~~0000310158us-gaap:OperatingSegmentsMembermrk:ZepatierMembermrk:PharmaceuticalsegmentMembermrk:InternationalMember2020-01-012020-09-30~~0000310158mrk:PharmaceuticalsegmentMemberus-gaap:OperatingSegmentsMembercountry:US2020-07-012020-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2020~~2021


☐			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.

(Exact name of registrant as specified in its charter)


New Jersey	22-1918501
(State or other jurisdiction of incorporation)	(~~I.R.S~~I.R.S. Employer Identification No.)

2000 Galloping Hill Road
Kenilworth	New Jersey	07033
(Address of principal executive offices) (zip code)

(Registrant’s telephone number, including area code) (908) 740-4000


			Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)


Securities Registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock ($0.50 par value)	MRK	New York Stock Exchange
0.500% Notes due 2024	MRK 24	New York Stock Exchange
1.875% Notes due 2026	MRK/26	New York Stock Exchange
2.500% Notes due 2034	MRK/34	New York Stock Exchange
1.375% Notes due 2036	MRK 36A	New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒


~~Securities Registered pursuant to Section 12(b) of the Act:~~
~~Title of each class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock ($0.50 par value)~~	~~MRK~~	~~New York Stock Exchange~~
~~1.125% Notes due 2021~~	~~MRK/21~~	~~New York Stock Exchange~~
~~0.500% Notes due 2024~~	~~MRK 24~~	~~New York Stock Exchange~~
~~1.875% Notes due 2026~~	~~MRK/26~~	~~New York Stock Exchange~~
~~2.500% Notes due 2034~~	~~MRK/34~~	~~New York Stock Exchange~~
~~1.375% Notes due 2036~~	~~MRK 36A~~	~~New York Stock Exchange~~

The number of shares of common stock outstanding as of the close of business on October 31, ~~2020: 2,530,034,437~~2021: 2,525,943,936

Table of Contents

Part I - Financial Information

Item 1. Financial Statements

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Unaudited, $ in millions except per share amounts)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Sales	Sales	$	12,551	$	12,397	$	35,479	$	34,972	Sales	$	13,154	$	10,929	$	35,183	$	30,570
Costs, Expenses and Other	Costs, Expenses and Other									Costs, Expenses and Other
Cost of sales	Cost of sales	3,481		3,990		9,952		10,443		Cost of sales	3,450		3,013		9,752		8,589
Selling, general and administrative	Selling, general and administrative	2,450		2,589		7,383		7,726		Selling, general and administrative	2,336		2,060		6,804		6,336
Research and development	Research and development	3,390		3,204		7,721		7,324		Research and development	2,445		3,349		9,177		7,609
Restructuring costs	Restructuring costs	114		232		269		444		Restructuring costs	107		113		487		265
Other (income) expense, net	Other (income) expense, net	(312)		35		(630)		362		Other (income) expense, net	(450)		(312)		(1,007)		(637)
		9,123		10,050		24,695		26,299			7,888		8,223		25,213		22,162
Income Before Taxes		3,428		2,347		10,784		8,673
Taxes on Income		483		440		1,611		1,259
Income from Continuing Operations Before Taxes										Income from Continuing Operations Before Taxes	5,266		2,706		9,970		8,408
Taxes on Income from Continuing Operations										Taxes on Income from Continuing Operations	695		380		1,436		1,271
Net Income from Continuing Operations										Net Income from Continuing Operations	4,571		2,326		8,534		7,137
Less: Net Income Attributable to Noncontrolling Interests										Less: Net Income Attributable to Noncontrolling Interests	4		2		9		1
Net Income from Continuing Operations Attributable to Merck & Co., Inc.										Net Income from Continuing Operations Attributable to Merck & Co., Inc.	4,567		2,324		8,525		7,136
Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests										Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests	—		617		766		2,025
Net Income Attributable to Merck & Co. Inc.										Net Income Attributable to Merck & Co. Inc.	$	4,567	$	2,941	$	9,291	$	9,161
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders:										Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations										Income from Continuing Operations	$	1.81	$	0.92	$	3.37	$	2.82
Income from Discontinued Operations										Income from Discontinued Operations	—		0.24		0.30		0.80
Net Income	Net Income	2,945		1,907		9,173		7,414		Net Income	$	1.81	$	1.16	$	3.67	$	3.62
Less: Net Income (Loss) Attributable to Noncontrolling Interests		4		6		12		(73)
Net Income Attributable to Merck & Co., Inc.		$	2,941	$	1,901	$	9,161	$	7,487
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders		$	1.16	$	0.74	$	3.62	$	2.91
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders		$	1.16	$	0.74	$	3.61	$	2.89
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders:										Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations										Income from Continuing Operations	$	1.80	$	0.92	$	3.36	$	2.81
Income from Discontinued Operations										Income from Discontinued Operations	—		0.24		0.30		0.80
Net Income										Net Income	$	1.80	$	1.16	$	3.66	$	3.61

