
Restructuring224
 4.0
 62
 0.7
 163
 2.2
145
 3.1
 167
 3.1
 289
 1.7
U.S. health care reform legislation65
 1.2
 60
 0.7
 50
 0.7
68
 1.4
 66
 1.2
 134
 0.8
Intangible asset impairment charges56
 1.0
 40
 0.5
 (5) (0.1)
Vioxx and ENHANCE litigation settlements
—
 —
 98
 1.2
 —
 —
Arbitration settlement charge—
 —
 —
 —
 177
 2.4
State taxes44
 0.8
 31
 0.3
 72
 1.0
Divestiture of Merck Consumer Care—
 —
 —
 —
 440
 2.5
Other (1)
(63) (1.1) 207
 2.4
 365
 5.0
(299) (6.4) (196) (3.6) 213
 1.2
$1,028
 18.5 % $2,440
 27.9 % $942
 12.8 %$718
 15.4 % $942
 17.4 % $5,349
 30.9 %
(1) 
Other includes the tax effect of contingency reserves, research credits, and miscellaneous items.
The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the United States, particularly Singapore, Ireland and Switzerland, as well as Singapore and Puerto Rico (which operateswhich operate under a tax incentive grant),grants, where the earnings have been indefinitely reinvested, thereby yielding a favorable impact on the effective tax rate as compared with the 35.0% U.S. statutory rate. The foreign earnings tax rate differentials do not include the impact of intangible asset impairment charges, amortization of purchase accounting adjustments or restructuring costs and the arbitration settlement charge.costs. These items are presented separately as they each represent a significant, separately disclosed pretax cost or charge, and a substantial portion of each of these items relates to jurisdictions with lower tax rates than the United States. Therefore, the impact of recording these expense items in lower tax rate jurisdictions is an unfavorable impact on the effective tax rate as compared to the 35.0% U.S. statutory rate.
The American Taxpayer ReliefCompany’s 2015 effective tax rate reflects the impact of the Protecting Americans From Tax Hikes Act, of 2012which was signed into law on January 2, 2013,December 18, 2015, extending the research credit permanently and the controlled foreign corporation look-through provisions for five years. The Company’s 2014 effective tax rate reflects the impact of the Tax Increase Prevention Act, which was signed into law on December 19, 2014, extending the research credit and the controlled foreign corporation look-through provisions for two years retroactively from January 1, 2012 through December 31, 2013. The Company has recorded the entire 2012 benefit of this legislation in 2013, the financial statements period that includes the date of enactment, and that impact is reflected in the reconciliation above.one year only.
Income before taxes consisted of:
Years Ended December 312013 2012 20112016 2015 2014
Domestic$3,513
 $4,500
 $2,626
$518
 $2,247
 $15,730
Foreign2,032
 4,239
 4,708
4,141
 3,154
 1,553
$5,545
 $8,739
 $7,334
$4,659
 $5,401
 $17,283

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Taxes on income consisted of:
Years Ended December 312013 2012 20112016 2015 2014
Current provision          
Federal$568
 $1,346
 $859
$1,166
 $732
 $7,136
Foreign923
 651
 1,568
916
 844
 438
State(133) (226) 52
157
 130
 375
1,358
 1,771
 2,479
2,239
 1,706
 7,949
Deferred provision          
Federal30
 749
 (584)(1,255) (552) (2,162)
Foreign(398) (323) (683)(225) (163) (201)
State38
 243
 (270)(41) (49) (237)
(330) 669
 (1,537)(1,521) (764) (2,600)
$1,028
 $2,440
 $942
$718
 $942
 $5,349
Deferred income taxes at December 31 consisted of:
2013 20122016 2015
Assets Liabilities Assets LiabilitiesAssets Liabilities Assets Liabilities
Intangibles$—
 $3,772
 $—
 $4,584
$86
 $3,734
 $—
 $4,962
Inventory related49
 604
 79
 488
30
 660
 49
 752
Accelerated depreciation125
 1,215
 129
 1,348
28
 927
 43
 910
Unremitted foreign earnings—
 2,361
 —
 2,435
—
 2,044
 —
 2,124
Equity investments—
 539
 —
 451
Pensions and other postretirement benefits162
 543
 1,098
 109
727
 109
 435
 131
Compensation related600
 —
 748
 —
438
 —
 535
 —
Unrecognized tax benefits497
 —
 706
 —
383
 —
 412
 —
Net operating losses and other tax credit carryforwards225
 —
 425
 —
437
 —
 565
 —
Other1,605
 71
 1,798
 91
1,128
 46
 1,217
 —
Subtotal3,263
 9,105
 4,983
 9,506
3,257
 7,520
 3,256
 8,879
Valuation allowance(205)   (107)  (268)   (304)  
Total deferred taxes$3,058
 $9,105
 $4,876
 $9,506
$2,989
 $7,520
 $2,952
 $8,879
Net deferred income taxes  $6,047
   $4,630
  $4,531
   $5,927
Recognized as:              
Deferred income taxes and other current assets$572
   $624
  
Other assets381
   527
  $546
   $608
  
Income taxes payable  $224
   $41
Deferred income taxes  6,776
   5,740
  $5,077
   $6,535
The Company has net operating loss (“NOL”)(NOL) carryforwards in several jurisdictions. As of December 31, 2013, approximately2016, $170243 million of deferred taxes on NOL carryforwards relate to foreign jurisdictions, none of which are individually significant. ApproximatelyValuation allowances of $205268 million of valuation allowances have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has approximately $55194 million of deferred tax assets relating to various U.S. tax credit carryforwards and NOL carryforwards, all of which are expected to be fully utilized prior to expiry.
Income taxes paid in 2013, 20122016, 2015 and 20112014 were $2.31.8 billion, $2.51.8 billion and $2.77.9 billion, respectively. Income taxes paid in 2014 reflects approximately $5.0 billion of taxes paid on the divestiture of MCC. Tax benefits relating to stock option exercises reflected in paid-in capital were $61$147 million in 2013 and2016, $94109 million in 2012. These amounts were not material2015 and $202 million in 2011.2014.

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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2013 2012 20112016 2015 2014
Balance January 1$4,425
 $4,277
 $4,919
$3,448
 $3,534
 $3,503
Additions related to current year positions320
 496
 695
196
 198
 389
Additions related to prior year positions177
 58
 145
75
 53
 23
Reductions for tax positions of prior years (1)
(747) (320) (1,223)(90) (59) (156)
Settlements(1)(603) (67) (259)(92) (184) (161)
Lapse of statute of limitations(69) (19) —
(43) (94) (64)
Balance December 31$3,503
 $4,425
 $4,277
$3,494
 $3,448
 $3,534
(1) 
Amounts reflect the settlements with the IRS and CRA as discussed below.
If the Company were to recognize the unrecognized tax benefits of $3.5$3.5 billion at December 31, 2013,2016, the income tax provision would reflect a favorable net impact of $3.3 billion.
The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of December 31, 20132016 could decrease by up to $128 million1.7 billion in the next 12 months as a result of various audit closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures. However, there is one item that is currently under discussion with the Internal Revenue Service (IRS) relating to the 2006 through 2008 examination. The Company has concluded that its position should be sustained upon audit. However, if this item were to result in an unfavorable outcome or settlement, it could have a material adverse impact on the Company’s financial position, liquidity and results of operations.
InterestExpenses for interest and penalties associated with uncertain tax positions amounted to a benefit of $319134 million in 2013,2016, $88102 million in 20122015 and $959 million in 2011.2014. These amounts reflect the beneficial impacts of various tax settlements, including those discussed below. Liabilities for accrued interest and penalties were $665886 million and $1.2 billion766 million as of December 31, 20132016 and 2012,2015, respectively.
In 2013,The IRS is currently conducting examinations of the Internal Revenue Service (“IRS”) finalized its examination of Schering-Plough’s 2007-2009Company’s tax years. The Company’s unrecognized tax benefitsreturns for the years under2006 through 2008, as well as 2010 and 2011. Although the IRS’s examination of the Company’s 2002-2005 federal tax returns was concluded prior to 2015, one issue relating to a refund claim remained open. During 2015, this issue was resolved and the Company received a refund of approximately $715 million, which exceeded the adjustments related to this examination period and thereforereceivable previously recorded by the Company, recordedresulting in a net $165 million tax provision benefit in 2013.
In 2010, the IRS finalized its examination of Schering-Plough’s 2003-2006 tax years. In this audit cycle, the Company reached an agreement with the IRS on an adjustment to income related to intercompany pricing matters. This income adjustment mostly reduced NOLs and other tax credit carryforwards. The Company’s reserves for uncertain tax positions were adequate to cover all adjustments related to this examination period. Additionally, as previously disclosed, the Company was seeking resolution of one issue raised during this examination through the IRS administrative appeals process. In 2013, the Company recorded an out-of-period net tax benefit of $160 million related to this issue, which was settled in the fourth quarter of 2012, with final resolution relating to interest owed being reached in the first quarter of 2013. The Company’s unrecognized tax benefits related to this issue exceeded the settlement amount. Management has concluded that the exclusion of this benefit is not material to current or prior year financial statements.
As previously disclosed, the Canada Revenue Agency (the “CRA”) had proposed adjustments for 1999 and 2000 relating to intercompany pricing matters and, in July 2011, the CRA issued assessments for other miscellaneous audit issues for tax years 2001-2004. In 2012, Merck and the CRA reached a settlement for these years that calls for Merck to pay additional Canadian tax of approximately $65 million. The Company’s unrecognized tax benefits related to these matters exceeded the settlement amount and therefore the Company recorded a net $112 million tax provision benefit in 2012. A portion of the taxes paid is expected to be creditable for U.S. tax purposes. The Company had previously established reserves for these matters. The resolution of these matters did not have a material effect on the Company’s results of operations, financial position or liquidity.
In 2011, the IRS concluded its examination of Merck’s 2002-2005 federal income tax returns and as a result the Company was required to make net payments of approximately $465 million. The Company’s unrecognized tax benefits for the years under examination exceeded the adjustments related to this examination period and therefore the Company recorded a net $700 million tax provision benefit in 2011. This net benefit reflects the decrease of unrecognized tax benefits for the years under examination partially offset by increases to unrecognized tax benefits for years subsequent

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to the examination period as a result of this settlement. The Company disagrees with the IRS treatment of one issue raised during this examination and is appealing the matter through the IRS administrative process.$410 million.
In addition, various state and foreign tax examinations are in progress. For most of its other significant tax jurisdictions (both U.S. state and foreign), the Company’s income tax returns are open for examination for the period 2003 through 2013.2016.
At December 31, 2013,2016, foreign earnings of $57.163.1 billion have been retained indefinitely by subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability. In addition, the Company has subsidiaries operating in Puerto Rico and Singapore under tax incentive grants that beganbegin to expire in 2013.2022.