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited, $ in millions)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Net Income Attributable to Merck & Co., Inc.	Net Income Attributable to Merck & Co., Inc.	$	2,941	$	1,901	$	9,161	$	7,487	Net Income Attributable to Merck & Co., Inc.	$	4,567	$	2,941	$	9,291	$	9,161
Other Comprehensive Income (Loss) Net of Taxes:	Other Comprehensive Income (Loss) Net of Taxes:									Other Comprehensive Income (Loss) Net of Taxes:
Net unrealized (loss) gain on derivatives, net of reclassifications		(137)		91		(153)		(9)
Net unrealized (loss) gain on investments, net of reclassifications		0		(17)		(18)		109
Net unrealized gain (loss) on derivatives, net of reclassifications										Net unrealized gain (loss) on derivatives, net of reclassifications	84		(137)		324		(153)
Net unrealized loss on investments, net of reclassifications										Net unrealized loss on investments, net of reclassifications	—		—		—		(18)
Benefit plan net gain and prior service credit, net of amortization	Benefit plan net gain and prior service credit, net of amortization	62		15		161		41		Benefit plan net gain and prior service credit, net of amortization	38		62		1,522		161
Cumulative translation adjustment	Cumulative translation adjustment	85		(117)		(180)		14		Cumulative translation adjustment	(84)		85		(251)		(180)
		10		(28)		(190)		155			38		10		1,595		(190)
Comprehensive Income Attributable to Merck & Co., Inc.	Comprehensive Income Attributable to Merck & Co., Inc.	$	2,951	$	1,873	$	8,971	$	7,642	Comprehensive Income Attributable to Merck & Co., Inc.	$	4,605	$	2,951	$	10,886	$	8,971

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 3 -

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited, $ in millions except per share amounts)