16.    Earnings per Share
Prior to 2013, the Company calculated earnings per share pursuant to the two-class method under which all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. RSUs and certain PSUs granted before December 31, 2009 (which generally have a three year vesting period) to certain management level employees met the definition of participating securities. RSUs and PSUs issued on or after January 1, 2010, do not meet the definition of participating securities; therefore, beginning in 2013 the Company no longer applies the two-class method.
The calculations of earnings per share (shares in millions) are as follows:
Years Ended December 312013 2012 20112016 2015 2014
Basic Earnings per Common Share     
Net income attributable to Merck & Co., Inc.$4,404
 $6,168
 $6,272
$3,920
 $4,442
 $11,920
Less: Income allocated to participating securities—
 3
 15
Net income allocated to common shareholders$4,404
 $6,165
 $6,257
Average common shares outstanding2,963
 3,041
 3,071
$1.49
 $2.03
 $2.04
Earnings per Common Share Assuming Dilution     
Net income attributable to Merck & Co., Inc.$4,404
 $6,168
 $6,272
Less: Income allocated to participating securities—
 3
 15
Net income allocated to common shareholders$4,404
 $6,165
 $6,257
Average common shares outstanding2,963
 3,041
 3,071
2,766
 2,816
 2,894
Common shares issuable (1)
33
 35
 23
21
 25
 34
Average common shares outstanding assuming dilution2,996
 3,076
 3,094
2,787
 2,841
 2,928
$1.47
 $2.00
 $2.02
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$1.42
 $1.58
 $4.12
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$1.41
 $1.56
 $4.07
(1) 
Issuable primarily under share-based compensation plans.
In 2013, 20122016, 2015 and 2011, 252014, 13 million, 1049 million and 1694 million, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.

124


17.   Other Comprehensive Income (Loss)
In the first quarter of 2013, the Company adopted guidance issued by the FASB that requires additional disclosure related to the impact of reclassification adjustments out of AOCI on net income. Changes in AOCI by component are as follows:
Derivatives Investments 
Employee
Benefit
Plans
 
Cumulative
Translation
Adjustment
 
Accumulated Other
Comprehensive
Income (Loss)
Derivatives Investments 
Employee
Benefit
Plans
 
Cumulative
Translation
Adjustment
 
Accumulated Other
Comprehensive
Income (Loss)
Balance January 1, 2011, net of taxes$41
 $31
 $(2,043) $(1,245) $(3,216)
Balance January 1, 2014, net of taxes$132
 $54
 $(909) $(1,474) $(2,197)
Other comprehensive income (loss) before reclassification adjustments, pretax(143) (10) (573) 435
 (291)778
 48
 (3,196) (412) (2,782)
Tax56
 5
 187
 (1) 247
(285) (17) 1,067
 (92) 673
Other comprehensive income (loss) before reclassification adjustments, net of taxes(87) (5) (386) 434
 (44)493
 31
 (2,129) (504) (2,109)
Reclassification adjustments, pretax83
 (7) 151
 —
 227
(146)
(1) 
43
(2) 
62
(3) 
—
 (41)
Tax(33) 2
 (68) —
 (99)51
 (17) (10) —
 24
Reclassification adjustments, net of taxes50
(1) 
(5)
(2) 
83
(3) 
—
 128
(95) 26
 52
 —
 (17)
Other comprehensive income (loss), net of taxes(37) (10) (303) 434
 84
398
 57
 (2,077) (504) (2,126)
Balance December 31, 2011, net of taxes4
 21
 (2,346) (811) (3,132)
Balance December 31, 2014, net of taxes530
 111
 (2,986) (1,978) (4,323)
Other comprehensive income (loss) before reclassification adjustments, pretax(198) 74
 (1,852) (99) (2,075)526
 (9) 710
 (158) 1,069
Tax77
 (10) 450
 (81) 436
(177) (13) (272) (28) (490)
Other comprehensive income (loss) before reclassification adjustments, net of taxes(121) 64
 (1,402) (180) (1,639)349
 (22) 438
 (186) 579
Reclassification adjustments, pretax33
 (13) 136
 —
 156
(731)
(1) 
(73)
(2) 
203
(3) 
(22) (623)
Tax(13) 1
 (55) —
 (67)256
 25
 (62) —
 219
Reclassification adjustments, net of taxes20
(1) 
(12)
(2) 
81
(3) 
—
 89
(475) (48) 141
 (22) (404)
Other comprehensive income (loss), net of taxes(101) 52
 (1,321) (180) (1,550)(126) (70) 579
 (208) 175
Balance December 31, 2012, net of taxes(97) 73
 (3,667)
(4) 
(991) (4,682)
Balance December 31, 2015, net of taxes404
 41
 (2,407)
(4) 
(2,186) (4,148)
Other comprehensive income (loss) before reclassification adjustments, pretax335
 33
 3,917
 (383) 3,902
210
 (38) (1,199) (150) (1,177)
Tax(132) (23) (1,365) (100) (1,620)(72) 16
 363
 (19) 288
Other comprehensive income (loss) before reclassification adjustments, net of taxes203
 10
 2,552
 (483) 2,282
138
 (22) (836) (169) (889)
Reclassification adjustments, pretax42
 (39) 286
 —
 289
(314)
(1) 
(31)
(2) 
37
(3) 
—
 (308)
Tax(16) 10
 (80) —
 (86)110
 9
 —
 —
 119
Reclassification adjustments, net of taxes26
(1) 
(29)
(2) 
206
(3) 
—
 203
(204) (22) 37
 —
 (189)
Other comprehensive income (loss), net of taxes229
 (19) 2,758
 (483) 2,485
(66) (44) (799) (169) (1,078)
Balance December 31, 2013, net of taxes$132
 $54
 $(909)
(4) 
$(1,474) $(2,197)
Balance December 31, 2016, net of taxes$338
 $(3) $(3,206)
(4) 
$(2,355) $(5,226)
(1)
Relates to foreign currency cash flow hedges that were reclassified from AOCI to Sales.
(2)
Represents net realized gains(gains) losses on the sales of available-for-sale investments that were reclassified from AOCI to Other (income) expense, net.
(3)
Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note 13).
(4) 
Includes pension plan net loss of $(1.7)$3.9 billion and $(4.1)$3.3 billion at December 31, 20132016 and 2012,2015, respectively, and other postretirement benefit plan net loss of $(80)$115 million and $(414)$86 million at December 31, 20132016 and in 2012,2015, respectively, as well as pension plan prior service credit of $559$361 million and $449$414 million at December 31, 20132016 and 2012,2015, respectively, and other postretirement benefit plan prior service credit of $331$466 million and $354$547 million at December 31, 20132016 and 2012.
2015, respectively.

Included in cumulative translation adjustment are pretax gains of approximately $392 million for 2011 relating to translation impacts of intangible assets recorded in conjunction with the Merger.






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18.    Segment Reporting
The Company’s operations are principally managed on a products basis and are comprised of four operating segments – Pharmaceutical, Animal Health, Consumer CareHealthcare Services and Alliances (which includes revenue and equity income from the Company’s relationship with AZLP).Alliances. The Animal Health, Consumer CareHealthcare Services and Alliances segments are not material for separate reporting and are included in all other in the table below. reporting.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures.products. 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. A large component of pediatric and adolescent vaccines is soldvaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. Sales of vaccines in most major European markets were marketed through the Company’s SPMSD joint venture until its termination on December 31, 2016 (see Note 8).
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,During 2016, the Company has consumermade changes to the composition of the Animal Health segment that resulted in the inclusion of certain revenues and costs that were previously included in non-segment revenues and profits. Prior periods have been recast to reflect these changes on a comparable basis. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care operationsdelivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AZLP until the termination of that develop, manufacturerelationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketmarketed over-the-counter, foot care and sun care products which are sold through wholesale and retail drug, food chain and mass merchandiser outlets, as well as club stores and specialty channels.(see Note 3).
The accounting policies for the segments described above are the same as those described in Note 2.