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
Assets	Assets					Assets
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	7,356	$	9,676	Cash and cash equivalents	$	10,016	$	8,050
Short-term investments		0		774
Accounts receivable (net of allowance for doubtful accounts of $89 in 2020 and $86 in 2019)		8,422		6,778
Inventories (excludes inventories of $2,081 in 2020 and $1,480 in 2019 classified in Other assets - see Note 6)		6,128		5,978
Accounts receivable (net of allowance for doubtful accounts of $69 in 2021 and $67 in 2020)						Accounts receivable (net of allowance for doubtful accounts of $69 in 2021 and $67 in 2020)	8,571		6,803
Inventories (excludes inventories of $2,373 in 2021 and $2,070 in 2020 classified in Other assets - see Note 7)						Inventories (excludes inventories of $2,373 in 2021 and $2,070 in 2020 classified in Other assets - see Note 7)	5,603		5,554
Other current assets	Other current assets	4,671		4,277		Other current assets	6,868		4,674
Current assets of discontinued operations						Current assets of discontinued operations	—		2,683
Total current assets	Total current assets	26,577		27,483		Total current assets	31,058		27,764
Investments	Investments	1,372		1,469		Investments	435		785
Property, Plant and Equipment, at cost, net of accumulated depreciation of $18,572 in 2020 and $17,686 in 2019		16,919		15,053
Property, Plant and Equipment, at cost, net of accumulated depreciation of $18,155 in 2021 and $18,162 in 2020						Property, Plant and Equipment, at cost, net of accumulated depreciation of $18,155 in 2021 and $18,162 in 2020	18,565		17,000
Goodwill	Goodwill	20,248		19,425		Goodwill	18,862		18,882
Other Intangibles, Net	Other Intangibles, Net	16,677		14,196		Other Intangibles, Net	13,384		14,101
Other Assets	Other Assets	8,007		6,771		Other Assets	11,190		9,881
Noncurrent Assets of Discontinued Operations						Noncurrent Assets of Discontinued Operations	—		3,175
		$	89,800	$	84,397		$	93,494	$	91,588
Liabilities and Equity	Liabilities and Equity					Liabilities and Equity
Current Liabilities	Current Liabilities					Current Liabilities
Loans payable and current portion of long-term debt	Loans payable and current portion of long-term debt	$	2,420	$	3,610	Loans payable and current portion of long-term debt	$	3,534	$	6,431
Trade accounts payable	Trade accounts payable	3,744		3,738		Trade accounts payable	3,366		4,327
Accrued and other current liabilities	Accrued and other current liabilities	11,690		12,549		Accrued and other current liabilities	14,214		12,212
Income taxes payable	Income taxes payable	984		736		Income taxes payable	954		1,597
Dividends payable	Dividends payable	1,567		1,587		Dividends payable	1,660		1,674
Current liabilities of discontinued operations						Current liabilities of discontinued operations	—		1,086
Total current liabilities	Total current liabilities	20,405		22,220		Total current liabilities	23,728		27,327
Long-Term Debt	Long-Term Debt	26,321		22,736		Long-Term Debt	22,907		25,360
Deferred Income Taxes	Deferred Income Taxes	1,777		1,470		Deferred Income Taxes	1,527		1,005
Other Noncurrent Liabilities	Other Noncurrent Liabilities	12,027		11,970		Other Noncurrent Liabilities	9,469		12,306
Noncurrent Liabilities of Discontinued Operations						Noncurrent Liabilities of Discontinued Operations	—		186
Merck & Co., Inc. Stockholders’ Equity	Merck & Co., Inc. Stockholders’ Equity					Merck & Co., Inc. Stockholders’ Equity
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2020 and 2019		1,788		1,788
Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2021 and 2020						Common stock, $0.50 par value Authorized - 6,500,000,000 shares Issued - 3,577,103,522 shares in 2021 and 2020	1,788		1,788
Other paid-in capital	Other paid-in capital	39,489		39,660		Other paid-in capital	44,149		39,588
Retained earnings	Retained earnings	51,107		46,602		Retained earnings	51,691		47,362
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(6,383)		(6,193)		Accumulated other comprehensive loss	(4,590)		(6,634)
		86,001		81,857			93,038		82,104
Less treasury stock, at cost: 1,047,343,390 shares in 2020 and 1,038,087,496 shares in 2019		56,815		55,950
Less treasury stock, at cost: 1,051,780,149 shares in 2021 and 1,046,877,695 shares in 2020						Less treasury stock, at cost: 1,051,780,149 shares in 2021 and 1,046,877,695 shares in 2020	57,244		56,787
Total Merck & Co., Inc. stockholders’ equity	Total Merck & Co., Inc. stockholders’ equity	29,186		25,907		Total Merck & Co., Inc. stockholders’ equity	35,794		25,317
Noncontrolling Interests	Noncontrolling Interests	84		94		Noncontrolling Interests	69		87
Total equity	Total equity	29,270		26,001		Total equity	35,863		25,404
		$	89,800	$	84,397		$	93,494	$	91,588

The accompanying notes are an integral part of this condensed consolidated financial statement.