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Sales of the Company’s products were as follows:
Years Ended December 312013 2012 20112016 2015 2014
Primary Care and Women’s Health          
Cardiovascular          
Zetia$2,658
 $2,567
 $2,428
$2,560
 $2,526
 $2,650
Vytorin1,643
 1,747
 1,882
1,141
 1,251
 1,516
Diabetes and Obesity     
Diabetes     
Januvia4,004
 4,086
 3,324
3,908
 3,863
 3,931
Janumet1,829
 1,659
 1,363
2,201
 2,151
 2,071
Respiratory     
Nasonex1,335
 1,268
 1,286
Singulair1,196
 3,853
 5,479
General Medicine and Women’s Health     
NuvaRing777
 732
 723
Implanon/Nexplanon606
 588
 502
Dulera324
 207
 96
436
 536
 460
Asmanex184
 185
 206
Women’s Health and Endocrine     
NuvaRing686
 623
 623
Fosamax560
 676
 855
Follistim AQ481
 468
 530
355
 383
 412
Implanon403
 348
 294
Cerazette208
 271
 268
Other     
Arcoxia484
 453
 431
Avelox140
 201
 322
Hospital and Specialty          
Hepatitis     
Zepatier555
 —
 —
HIV     
Isentress1,387
 1,511
 1,673
Hospital Acute Care     
Cubicin (1)
1,087
 1,127
 25
Noxafil595
 487
 402
Invanz561
 569
 529
Cancidas558
 573
 681
Bridion482
 353
 340
Primaxin297
 313
 329
Immunology          
Remicade2,271
 2,076
 2,667
1,268
 1,794
 2,372
Simponi500
 331
 264
766
 690
 689
Infectious Disease     
Isentress1,643
 1,515
 1,359
Cancidas660
 619
 640
PegIntron496
 653
 657
Invanz488
 445
 406
Victrelis428
 502
 140
Noxafil309
 258
 230
Oncology          
Keytruda1,402
 566
 55
Emend549
 535
 553
Temodar708
 917
 935
283
 312
 350
Emend507
 489
 419
Diversified Brands     
Respiratory     
Singulair915
 931
 1,092
Nasonex537
 858
 1,099
Other          
Cosopt/Trusopt416
 444
 477
Bridion288
 261
 201
Integrilin186
 211
 230
Diversified Brands     
Cozaar/Hyzaar1,006
 1,284
 1,663
511
 667
 806
Primaxin335
 384
 515
Arcoxia450
 471
 519
Fosamax284
 359
 470
Zocor301
 383
 456
186
 217
 258
Propecia283
 424
 447
Clarinex235
 393
 621
Remeron206
 232
 241
Claritin Rx204
 244
 314
Proscar183
 217
 223
Maxalt149
 638
 639
Vaccines (1)
     
Gardasil1,831
 1,631
 1,209
ProQuad/M-M-R II/Varivax
1,306
 1,273
 1,202
Vaccines (2)
     
Gardasil/Gardasil 9
2,173
 1,908
 1,738
ProQuad/M-M-R II/Varivax1,640
 1,505
 1,394
Zostavax758
 651
 332
685
 749
 765
RotaTeq652
 610
 659
Pneumovax 23
653
 580
 498
641
 542
 746
RotaTeq636
 601
 651
Other pharmaceutical (2)
4,316
 4,333
 4,266
Other pharmaceutical (3)
4,703
 5,105
 6,233
Total Pharmaceutical segment sales37,437
 40,601
 41,289
35,151
 34,782
 36,042
Other segment sales (3)
6,325
 6,412
 6,428
Other segment sales (4)
3,862
 3,667
 5,758
Total segment sales43,762
 47,013
 47,717
39,013
 38,449
 41,800
Other (4)
271
 254
 330
Other (5)
794
 1,049
 437
$44,033
 $47,267
 $48,047
$39,807
 $39,498
 $42,237
(1)
Sales of Cubicin in 2015 represent sales subsequent to the Cubist acquisition date. Sales of Cubicin in 2014 reflect sales in Japan pursuant to a previously existing licensing agreement.
(2) 
These amounts do not reflect sales of vaccines sold in most major European markets through the Company’s joint venture, Sanofi Pasteur MSD,SPMSD, the results of which are reflected in Equityequity income from affiliates which is included in Other (income) expense, net. These amounts do, however, reflect supply sales to SPMSD. On December 31, 2016, Merck and Sanofi Pasteur MSD.terminated the SPMSD joint venture (see Note 8).
(2)(3) 
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
(3) (4) 
Represents the non-reportable segments of Animal Health, Healthcare Services and Alliances, as well as Consumer Care and Alliances.until its divestiture on October 1, 2014 (see Note 3). The Alliances segment includes revenue from the Company’s relationship with AZLP.AZLP until termination on June 30, 2014 (see Note 8).
(4)(5) 
Other revenues areis primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales, sales relatedsales. Other in 2016 and 2014 also includes approximately $170 million and $232 million, respectively, in connection with the sale of the marketing rights to divested products or businesses and other supply sales not included in segment results. On October 1, 2013, the Company divested a substantial portion of its third-party manufacturing sales (see Note 3). In addition, other revenues in 2013 reflect $50 million of revenue for the out-license of a pipeline compound.certain products.

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Consolidated revenues by geographic area where derived are as follows:
Years Ended December 312013 2012 20112016 2015 2014
United States$18,246
 $20,392
 $20,495
$18,478
 $17,519
 $17,071
Europe, Middle East and Africa13,140
 12,990
 13,782
10,953
 10,677
 13,174
Asia Pacific3,918
 3,825
 3,952
Japan4,044
 5,102
 4,835
2,846
 2,673
 3,471
Asia Pacific3,845
 3,775
 3,496
Latin America3,203
 3,389
 3,472
2,155
 2,825
 3,151
Other1,555
 1,619
 1,967
1,457
 1,979
 1,418
$44,033
 $47,267
 $48,047
$39,807
 $39,498
 $42,237
A reconciliation of total segment profits to consolidated Income before taxes is as follows:
Years Ended December 312013 2012 20112016 2015 2014
Segment profits:          
Pharmaceutical segment$22,983
 $25,852
 $25,617
$22,180
 $21,658
 $22,164
Other segments3,094
 3,163
 2,995
1,507
 1,573
 2,386
Total segment profits26,077
 29,015
 28,612
23,687
 23,231
 24,550
Other profits (losses)19
 26
 (11)
Other profits481
 810
 627
Unallocated:          
Interest income264
 232
 145
328
 289
 266
Interest expense(801) (714) (695)(693) (672) (732)
Equity income from affiliates(159) 102
 41
(19) 135
 59
Depreciation and amortization(2,250) (2,059) (2,412)(1,585) (1,573) (2,452)
Research and development(6,381) (7,126) (7,251)(9,084) (5,871) (5,823)
Amortization of purchase accounting adjustments(4,690) (4,872) (5,000)(3,692) (4,816) (4,182)
Restructuring costs(1,709) (664) (1,306)(651) (619) (1,013)
Net charge related to settlement of ENHANCE Litigation—
 (493) —
Arbitration settlement charge—
 —
 (500)
Gain on sale of certain migraine clinical development programs100
 250
 —
Charge related to the settlement of worldwide Keytruda patent litigation
(625) —
 —
Gain on divestiture of certain ophthalmic products—
 147
 480
Foreign currency devaluation related to Venezuela—
 (876) —
Net charge related to the settlement of Vioxx shareholder class action litigation
—
 (680) —
Gain on divestiture of Merck Consumer Care—
 —
 11,209
Gain on AstraZeneca option exercise—
 —
 741
Loss on extinguishment of debt—
 —
 (628)
Other unallocated, net(4,825) (4,708) (4,289)(3,588) (4,354) (5,819)
$5,545
 $8,739
 $7,334
$4,659
 $5,401
 $17,283
Segment profits are comprised of segment sales less standard costs and certain operating expenses directly incurred by the segments. For internal management reporting presented to the chief operating decision maker, Merck does not allocate materials and production costs, other than standard costs, the majority of research and development expenses or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to segments.
Other profits (losses) are primarily comprised of miscellaneous corporate profits, (losses), as well as operating profits (losses) related to third-party manufacturing sales, divested products or businesses and other supply sales.
Other unallocated, net includes expenses from corporate and manufacturing cost centers, productgoodwill and other intangible asset impairment charges, gaingains or losses on sales of businesses, expense or income related to changes in the estimated fair value of contingent consideration, and other miscellaneous income or expense items.

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Equity income from affiliates and depreciation and amortization included in segment profits is as follows:
Pharmaceutical All Other TotalPharmaceutical All Other Total
Year Ended December 31, 2013        
Year Ended December 31, 2016        
Included in segment profits:          
Equity income from affiliates$88
 $475
 $563
$105
 $—
 $105
Depreciation and amortization(27) (22) (49)(160) (23) (183)
Year Ended December 31, 2012        
Year Ended December 31, 2015        
Included in segment profits:          
Equity income from affiliates$36
 $504
 $540
$70
 $—
 $70
Depreciation and amortization(25) (20) (45)(82) (18) (100)
Year Ended December 31, 2011        
Year Ended December 31, 2014        
Included in segment profits:          
Equity income from affiliates$59
 $510
 $569
$90
 $108
 $198
Depreciation and amortization(51) (20) (71)(39) (18) (57)
Property, plant and equipment, net by geographic area where located is as follows:
Years Ended December 312013 2012 2011
December 312016 2015 2014
United States$10,076
 $10,687
 $10,826
$8,114
 $8,467
 $8,727
Europe, Middle East and Africa3,346
 3,688
 3,780
2,732
 2,844
 3,120
Asia Pacific1,001
 1,059
 1,064
775
 842
 897
Latin America242
 250
 234
234
 182
 207
Japan211
 243
 279
164
 164
 172
Other97
 103
 114
7
 8
 13
$14,973
 $16,030
 $16,297
$12,026
 $12,507
 $13,136
The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not presented.

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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Merck & Co., Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, equity and cash flows present fairly, in all material respects, the financial position of Merck & Co., Inc. and its subsidiaries at December 31, 2013 2016and December 31, 2012,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20132016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2016 , based on criteria established in Internal Control —- Integrated Framework (2013)issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report under Item 9A.9a. Our responsibility is to express opinions on these financial statements and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 27, 201428, 2017

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(b)Supplementary Data
Selected quarterly financial data for 20132016 and 20122015 are contained in the Condensed Interim Financial Data table below.
Condensed Interim Financial Data (Unaudited)
($ in millions except per share amounts)
4th Q (1)
 
3rd Q (2)
 2nd Q 
1st Q (2)
4th Q (1)
 
3rd Q (2)
 
2nd Q (3)
 1st Q
2013 (3)
       
2016 (4)
       
Sales$11,319
 $11,032
 $11,010
 $10,671
$10,115
 $10,536
 $9,844
 $9,312
Materials and production4,607
 4,104
 4,284
 3,959
3,332
 3,409
 3,578
 3,572
Marketing and administrative2,982
 2,803
 3,140
 2,987
2,593
 2,393
 2,458
 2,318
Research and development1,836
 1,660
 2,101
 1,907
4,650
 1,664
 2,151
 1,659
Restructuring costs565
 870
 155
 119
265
 161
 134
 91
Equity income from affiliates(53) (102) (116) (133)
Other (income) expense, net631
 22
 19
 48
(Loss) income before taxes(1,356) 2,887
 1,504
 1,624
Net (loss) income attributable to Merck & Co., Inc.(594) 2,184
 1,205
 1,125
Basic (loss) earnings per common share attributable to Merck & Co., Inc. common shareholders$(0.22) $0.79
 $0.44
 $0.41
(Loss) earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$(0.22) $0.78
 $0.43
 $0.40
2015 (4)
       
Sales$10,215
 $10,073
 $9,785
 $9,425
Materials and production3,850
 3,761
 3,754
 3,569
Marketing and administrative2,615
 2,472
 2,624
 2,601
Research and development1,797
 1,500
 1,670
 1,737
Restructuring costs233
 113
 191
 82
Other (income) expense, net157
 172
 201
 282
905
 (170) 739
 55
Income before taxes1,225
 1,525
 1,245
 1,550
815
 2,397
 807
 1,381
Net income attributable to Merck & Co., Inc.781
 1,124
 906
 1,593
976
 1,826
 687
 953
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$0.27
 $0.38
 $0.30
 $0.53
$0.35
 $0.65
 $0.24
 $0.34
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$0.26
 $0.38
 $0.30
 $0.52
$0.35
 $0.64
 $0.24
 $0.33
2012 (3)
       
Sales$11,738
 $11,488
 $12,311
 $11,731
Materials and production4,160
 4,137
 4,112
 4,037
Marketing and administrative3,390
 3,063
 3,249
 3,074
Research and development2,224
 1,918
 2,165
 1,862
Restructuring costs191
 110
 144
 219
Equity income from affiliates(231) (158) (142) (110)
Other (income) expense, net669
 200
 103
 142
Income before taxes1,335
 2,218
 2,680
 2,507
Net income attributable to Merck & Co., Inc.908
 1,729
 1,793
 1,738
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders$0.30
 $0.57
 $0.59
 $0.57
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders$0.30
 $0.56
 $0.58
 $0.56
(1) 
Amounts for 20122016 include a charge to settle worldwide patent litigation related to Keytruda (see Note 10). Amounts for 2015 reflect a net charge related to the settlement of certain Vioxx shareholder class action litigation (see Note 10), foreign exchange losses related to Venezuela (see Note 14) and a gain on the sale of the Company’s remaining ophthalmics business in international markets (see Note 3).
(2) 
Amounts for 20132015 include net benefits relating toa gain on the settlementssale of certain federal income tax issuesmigraine clinical development programs (see Note 15)3).
(3) Amounts for 2015 include foreign exchange losses related to the devaluation of the Company’s net monetary assets in Venezuela (see Note 14).
(3)(4) 
Amounts for 20132016 and 20122015 reflect acquisition-relatedacquisition and divestiture-related costs (see Note 7) and the impact of restructuring actions (see Note 3)4).

131

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.  Controls and Procedures.
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluation, as of the end of the period covered by this Form 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”)Act)) are effective.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Act. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued in 19922013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that internal control over financial reporting was effective as of December 31, 2013.2016. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has performed its own assessment of the effectiveness of the Company’s internal control over financial reporting and its attestation report is included in this Form 10-K filing.
Management’s Report
Management’s Responsibility for Financial Statements
Responsibility for the integrity and objectivity of the Company’s financial statements rests with management. The financial statements report on management’s stewardship of Company assets. These statements are prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are based on management’s best estimates and judgments. Nonfinancial information included in the Annual Report on Form 10-K has also been prepared by management and is consistent with the financial statements.
To assure that financial information is reliable and assets are safeguarded, management maintains an effective system of internal controls and procedures, important elements of which include: careful selection, training and development of operating and financial managers; an organization that provides appropriate division of responsibility; and communications aimed at assuring that Company policies and procedures are understood throughout the organization. A staff of internal auditors regularly monitors the adequacy and application of internal controls on a worldwide basis.
To ensure that personnel continue to understand the system of internal controls and procedures, and policies concerning good and prudent business practices, annually all employees of the Company are required to complete Code of Conduct training, which includes financial stewardship. This training reinforces the importance and understanding of internal controls by reviewing key corporate policies, procedures and systems. In addition, the Company has compliance programs, including an ethical business practices program to reinforce the Company’s long-standing commitment to high ethical standards in the conduct of its business.
The financial statements and other financial information included in the Annual Report on Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows. Our formal certification to the Securities and Exchange Commission is included in this Form 10-K filing.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued in 19922013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that internal control over financial reporting was effective as of December 31, 2013.2016.

132

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013,2016, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
 
Kenneth C. Frazier Peter N. KelloggRobert M. Davis
Chairman, President
and Chief Executive Officer
 
Executive Vice President,
Global Services and Chief Financial Officer
Item 9B.Other Information.
None.

133

PART III
 
Item 10.Directors, Executive Officers and Corporate Governance.
The required information on directors and nominees is incorporated by reference from the discussion under Proposal 1. Election of Directors of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017. Information on executive officers is set forth in Part I of this document on pages 29 through 31.page 29.
The required information on compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.
The Company has a Code of Conduct — Our Values and Standards applicable to all employees, including the principal executive officer, principal financial officer, principal accounting officer and Controller. The Code of Conduct is available on the Company’s website at www.merck.com/about/code_of_conduct.pdf. The Company intends to disclose future amendments to certain provisions of the Code of Conduct, and waivers of the Code of Conduct granted to executive officers and directors, if any, on the website within four business days following the date of any amendment or waiver. Every Merck employee is responsible for adhering to business practices that are in accordance with the law and with ethical principles that reflect the highest standards of corporate and individual behavior. A printed copy will be sent, without charge, to any shareholder who requests it by writing to the Chief Ethics and Compliance Officer of Merck & Co., Inc., One Merck Drive, Whitehouse Station,2000 Galloping Hill Road, Kenilworth, NJ 08889-0100.07033.
The required information on the identification of the audit committee and the audit committee financial expert is incorporated by reference from the discussion under the heading “Board Meetings and Committees” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.
Item 11.Executive Compensation.
The information required on executive compensation is incorporated by reference from the discussion under the headings “Compensation Discussion and Analysis”, “Summary Compensation Table”, “All Other Compensation” table, “Grants of Plan-Based Awards” table, “Outstanding Equity Awards” table, “Option Exercises and Stock Vested” table, “Pension Benefits” table, “Nonqualified Deferred Compensation” table, Potential Payments Upon Termination or a Change in Control, including the discussion under the subheadings “Separation” and “Change in Control”, as well as all footnote information to the various tables, of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.
The required information on director compensation is incorporated by reference from the discussion under the heading “Director Compensation” and related “Director Compensation” table and “Schedule of Director Fees” table of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.
The required information under the headings “Compensation and Benefits Committee Interlocks and Insider Participation” and “Compensation and Benefits Committee Report” is incorporated by reference from the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.

134


Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Stock Ownership Information” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.
Equity Compensation Plan Information
The following table summarizes information about the options, warrants and rights and other equity compensation under the Company’s equity compensation plans as of the close of business on December 31, 2013.2016. The table does not include information about tax qualified plans such as the MSD Employee Savings and Security Plan and the Schering-Plough Employees’Merck U.S. Savings Plan.
Plan Category 
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
 
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
 
Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding
securities
reflected in column (a))
(c)
 
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
 
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
 
Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding
securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders(1)
 
115,805,403(2)

 $38.75
 143,391,240
 
45,050,279(2)

 $44.47
 124,902,265
Equity compensation plans not approved by security holders —
 —
 —
 —
 —
 —
Total 115,805,403
 $38.75
 143,391,240
 45,050,279
 $44.47
 124,902,265
(1)
Includes options to purchase shares of Company Common Stock and other rights under the following shareholder-approved plans: the Merck Sharp & Dohme 2001, 2004, 2007 and 2010 Incentive Stock Plans, the Merck & Co., Inc. 2001, 2006 and 2010 Non-Employee Directors Stock Option Plans, and the Merck & Co., Inc. Schering-Plough 1997, 2002 and 2006 Stock Incentive Plans.
(2)
Excludes approximately 17,569,40213,265,959 shares of restricted stock units and 2,440,2351,743,587 performance share units (assuming maximum payouts) under the Merck Sharp & Dohme 2004, 2007 and 2010 Incentive Stock Plans and 1,564,574 shares of restricted stock units and 107,813 performance share units (excluding accrued dividends) under the Merck & Co., Inc. Schering-Plough 2006 Stock Incentive Plan.Plans. Also excludes 390,268244,119 shares of phantom stock deferred under the MSD Employee Deferral Program and 459,241561,846 shares of phantom stock deferred under the MSD Directors Deferral Program.Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
The required information on transactions with related persons is incorporated by reference from the discussion under the heading “Related Person Transactions” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.
The required information on director independence is incorporated by reference from the discussion under the heading “Independence of Directors” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.
Item 14.Principal Accountant Fees and Services.
The information required for this item is incorporated by reference from the discussion under “Audit Committee”Proposal 4. Ratification of Appointment of Independent Registered Public Accounting Firm for 2017 beginning with the caption “Pre-Approval Policy for Services of Independent Registered Public Accounting Firm” through “Fees for Services providedProvided by Independent Registered Public Accounting Firm” of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2014.23, 2017.