- 4 -

MERCK & CO., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited, $ in millions)


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2020		2019			2021		2020
Cash Flows from Operating Activities	Cash Flows from Operating Activities					Cash Flows from Operating Activities
Net income		$	9,173	$	7,414
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,721		2,716
Net income from continuing operations						Net income from continuing operations	$	8,534	$	7,137
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:						Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Amortization						Amortization	1,231		1,393
Depreciation						Depreciation	1,148		1,210
Intangible asset impairment charges	Intangible asset impairment charges	35		864		Intangible asset impairment charges	—		35
Charge for acquisition of Peloton Therapeutics, Inc.		0		982
Income from investments in equity securities, net						Income from investments in equity securities, net	(1,535)		(964)
Charge for the acquisition of Pandion Therapeutics, Inc.						Charge for the acquisition of Pandion Therapeutics, Inc.	1,556		—
Deferred income taxes	Deferred income taxes	47		(386)		Deferred income taxes	28		32
Share-based compensation	Share-based compensation	354		306		Share-based compensation	360		329
Other	Other	(445)		219		Other	499		519
Net changes in assets and liabilities	Net changes in assets and liabilities	(5,638)		(3,469)		Net changes in assets and liabilities	(3,794)		(5,484)
Net Cash Provided by Operating Activities		6,247		8,646
Net Cash Provided by Operating Activities from Continuing Operations						Net Cash Provided by Operating Activities from Continuing Operations	8,027		4,207
Cash Flows from Investing Activities	Cash Flows from Investing Activities					Cash Flows from Investing Activities
Capital expenditures	Capital expenditures	(3,170)		(2,336)		Capital expenditures	(3,240)		(2,998)
Purchases of securities and other investments	Purchases of securities and other investments	(78)		(2,380)		Purchases of securities and other investments	(1)		(78)
Proceeds from sales of securities and other investments	Proceeds from sales of securities and other investments	1,894		7,459		Proceeds from sales of securities and other investments	497		1,894
Acquisition of Pandion Therapeutics, Inc. net of cash acquired						Acquisition of Pandion Therapeutics, Inc. net of cash acquired	(1,554)		—
Acquisition of ArQule, Inc., net of cash acquired	Acquisition of ArQule, Inc., net of cash acquired	(2,545)		0		Acquisition of ArQule, Inc., net of cash acquired	—		(2,545)
Acquisition of Antelliq Corporation, net of cash acquired		0		(3,620)
Acquisition of Peloton Therapeutics, Inc., net of cash acquired		0		(1,040)
Other acquisitions, net of cash acquired	Other acquisitions, net of cash acquired	(907)		(269)		Other acquisitions, net of cash acquired	(89)		(907)
Other	Other	141		320		Other	15		138
Net Cash Used in Investing Activities		(4,665)		(1,866)
Net Cash Used in Investing Activities from Continuing Operations						Net Cash Used in Investing Activities from Continuing Operations	(4,372)		(4,496)
Cash Flows from Financing Activities	Cash Flows from Financing Activities					Cash Flows from Financing Activities
Net change in short-term borrowings	Net change in short-term borrowings	(311)		(3,892)		Net change in short-term borrowings	(3,983)		(311)
Payments on debt	Payments on debt	(1,954)		0		Payments on debt	(1,153)		(1,954)
Distribution from Organon & Co.						Distribution from Organon & Co.	9,000		—
Proceeds from issuance of debt	Proceeds from issuance of debt	4,419		4,958		Proceeds from issuance of debt	—		4,419
Purchases of treasury stock	Purchases of treasury stock	(1,281)		(3,730)		Purchases of treasury stock	(822)		(1,281)
Dividends paid to stockholders	Dividends paid to stockholders	(4,673)		(4,290)		Dividends paid to stockholders	(4,967)		(4,673)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	68		344		Proceeds from exercise of stock options	68		68
Other	Other	(472)		(240)		Other	(253)		(472)
Net Cash Used in Financing Activities		(4,204)		(6,850)
Net Cash Used in Financing Activities from Continuing Operations						Net Cash Used in Financing Activities from Continuing Operations	(2,110)		(4,204)
Discontinued Operations						Discontinued Operations
Net cash provided by operating activities						Net cash provided by operating activities	1,051		2,040
Net cash used in investing activities						Net cash used in investing activities	(134)		(169)
Net cash used in financing activities						Net cash used in financing activities	(504)		—
Net Cash Flows Provided by Discontinued Operations						Net Cash Flows Provided by Discontinued Operations	413		1,871
Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	89		(26)		Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash	(65)		89
Net Decrease in Cash, Cash Equivalents and Restricted Cash		(2,533)		(96)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of $258 at January 1, 2020 included in Other Assets)		9,934		7,967
Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $45 at September 30, 2020 included in Other Assets)		$	7,401	$	7,871
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash						Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	1,893		(2,533)
Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of $103 at January 1, 2021 included in Other Assets)						Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes restricted cash of $103 at January 1, 2021 included in Other Assets)	8,153		9,934
Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $30 at September 30, 2021 included in Other Assets)						Cash, Cash Equivalents and Restricted Cash at End of Period (includes restricted cash of $30 at September 30, 2021 included in Other Assets)	$	10,046	$	7,401