135


PART IV
 
Item 15.Exhibits and Financial Statement Schedules.
(a)    The following documents are filed as part of this Form 10-K
1.    Financial Statements
Consolidated statement of income for the years ended December 31, 2013, 20122016, 2015 and 20112014
Consolidated statement of comprehensive income for the years ended December 31, 2013, 20122016, 2015 and 20112014
Consolidated balance sheet as of December 31, 20132016 and 20122015
Consolidated statement of equity for the years ended December 31, 2013, 20122016, 2015 and 20112014
Consolidated statement of cash flows for the years ended December 31, 2013, 20122016, 2015 and 20112014
Notes to consolidated financial statements
Report of PricewaterhouseCoopers LLP, independent registered public accounting firm
2.    Financial Statement Schedules
Schedules are omitted because they are either not required or not applicable.
Financial statements of affiliates carried on the equity basis have been omitted because, considered individually or in the aggregate, such affiliates do not constitute a significant subsidiary.

136

3.    Exhibits
Exhibit
Number
   Description
2.1—Master Restructuring Agreement dated as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
2.2—Agreement and Plan of Merger by and among Merck & Co., Inc., Schering-Plough Corporation, Blue, Inc. and Purple, Inc. dated as of March 8, 2009 — Incorporated by reference to Schering-Plough’s Current Report on Form 8-K filed March 11, 2009 (No. 1-6571)
2.3—Share Purchase Agreement, dated July 29, 2009, by and among Merck & Co., Inc., Merck SH Inc., Merck Sharp & Dohme (Holdings) Limited and sanofi-aventis — Incorporated by reference to MSD’s Current Report on Form 8-K dated July 31, 2009 (1-3305)
3.1 — Restated Certificate of Incorporation of Merck & Co., Inc. (November 3, 2009) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
3.2 — By-Laws of Merck & Co., Inc. (effective February 25, 2013)July 22, 2015) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8-K filed July 28, 2015 (No. 1-6571)
4.1 — Indenture, dated as of April 1, 1991, between Merck Sharp & Co., Inc.Dohme Corp. (f/k/a Schering Corporation) and U.S. Bank Trust National Association (as successor to Morgan Guaranty Trust Company of New York,York), as Trustee (the 1991 Indenture) — Incorporated by reference to Exhibit 4 to MSD’s Registration Statement on Form S-3 (No. 33-39349)
4.2 — First Supplemental Indenture to the 1991 Indenture, dated as of October 1, 1997 between Merck & Co., Inc. and First Trust of New York, National Association, as Trustee — Incorporated by reference to Exhibit 4(b) to MSD’s Registration Statement on Form S-3 (No. 333-36383)
4.3 — Second Supplemental Indenture to the 1991 Indenture, dated November 3, 2009 among Merck Sharp & Dohme Corp., Merck & Co., Inc. and U.S. Bank Trust National Association, as Trustee — Incorporated by reference to Exhibit 4.3 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
4.4 — Third Supplemental Indenture to the 1991 Indenture, dated May 1, 2012 —Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the quarter year ended March 31, 2012 (No. 1-6571)
4.5—Indenture, dated November 26, 2003, between Merck & Co., Inc. (f/k/a Schering-Plough Corporation) and The Bank of New York as Trustee (the 2003 Indenture) — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8‑K filed November 28, 2003 (No. 1-6571)
4.5—First Supplemental Indenture (including Form of Note), dated November 26, 2003 — Incorporated by reference to Exhibit 4.2 to Schering-Plough’s Current Report on Form 8-K filed November 28, 2003 (No. 1-6571)
4.6 — Second Supplemental Indenture to the 2003 Indenture (including Form of Note), dated November 26, 2003 —Incorporated by reference to Exhibit 4.3 to Schering-Plough’s Current Report on Form 8-K8‑K filed November 28, 2003 (No. 1-6571)
4.7 — Third Supplemental Indenture to the 2003 Indenture (including Form of Note), dated September 17, 2007 — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8-K8‑K filed September 17, 2007 (No. 1-6571)

4.8
Exhibit
Number
 — Fourth Supplemental Indenture (including Form of Note), dated October 1, 2007 — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8‑K filed October 2, 2007 (No.1-6571)Description
4.94.8 — Fifth Supplemental Indenture to the 2003 Indenture, dated November 3, 2009 among Merck Sharp & Dohme Corp., Merck & Co., Inc. and The Bank of New York Mellon, as Trustee — Incorporated by reference to Exhibit 4.4 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
4.104.9 — Indenture, dated as of January 6, 2010, between Merck & Co., Inc. and U.S. Bank Trust National Association, as Trustee — Incorporated by reference to Exhibit 4.1 to Merck & Co., Inc.’s Current Report on Form 8-K filed December 10, 2010 (No. 1-6571)
4.114.10 — Third Supplemental Indenture, dated May 1, 2012, among Merck Sharp & Dohme Corp., Schering Corporation,Long-term debt instruments under which the total amount of securities authorized does not exceed 10% of Merck & Co., Inc.’s total consolidated assets are not filed as exhibits to this report. Merck & Co., Inc. will furnish a copy of these agreements to the Securities and U.S. Bank Trust National Association, as Trustee —IncorporatedExchange Commission on request.
*10.1—Merck & Co., Inc. Executive Incentive Plan (as amended and restated effective June 1, 2015) — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the quarter year ended March 31, 2012Schedule 14A filed April 13, 2015 (No. 1-6571)

137

Exhibit
Number
Description
*10.1—Executive Incentive Plan (as amended effective February 27, 1996) — Incorporated by reference to MSD’s Form 10-K Annual Report for the fiscal year ended December 31, 1995 (No. 1-3305)
*10.2 — Merck & Co., Inc. Deferral Program Including the Base Salary Deferral Plan (Amended and Restated effective JanuaryDecember 1, 2013) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-6571)2015)
*10.3—Merck Sharp & Dohme Corp. 2001 Incentive Stock Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.9 to Merck & Co., Inc.’s Current Report on Form 8‑K filed November 4, 2009 (No. 1-6571)
*10.4 — Merck Sharp & Dohme Corp. 2004 Incentive Stock Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.8 to Merck & Co., Inc.’s Current Report on Form 8‑K filed November 4, 2009 (No. 1-6571)
*10.510.4 — Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective as amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.7 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
*10.610.5 — Amendment One to the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective February 15, 2010) — Incorporated by reference to Exhibit 10.2 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 18, 2010 (No. 1-6571)
*10.7—2002 Stock Incentive Plan (as amended to February 25, 2003) — Incorporated by reference to Exhibit 10(d) to Schering-Plough’s 10-K for the year ended December 31, 2002 (No. 1-5671)
*10.8—Merck & Co., Inc. Schering-Plough 2006 Stock Incentive Plan (as amended and restated, effective November 3, 2009) — Incorporated by reference to Exhibit 10.13 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
*10.910.6 — Merck & Co., Inc. 2010 Incentive Stock Plan (effective as of May(as amended and restated June 1, 2010)2015) — Incorporated by reference to Merck & Co., Inc.’s Schedule 14A filed April 12, 201013, 2015 (No. 1-6571)
*10.1010.7 — StockForm of stock option terms for a non-qualified stock option under the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan and the Schering-Plough 2006 Stock Incentive Plan — Incorporated by reference to Exhibit 10.3 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 15, 2010 (No. 1-6571)
*10.1110.8 — RestrictedForm of stock unit terms for annual grant under the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan and the Schering-Plough 2006 Stock Incentive Plan — Incorporated by reference to Exhibit 10.4 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 15, 2010 (No. 1-6571)
*10.12—Restricted stock unit terms for 2011 grants for Richard T. Clark under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co.’s Form 10-Q Quarterly Report for the period ended March 31, 2011 (No. 1-6571)
*10.13—Stock option terms for 2011 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10‑Q Quarterly Report for the period ended March 31, 2011 (No. 1-6571)
*10.14—Restricted stock unit terms for 2011 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended March 31, 2011 (No. 1-6571)
*10.1510.9 — Form of Performance share unit terms for 2011 and 2012 grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-6571)
*10.16—Stock option terms for 2012 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10‑K Annual Report for the fiscal year ended December 31, 2011 (No. 1-6571)
*10.17—Restricted stock unit terms for 2012 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2011 (No. 1-6571)
*10.18—Performanceperformance share unit terms for 2012 grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended March 31, 2012 (No. 1-6571)

138

Exhibit
Number
Description
*10.1910.10 — Form of Stockstock option agreementterms for 2013 and later quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-6571)
*10.2010.11 — Form of Restrictedrestricted stock unit agreementterms for 2013 and later quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No. 1-6571)
*10.2110.12 — Form of performance share unit terms for 2013 grants under the Merck & Co., Inc. Change in Control Separation Benefits2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s CurrentForm 10-K Annual Report on Form 8-K dated November 23, 2009for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.2210.13 — Amendment One toForm of stock option terms for 2014 quarterly and annual non-qualified option grants under the Merck & Co., Inc. Change in Control Separation Benefits2010 Incentive Stock Plan (effective February 15, 2010) — Incorporated by reference to Exhibit 10.1 to Merck & Co., Inc.’s CurrentForm 10-K Annual Report on Form 8-K filed February 18, 2010for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.2310.14—Form of restricted stock unit terms for 2014 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)

Exhibit
Number
Description
*10.15—Form of performance share unit terms for 2014 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.16—Form of stock option terms for 2015 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
*10.17—Form of restricted stock unit terms for 2015 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
*10.18—Form of performance share unit terms for 2015 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
*10.19—Form of stock option terms for 2016 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan
*10.20—Form of restricted stock unit terms for 2016 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan
*10.21—Form of performance share unit terms for 2016 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan
*10.22 — Merck & Co., Inc. Change in Control Separation Benefits Plan (Effective as Amended and Restated, as of January 1, 2013) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8‑K dated November 29, 2012 (No. 1-6571)
*10.2410.23 — Merck & Co., Inc. U.S. Separation Benefits Plan (effective(amended and restated effective as of January 1, 2012)November 15, 2014) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 20112014 (No. 1-6571)
*10.2510.24 — Merck & Co., Inc. U.S. Separation Benefits Plan (effective(amended and restated effective as of January 1, 2013) (amended and restated as of October 1, 2013) — Incorporated by reference to Merck & Co., Inc.’s Form 10‑Q Quarterly Report for the period ended September 30, 2013 (No. 1-6571)2017)
*10.26—Merck & Co., Inc. 2001 Non-Employee Directors Stock Option Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.11 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
*10.2710.25 — Merck & Co., Inc. 2006 Non-Employee Directors Stock Option Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.5 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
*10.2810.26 — Merck & Co., Inc. 2010 Non-Employee Directors Stock Option Plan (amended and restated as of December 1, 2010) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No. 1-6571)
*10.2910.27 — Retirement Plan for the Directors of Merck & Co., Inc. (amended and restated June 21, 1996) —Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1996 (No. 1-3305)
*10.3010.28 — Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation (effective as amended and restated as of December 1, 2010) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No. 1-6571)
*10.31—Offer Letter between Merck & Co., Inc. and Peter S. Kim, dated December 15, 2000 —Incorporated by reference to MSD’s Form 10-K Annual Report for the fiscal year ended December 31, 2003 (No.1-3305)
*10.32—Offer Letter between Merck & Co., Inc. and Peter N. Kellogg, dated June 18, 2007 —Incorporated by reference to MSD’s Current Report on Form 8-K dated June 28, 2007 (No. 1-3305)
*10.33—Form of employment agreement effective upon a change of control between Schering-Plough and certain executives for new agreements beginning in January 1, 2008 — Incorporated by reference to Exhibit 10(e)(xv) to Schering-Plough’s 10-K for the year ended December 31, 2008 (No. 1-6571)
10.34—Share Purchase Agreement between Akzo Nobel N.V., Schering-Plough International C.V., and Schering-Plough Corporation — Incorporated by reference to Exhibit 10.1 to Schering-Plough’s 8‑K filed October 2, 2007 (No. 1-6571)
10.35—Amended and Restated License and Option Agreement dated as of July 1, 1998 between Astra AB and Astra Merck Inc. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)

139

Exhibit
Number
Description
10.36—KBI Shares Option Agreement dated as of July 1, 1998 by and among Astra AB, Merck & Co., Inc. and Merck Holdings, Inc. — Incorporated by reference to MSD’s Form 10‑Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
10.37—Amended and Restated KBI Shares Option Agreement dated as of June 26, 2012 by and among AstraZeneca AB, Merck Sharp & Dohme Corp. and Merck Holdings LLC — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended September 30, 2012 (No. 1-6571)
10.38—KBI-E Asset Option Agreement dated as of July 1, 1998 by and among Astra AB, Merck & Co., Inc., Astra Merck Inc. and Astra Merck Enterprises Inc. — Incorporated by reference to MSD’s Form 10‑Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
10.39—KBI Supply Agreement dated as of July 1, 1998 between Astra Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission). — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
10.40—Second Amended and Restated Manufacturing Agreement dated as of July 1, 1998 among Merck & Co., Inc., Astra AB, Astra Merck Inc. and Astra USA, Inc. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
10.41—Limited Partnership Agreement dated as of July 1, 1998 between KB USA, L.P. and KBI Sub Inc. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
10.42—Distribution Agreement dated as of July 1, 1998 between Astra Merck Enterprises Inc. and Astra Pharmaceuticals, L.P. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
10.43—Agreement to Incorporate Defined Terms dated as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
10.44—Form of Voting Agreement made and entered into as of October 30, 2006 by and between Merck & Co., Inc. and Sirna Therapeutics, Inc. — Incorporated by reference to MSD’s Current Report on Form 8-K dated October 30, 2006 (No. 1-3305)
10.45—Commitment Letter by and among Merck & Co., Inc., J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. dated as of March 8, 2009 — Incorporated by reference to MSD’s Current Report on Form 8-K dated March 8, 2009 (No. 1-3305)
10.46—Incremental Credit Agreement dated as of May 6, 2009, among Merck & Co., Inc., the Guarantors and Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to MSD’s Current Report on Form 8-K dated May 6, 2009 (No. 1-3305)
10.47—Asset Sale Facility Agreement dated as of May 6, 2009, among Merck & Co., Inc., the Guarantors and Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to MSD’s Current Report on Form 8-K dated May 6, 2009 (No. 1-3305)
10.48—Bridge Loan Agreement dated as of May 6, 2009, among Merck & Co., Inc., the Guarantors and Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to MSD’s Current Report on Form 8-K dated May 6, 2009 (No. 1-3305)
10.49—Amendment No. 1 to Amended and Restated Five-Year Credit Agreement dated as of April 20, 2009 among Merck & Co., Inc., the Lenders party thereto and Citicorp USA, Inc., as Administrative Agent — Incorporated by reference to Exhibit 10.1 to Merck & Co., Inc.’s Current Report on Form 8‑K filed November 4, 2009 (No. 1-6571)
10.50—Guarantee and Joinder Agreement dated as of November 3, 2009 by Merck & Co., Inc., the Guarantor, for the benefit of the Guaranteed Parties — Incorporated by reference to Exhibit 10.3 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
10.51—Guarantor Joinder Agreement dated as of November 3, 2009, by Merck & Co., Inc., the Guarantor and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to Exhibit 10.4 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)

140

Exhibit
Number
Description
10.52—Call Option Agreement, dated July 29, 2009, by and among Merck & Co., Inc., Schering-Plough Corporation and sanofi-aventis — Incorporated by reference to MSD’s Current Report on Form 8‑K dated July 31, 2009 (No. 1-3305)
10.53—Termination Agreement, dated as of September 17, 2009, by and among Merck & Co., Inc., Merck SH Inc., Merck Sharp & Dohme (Holdings) Limited, sanofi-aventis, sanofi 4 and Merial Limited — Incorporated by reference to MSD’s Current Report on Form 8-K dated September 21, 2009 (No. 1-3305)
10.54—Letter Agreement dated April 14, 2003 relating to Consent Decree — Incorporated by reference to Exhibit 99.3 to Schering-Plough’s 10-Q for the period ended March 31, 2003 (No. 1-6571)
10.5510.29 — Distribution agreement between Schering-Plough and Centocor, Inc., dated April 3, 1998 — Incorporated by reference to Exhibit 10(u) to Schering-Plough’s Amended 10-K for the year ended December 31, 2003, filed May 3, 2004 (No. 1-6571)†
10.5610.30 — Amendment Agreement to the Distribution Agreement between Centocor, Inc., CAN Development, LLC, and Schering-Plough (Ireland) Company — Incorporated by reference to Exhibit 10.1 to Schering-Plough’s Current Report on Form 8-K filed December 21, 2007 (No. 1-6571)†
10.5710.31 — Accelerated Share Purchase Agreement between Merck & Co., Inc. and Goldman, Sachs & Co., dated May 20, 2013 — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended June 30, 2013 (No. 1-6571)

Exhibit
Number
Description
12 — Computation of Ratios of Earnings to Fixed Charges
21 — Subsidiaries of Merck & Co., Inc.
23 — Consent of Independent Registered Public Accounting Firm
24.1 — Power of Attorney
24.2 — Certified Resolution of Board of Directors
31.1 — Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 — Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 — Section 1350 Certification of Chief Executive Officer
32.2 — Section 1350 Certification of Chief Financial Officer
101 — The following materials from Merck & Co., Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013,2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated Statement of Comprehensive Income, (iii) the Consolidated Balance Sheet, (iv) the Consolidated Statement of Equity, (v) the Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
                
*Management contract or compensatory plan or arrangement.
†Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 under the Securities Exchange Act of 1934, as amended.


141
Item 16.    Form 10-K Summary
Table of Contents
Not applicable.


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated:    February 27, 201428, 2017
 
MERCK & CO., INC.
  
By:KENNETH C. FRAZIER
 (Chairman, President and Chief Executive Officer)
   
 By:/S/ GERALYN S. RITTERMICHAEL J. HOLSTON
  Geralyn S. RitterMichael J. Holston
  (Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
     
KENNETH C. FRAZIER 
Chairman, President and Chief Executive Officer;
Principal Executive Officer; Director
 February 27, 201428, 2017
PETER N. KELLOGGROBERT M. DAVIS 
Executive Vice President, Global Services and
Chief Financial Officer;
Principal Financial Officer
 February 27, 201428, 2017
JOHN CANANRITA A. KARACHUN 
Senior Vice President Finance-Global Controller;
Principal Accounting Officer
 February 27, 201428, 2017
LESLIE A. BRUN Director February 27, 201428, 2017
THOMAS R. CECH Director February 27, 201428, 2017
PAMELA J. CRAIGDirectorFebruary 28, 2017
THOMAS H. GLOCER Director February 27, 2014
WILLIAM B. HARRISON, JR.DirectorFebruary 27, 201428, 2017
C. ROBERT KIDDER Director February 27, 201428, 2017
ROCHELLE B. LAZARUS Director February 27, 201428, 2017
CARLOS E. REPRESAS Director February 27, 201428, 2017
PAUL B. ROTHMANDirectorFebruary 28, 2017
PATRICIA F. RUSSO Director February 27, 201428, 2017
CRAIG B. THOMPSON Director February 27, 201428, 2017
WENDELL P. WEEKS Director February 27, 201428, 2017
PETER C. WENDELL Director February 27, 201428, 2017
Geralyn S. Ritter,Michael J. Holston, by signing herhis name hereto, does hereby sign this document pursuant to powers of attorney duly executed by the persons named, filed with the Securities and Exchange Commission as an exhibit to this document, on behalf of such persons, all in the capacities and on the date stated, such persons including a majority of the directors of the Company.
 