The accompanying notes are an integral part of this condensed consolidated financial statement.

- 5 -

Notes to Condensed Consolidated Financial Statements (unaudited)

1.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Merck & Co., Inc. (Merck or the Company) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States (U.S.) (GAAP) for complete consolidated financial statements are not included herein. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Merck’s Form 10-K filed on February ~~26, 2020.~~25, 2021.

The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair statement of these interim statements have been included and are of a normal and recurring nature.

~~Planned~~ Reclassifications — Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Spin-Off of ~~Women’s Health, Biosimilars and Established Brands into New Company~~Organon & Co.

~~In February 2020,~~On June 2, 2021, Merck ~~announced its intention to~~completed the spin-off of products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The ~~distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The~~ established brands included in the transaction ~~consist~~consisted of dermatology, non-opioid pain management, respiratory, ~~and~~ select cardiovascular products, ~~including~~ ~~Zetia~~ ~~(ezetimibe) and~~ ~~Vytorin~~ ~~(ezetimibe and simvastatin),~~ as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs ~~will~~ continue to be owned and developed within Merck as planned. Organon will have development capabilities initially focused on late-stage development and life-cycle management and is expected over time to develop research capabilities in selected therapeutic areas. The ~~spin-off is expected to be completed in the second quarter of 2021, subject to market and certain other conditions. Subsequent to the spin-off, the~~ historical results of the women’s health, biosimilars and established brands businesses ~~will be~~that were contributed to Organon in the spin-off have been reflected as discontinued operations in the Company’s consolidated financial ~~statements.~~statements through the date of the spin-off (see Note 2).

Recently Adopted Accounting Standards

In ~~June 2016,~~December 2019, the Financial Accounting Standards Board (FASB) issued new guidance on the accounting for credit losses on financial instruments. The new 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 Company adopted the new guidance effective January 1, 2020. There was no impact to the Company’s consolidated financial statements upon adoption.

In November 2018, the FASB issued new guidance for collaborative arrangements intended to reduce diversity in practice by clarifying whether certain transactions between collaborative arrangement participants should be accounted for under revenue recognition guidance (ASC 606). The Company adopted the new guidance effective January 1, 2020, which resulted in minor changes to the presentation of information related to the Company’s collaborative arrangements.

~~Recently Issued Accounting Standards Not Yet Adopted~~

~~In December 2019, the FASB~~ issued amended guidance on the accounting and reporting of income taxes. The guidance is intended to simplify the accounting for income taxes ~~by:~~by removing exceptions related to certain intraperiod tax allocations and deferred tax ~~liabilities;~~liabilities, clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business ~~combination;~~combination, and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The ~~amended guidance is effective for interim and annual periods in 2021. Early adoption is permitted. The amendments in~~Company adopted the new guidance ~~are~~effective January 1, 2021. There was no impact to ~~be applied on a retrospective basis, on a modified retrospective basis through a cumulative-effect adjustment to retained earnings or prospectively, depending on~~ the ~~amendment. The Company is currently evaluating the impact of adoption on its~~Company’s consolidated financial ~~statements.~~statements upon adoption.

In January 2020, the FASB issued new guidance intended to clarify certain interactions between accounting standards related to equity securities, equity method investments and certain derivatives. The guidance addresses accounting for the transition into and out of the equity method of accounting and measuring certain purchased options and forward contracts to acquire investments. The Company adopted the new guidance is effective ~~for interim and annual periods in 2021 and is~~January 1, 2021. There was no impact to ~~be applied prospectively. Early adoption is permitted. The Company is currently evaluating~~ the ~~impact of adoption on its~~Company’s consolidated financial ~~statements.~~statements upon adoption.

Recently Issued Accounting Standards Not Yet Adopted

In March 2020, the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial ~~reporting.~~reporting and subsequently issued clarifying amendments. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions ~~affected by~~that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The optional guidance is effective upon issuance and can be applied on a prospective basis at any time between January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In August 2020, the FASB issued amended guidance on the accounting for convertible instruments and contracts in an entity’s own equity. The guidance removes the separation model for convertible debt instruments and preferred stock, amends requirements for conversion options to be classified in equity as well as amends diluted earnings per share (EPS) calculations for certain convertible debt instruments. The amended guidance is effective for interim and annual periods in 2022. Early adoption is permitted. The application of the amendments in the new guidance are to be applied either on a modified retrospective or a retrospective basis. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

In October 2021, the FASB issued amended guidance that requires acquiring entities to recognize and measure contract assets and liabilities in a business combination in accordance with existing revenue recognition guidance. The amended guidance is effective for interim and annual periods in 2023 and is to be applied prospectively. Early adoption is permitted on a retrospective basis to the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

- 6 -

Notes to Condensed Consolidated Financial Statements (unaudited) ~~(continued)~~

2. Spin-Off of Organon & Co.

On June 2, 2021, Merck completed the spin-off of Organon through a distribution of Organon’s publicly traded stock to Company shareholders. In connection with the spin-off, each Merck shareholder received one tenth of a share of Organon’s common stock for each share of Merck common stock held by such shareholder. The distribution is expected to qualify as tax free to Merck and its shareholders for U.S. federal income tax purposes. Indebtedness of $9.5 billion principal amount, consisting of term loans and senior notes, was issued in 2021 in connection with the spin-off and assumed by Organon. Merck is no longer the obligor of any Organon debt or financing arrangements. Cash proceeds of $9.0 billion were distributed by Organon to Merck in connection with the spin-off.

Also in connection with the spin-off, Merck and Organon entered into a separation and distribution agreement and also entered into various other agreements to effect the spin-off and provide a framework for the relationship between Merck and Organon after the spin-off, including a transition services agreement (TSA), manufacturing and supply agreements (MSAs), trademark license agreements, intellectual property license agreements, an employee matters agreement, a tax matters agreement and certain other commercial agreements. Under the TSA, Merck will provide Organon various services and, similarly, Organon will provide Merck various services. The provision of services under the TSA agreement generally will terminate within 25 months following the spin-off. Merck and Organon also entered into a series of interim operating agreements pursuant to which in various jurisdictions where Merck held licenses, permits and other rights in connection with marketing, import and/or distribution of Organon products prior to the separation, Merck will continue to market, import and distribute such products until such time as the relevant licenses and permits are transferred to Organon. Under such interim operating agreements and in accordance with the separation and distribution agreement, Merck will continue operations in the affected markets on behalf of Organon, with Organon receiving all of the economic benefits and burdens of such activities. Additionally, Merck and Organon entered into a number of MSAs pursuant to which Merck will (a) manufacture and supply certain active pharmaceutical ingredients for Organon, (b) toll manufacture and supply certain formulated pharmaceutical products for Organon, and (c) package and label certain finished pharmaceutical products for Organon. Similarly, Organon and Merck entered into a number of MSAs pursuant to which Organon will (a) manufacture and supply certain formulated pharmaceutical products for Merck, and (b) package and label certain finished pharmaceutical products for Merck. The terms of the MSAs range in initial duration from four years to ten years.