By: /S/ GERALYN S. RITTERMICHAEL J. HOLSTON
  Geralyn S. RitterMichael J. Holston
  (Attorney-in-Fact)


142

EXHIBIT INDEX
 
Exhibit
Number
   Description
2.1—Master Restructuring Agreement dated as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission) — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No. 1-3305)
2.2—Agreement and Plan of Merger by and among Merck & Co., Inc., Schering-Plough Corporation, Blue, Inc. and Purple, Inc. dated as of March 8, 2009 — Incorporated by reference to Schering-Plough’s Current Report on Form 8-K filed March 11, 2009 (No. 1-6571)
2.3—Share Purchase Agreement, dated July 29, 2009, by and among Merck & Co., Inc., Merck SH Inc., Merck Sharp & Dohme (Holdings) Limited and sanofi-aventis — Incorporated by reference to MSD’s Current Report on Form 8-K dated July 31, 2009 (No. 1-3305)
3.1 — Restated Certificate of Incorporation of Merck & Co., Inc. (November 3, 2009) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No. 1-6571)
3.2 — By-Laws of Merck & Co., Inc. (effective February 25, 2013)July 22, 2015) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8-K filed July 28, 2015 (No. 1-6571)
4.1 — Indenture, dated as of April 1, 1991, between Merck Sharp & Co., Inc.Dohme Corp. (f/k/a Schering Corporation) and U.S. Bank Trust National Association (as successor to Morgan Guaranty Trust Company of New York,York), as Trustee (the 1991 Indenture) — Incorporated by reference to Exhibit 4 to MSD’s Registration Statement on Form S-3 (No.33-39349)(No. 33-39349)
4.2 — First Supplemental Indenture to the 1991 Indenture, dated as of October 1, 1997 between Merck & Co., Inc. and First Trust of New York, National Association, as Trustee — Incorporated by reference to Exhibit 4(b) to MSD’s Registration Statement on Form S-3 (No. 333-36383)
4.3 — Second Supplemental Indenture to the 1991 Indenture, dated November 3, 2009 among Merck Sharp & Dohme Corp., Merck & Co., Inc. and U.S. Bank Trust National Association, as Trustee — Incorporated by reference to Exhibit 4.3 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
4.4 — Third Supplemental Indenture to the 1991 Indenture, dated May 1, 2012 —Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the quarter year ended March 31, 2012 (No. 1-6571)
4.5—Indenture, dated November 26, 2003, between Merck & Co., Inc. (f/k/a Schering-Plough Corporation) and The Bank of New York as Trustee (the 2003 Indenture) — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8-K8‑K filed November 28, 2003 (No.1-6571)
4.5—First Supplemental Indenture (including Form of Note), dated November 26, 2003 — Incorporated by reference to Exhibit 4.2 to Schering-Plough’s Current Report on Form 8-K filed November 28, 2003 (No.1-6571)(No. 1-6571)
4.6 — Second Supplemental Indenture to the 2003 Indenture (including Form of Note), dated November 26, 2003 — Incorporated—Incorporated by reference to Exhibit 4.3 to Schering-Plough’s Current Report on Form 8-K8‑K filed November 28, 2003 (No.1-6571)(No. 1-6571)
4.7 — Third Supplemental Indenture to the 2003 Indenture (including Form of Note), dated September 17, 2007 — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8-K8‑K filed September 17, 2007 (No.1-6571)(No. 1-6571)
4.8—Fourth Supplemental Indenture (including Form of Note), dated October 1, 2007 — Incorporated by reference to Exhibit 4.1 to Schering-Plough’s Current Report on Form 8‑K filed October 2, 2007 (No.1-6571)
4.9 — Fifth Supplemental Indenture to the 2003 Indenture, dated November 3, 2009 among Merck Sharp & Dohme Corp., Merck & Co., Inc. and The Bank of New York Mellon, as Trustee — Incorporated by reference to Exhibit 4.4 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)(No. 1-6571)
4.104.9 — Indenture, dated as of January 6, 2010, between Merck & Co., Inc. and U.S. Bank Trust National Association, as Trustee — Incorporated by reference to Exhibit 4.1 to Merck & Co., Inc.’s Current Report on Form 8-K filed December 10, 2010 (No.1-6571)(No. 1-6571)
4.114.10 — Third Supplemental Indenture, dated May 1, 2012, among Merck Sharp & Dohme Corp., Schering Corporation,Long-term debt instruments under which the total amount of securities authorized does not exceed 10% of Merck & Co., Inc.’s total consolidated assets are not filed as exhibits to this report. Merck & Co., Inc. will furnish a copy of these agreements to the Securities and U.S. Bank Trust National Association, as TrusteeExchange Commission on request.
*10.1—Merck & Co., Inc. Executive Incentive Plan (as amended and restated effective June 1, 2015) — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the quarter year ended March 31, 2012 (No.1-6571)

143

Exhibit
Number
Description
*10.1—Executive Incentive Plan (as amended effective February 27, 1996) — Incorporated by reference to MSD’s Form 10-K Annual Report for the fiscal year ended December 31, 1995Schedule 14A filed April 13, 2015 (No. 1-3305)1-6571)
*10.2 — Merck & Co., Inc. Deferral Program Including the Base Salary Deferral Plan (Amended and Restated effective JanuaryDecember 1, 2013) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No.1-6571)2015
*10.3—Merck Sharp & Dohme Corp. 2001 Incentive Stock Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.9 to Merck & Co., Inc.’s Current Report on Form 8‑K filed November 4, 2009 (No.1-6571)
*10.4 — Merck Sharp & Dohme Corp. 2004 Incentive Stock Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.8 to Merck & Co., Inc.’s Current Report on Form 8‑K filed November 4, 2009 (No.1-6571)(No. 1-6571)
*10.510.4 — Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective as amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.7 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)(No. 1-6571)
*10.610.5 — Amendment One to the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan (effective February 15, 2010) — Incorporated by reference to Exhibit 10.2 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 18, 2010 (No.1-6571)(No. 1-6571)

Exhibit
Number
Description
*10.7—2002 Stock Incentive Plan (as amended to February 25, 2003) — Incorporated by reference to Exhibit 10(d) to Schering-Plough’s 10-K for the year ended December 31, 2002 (No.1-6571)
*10.8—Merck & Co., Inc. Schering-Plough 2006 Stock Incentive Plan (as amended and restated, effective November 3, 2009) — Incorporated by reference to Exhibit 10.13 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
*10.910.6 — Merck & Co., Inc. 2010 Incentive Stock Plan (effective as of May(as amended and restated June 1, 2010)2015) — Incorporated by reference to Merck & Co., Inc.’s Schedule 14A filed April 12, 2010 (No.1-6571)13, 2015 (No. 1-6571)
*10.1010.7 — StockForm of stock option terms for a non-qualified stock option under the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan and the Schering-Plough 2006 Stock Incentive Plan — Incorporated by reference to Exhibit 10.3 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 15, 2010 (No.1-6571)(No. 1-6571)
*10.1110.8 — RestrictedForm of stock unit terms for annual grant under the Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan and the Schering-Plough 2006 Stock Incentive Plan — Incorporated by reference to Exhibit 10.4 to Merck & Co., Inc.’s Current Report on Form 8-K filed February 15, 2010 (No.1-6571)
*10.12—Restricted stock unit terms for 2011 grants for Richard T. Clark under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co.’s Form 10-Q Quarterly Report for the period ended March 31, 2011 (No.1-6571)
*10.13—Stock option terms for 2011 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10‑Q Quarterly Report for the period ended March 31, 2011 (No.1-6571)(No. 1-6571)
*10.14—Restricted stock unit terms for 2011 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended March 31, 2011 (No.1-6571)
*10.1510.9 — Form of Performance share unit terms for 2011 and 2012 grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No.1-6571)
*10.16—Stockstock option terms for 2012 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10‑K Annual Report for the fiscal year ended December 31, 2011 (No.1-6571)(No. 1-6571)
*10.17—Restricted stock unit terms for 2012 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2011 (No.1-6571)
*10.18—Performance share unit terms for 2012 grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended March 31, 2012 (No.1-6571)

144

Exhibit
Number
Description
*10.1910.10 — Form of Stockstock option agreementterms for 2013 and later quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No.1-6571)(No. 1-6571)
*10.2010.11 — Form of Restrictedrestricted stock unit agreementterms for 2013 and later quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2012 (No.1-6571)(No. 1-6571)
*10.2110.12 — Form of performance share unit terms for 2013 grants under the Merck & Co., Inc. Change in Control Separation Benefits2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s CurrentForm 10-K Annual Report on Form 8-K dated November 23, 2009 (No.1-6571)for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.2210.13 — Amendment One toForm of stock option terms for 2014 quarterly and annual non-qualified option grants under the Merck & Co., Inc. Change in Control Separation Benefits2010 Incentive Stock Plan (effective February 15, 2010) — Incorporated by reference to Exhibit 10.1 to Merck & Co., Inc.’s CurrentForm 10-K Annual Report on Form 8-K filed February 18, 2010 (No.1-6571)for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.2310.14—Form of restricted stock unit terms for 2014 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.15—Form of performance share unit terms for 2014 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2014 (No. 1-6571)
*10.16—Form of stock option terms for 2015 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
*10.17—Form of restricted stock unit terms for 2015 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
*10.18—Form of performance share unit terms for 2015 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2015 (No. 1-6571)
*10.19—Form of stock option terms for 2016 quarterly and annual non-qualified option grants under the Merck & Co., Inc. 2010 Incentive Stock Plan
*10.20—Form of restricted stock unit terms for 2016 quarterly and annual grants under the Merck & Co., Inc. 2010 Incentive Stock Plan
*10.21—Form of performance share unit terms for 2016 grants under the Merck & Co., Inc. 2010 Stock Incentive Plan
*10.22 — Merck & Co., Inc. Change in Control Separation Benefits Plan (Effective as Amended and Restated, as of January 1, 2013) — Incorporated by reference to Merck & Co., Inc.’s Current Report on Form 8‑K dated November 29, 2012 (No.1-6571)(No. 1-6571)
*10.2410.23 — Merck & Co., Inc. U.S. Separation Benefits Plan (effective(amended and restated effective as of January 1, 2012)November 15, 2014) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2011 (No.1-6571)2014 (No. 1-6571)

Exhibit
Number
Description
*10.2510.24 — Merck & Co., Inc. U.S. Separation Benefits Plan (effective(amended and restated effective as of January 1, 2013) (amended and restated as of October 1, 2013) — Incorporated by reference to Merck & Co., Inc.’s Form 10‑Q Quarterly Report for the period ended September30, 2013 (No.1-6571)2017)
*10.26—Merck & Co., Inc. 2001 Non-Employee Directors Stock Option Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.11 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
*10.2710.25 — Merck & Co., Inc. 2006 Non-Employee Directors Stock Option Plan (amended and restated as of November 3, 2009) — Incorporated by reference to Exhibit 10.5 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)(No. 1-6571)
*10.2810.26 — Merck & Co., Inc. 2010 Non-Employee Directors Stock Option Plan (amended and restated as of December 1, 2010) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No.1-6571)(No. 1-6571)
*10.2910.27 — Retirement Plan for the Directors of Merck & Co., Inc. (amended and restated June 21, 1996) — Incorporated—Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1996 (No.1-3305)(No. 1-3305)
*10.3010.28 — Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation (effective as amended and restated as of December 1, 2010) — Incorporated by reference to Merck & Co., Inc.’s Form 10-K Annual Report for the fiscal year ended December 31, 2010 (No.1-6571)(No. 1-6571)
*10.31—Offer Letter between Merck & Co., Inc. and Peter S. Kim, dated December 15, 2000 — Incorporated by reference to MSD’s Form 10-K Annual Report for the fiscal year ended December 31, 2003 (No.1-3305)
*10.32—Offer Letter between Merck & Co., Inc. and Peter N. Kellogg, dated June 18, 2007 — Incorporated by reference to MSD’s Current Report on Form 8-K dated June 28, 2007 (No.1-3305)
*10.33—Form of employment agreement effective upon a change of control between Schering-Plough and certain executives for new agreements beginning in January 1, 2008 — Incorporated by reference to Exhibit 10(e)(xv) to Schering-Plough’s 10-K for the year ended December 31, 2008 (No.1-6571)
10.34—Share Purchase Agreement between Akzo Nobel N.V., Schering-Plough International C.V., and Schering-Plough Corporation — Incorporated by reference to Exhibit 10.1 to Schering-Plough’s 8‑K filed October 2, 2007 (No.1-6571)
10.35—Amended and Restated License and Option Agreement dated as of July 1, 1998 between Astra AB and Astra Merck Inc. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)
10.36—KBI Shares Option Agreement dated as of July 1, 1998 by and among Astra AB, Merck & Co., Inc. and Merck Holdings, Inc. — Incorporated by reference to MSD’s Form 10‑Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)

145

Exhibit
Number
Description
10.37—Amended and Restated KBI Shares Option Agreement dated as of June 26, 2012 by and among AstraZeneca AB, Merck Sharp & Dohme Corp. and Merck Holdings LLC — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended September 30, 2012 (No.1-6571)
10.38—KBI-E Asset Option Agreement dated as of July 1, 1998 by and among Astra AB, Merck & Co., Inc., Astra Merck Inc. and Astra Merck Enterprises Inc. — Incorporated by reference to MSD’s Form 10‑Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)
10.39—KBI Supply Agreement dated as of July 1, 1998 between Astra Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this Exhibit are subject to a request for confidential treatment filed with the Commission). — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)
10.40—Second Amended and Restated Manufacturing Agreement dated as of July 1, 1998 among Merck & Co., Inc., Astra AB, Astra Merck Inc. and Astra USA, Inc. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)
10.41—Limited Partnership Agreement dated as of July 1, 1998 between KB USA, L.P. and KBI Sub Inc. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)
10.42—Distribution Agreement dated as of July 1, 1998 between Astra Merck Enterprises Inc. and Astra Pharmaceuticals, L.P. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)
10.43—Agreement to Incorporate Defined Terms dated as of June 19, 1998 between Astra AB, Merck & Co., Inc., Astra Merck Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals, L.P. — Incorporated by reference to MSD’s Form 10-Q Quarterly Report for the period ended June 30, 1998 (No.1-3305)
10.44—Form of Voting Agreement made and entered into as of October 30, 2006 by and between Merck & Co., Inc. and Sirna Therapeutics, Inc. — Incorporated by reference to MSD’s Current Report on Form 8-K dated October 30, 2006 (No.1-3305)
10.45—Commitment Letter by and among Merck & Co., Inc., J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. dated as of March 8, 2009 — Incorporated by reference to MSD’s Current Report on Form 8-K dated March 8, 2009 (No.1-3305)
10.46—Incremental Credit Agreement dated as of May 6, 2009, among Merck & Co., Inc., the Guarantors and Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to MSD’s Current Report on Form 8-K dated May 6, 2009 (No.1-3305)
10.47—Asset Sale Facility Agreement dated as of May 6, 2009, among Merck & Co., Inc., the Guarantors and Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to MSD’s Current Report on Form 8-K dated May 6, 2009 (No.1-3305)
10.48—Bridge Loan Agreement dated as of May 6, 2009, among Merck & Co., Inc., the Guarantors and Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to MSD’s Current Report on Form 8-K dated May 6, 2009 (No.1-3305)
10.49—Amendment No. 1 to Amended and Restated Five-Year Credit Agreement dated as of April 20, 2009 among Merck & Co., Inc., the Lenders party thereto and Citicorp USA, Inc., as Administrative Agent — Incorporated by reference to Exhibit 10.1 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
10.50—Guarantee and Joinder Agreement dated as of November 3, 2009 by Merck & Co., Inc., the Guarantor, for the benefit of the Guaranteed Parties — Incorporated by reference to Exhibit 10.3 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
10.51—Guarantor Joinder Agreement dated as of November 3, 2009, by Merck & Co., Inc., the Guarantor and JPMorgan Chase Bank, N.A., as Administrative Agent — Incorporated by reference to Exhibit 10.4 to Merck & Co., Inc.’s Current Report on Form 8-K filed November 4, 2009 (No.1-6571)
10.52—Call Option Agreement, dated July 29, 2009, by and among Merck & Co., Inc., Schering-Plough Corporation and sanofi-aventis — Incorporated by reference to MSD’s Current Report on Form 8‑K dated July 31, 2009 (No.1-3305)

146

Exhibit
Number
Description
10.53—Termination Agreement, dated as of September 17, 2009, by and among Merck & Co., Inc., Merck SH Inc., Merck Sharp & Dohme (Holdings) Limited, sanofi-aventis, sanofi 4 and Merial Limited — Incorporated by reference to MSD’s Current Report on Form 8-K dated September 21, 2009 (No.1-3305)
10.54—Letter Agreement dated April 14, 2003 relating to Consent Decree — Incorporated by reference to Exhibit 99.3 to Schering-Plough’s 10-Q for the period ended March 31, 2003 (No.1-6571)
10.5510.29 — Distribution agreement between Schering-Plough and Centocor, Inc., dated April 3, 1998 — Incorporated by reference to Exhibit 10(u) to Schering-Plough’s Amended 10-K for the year ended December 31, 2003, filed May 3, 2004 (No.1-6571)(No. 1-6571)†
10.5610.30 — Amendment Agreement to the Distribution Agreement between Centocor, Inc., CAN Development, LLC, and Schering-Plough (Ireland) Company — Incorporated by reference to Exhibit 10.1 to Schering-Plough’s Current Report on Form 8-K filed December 21, 2007 (No.1-6571)(No. 1-6571)†
10.5710.31 — Accelerated Share Purchase Agreement between Merck & Co., Inc. and Goldman, Sachs & Co., dated May 20, 2013 — Incorporated by reference to Merck & Co., Inc.’s Form 10-Q Quarterly Report for the period ended June 30, 2013 (No.1-6571)(No. 1-6571)
12 — Computation of Ratios of Earnings to Fixed Charges
21 — Subsidiaries of Merck & Co., Inc.
23 — Consent of Independent Registered Public Accounting Firm
24.1 — Power of Attorney
24.2 — Certified Resolution of Board of Directors
31.1 — Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 — Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 — Section 1350 Certification of Chief Executive Officer
32.2 — Section 1350 Certification of Chief Financial Officer
101 — The following materials from Merck & Co., Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013,2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated Statement of Comprehensive Income, (iii) the Consolidated Balance Sheet, (iv) the Consolidated Statement of Equity, (v) the Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
                
*Management contract or compensatory plan or arrangement.
†Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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