Amounts included in the condensed consolidated statement of income for the above agreements were immaterial in the third quarter and first nine months of 2021. The amount due from Organon under the above agreements was $1.4 billion at September 30, 2021 and is reflected in Other current assets. The amount due to Organon under these agreements was $930 million at September 30, 2021 and is included in Accrued and other current liabilities.

The results of the women’s health, biosimilars and established brands businesses (previously included in the Pharmaceutical segment) that were contributed to Organon in the spin-off, as well as interest expense related to the debt issuance in 2021, have been reflected as discontinued operations in the Company’s condensed consolidated statement of income as Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests through June 2, 2021, the date of the spin-off. Prior periods have been recast to reflect this presentation. As a result of the spin-off of Organon, Merck incurred separation costs of $556 million in the nine months ended September 30, 2021, and $193 million and $483 million in the three and nine months ended September 30, 2020, respectively, which are also included in Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests. These costs primarily relate to professional fees for separation activities within finance, tax, legal and information technology functions, as well as investment banking fees. As of December 31, 2020, the assets and liabilities associated with these businesses are classified as assets and liabilities of discontinued operations in the condensed consolidated balance sheet.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Details of Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests are as follows:


	Three Months Ended September 30,			Nine Months Ended September 30,
($ in millions)		2020		2021 (1)		2020
Sales		$	1,622	$	2,512	$	4,911
Costs, Expenses and Other
Cost of sales		468		789		1,362
Selling, general and administrative		390		877		1,046
Research and development		41		103		113
Restructuring costs		1		1		4
Other (income) expense, net		—		(15)		7
		900		1,755		2,532
Income from discontinued operations before taxes		722		757		2,379
Tax provision (benefit)		103		(12)		343
Income from discontinued operations, net of taxes		619		769		2,036
Less: Income of discontinued operations attributable to noncontrolling interests		2		3		11
Income from discontinued operations, net of taxes and amounts attributable to noncontrolling interests		$	617	$	766	$	2,025

(1)Reflects amounts through the June 2, 2021 spin-off date.

Details of assets and liabilities of discontinued operations are as follows:


($ in millions)	December 31, 2020
Cash and cash equivalents	$	12
Accounts receivable, less allowance for doubtful accounts	1,048
Inventories	756
Other current assets	867
Current assets of discontinued operations	$	2,683

Property, plant and equipment, net	$	986
Goodwill	1,356
Other intangibles, net	503
Other assets	330
Noncurrent Assets of Discontinued Operations	$	3,175

Trade accounts payable	$	267
Accrued and other current liabilities	841
Income taxes payable	(22)
Total current liabilities of discontinued operations	$	1,086

Deferred income taxes	$	10
Other noncurrent liabilities	176
Noncurrent Liabilities of Discontinued Operations	$	186

As a result of the spin-off of Organon, Merck distributed net liabilities of $5.1 billion as of June 2, 2021 consisting of debt of $9.4 billion (described above), goodwill of $1.4 billion, property, plant and equipment of $981 million, cash of $929 million, inventory of $815 million, other intangibles, net, of $519 million and other net liabilities of $328 million. The spin-off also resulted in a net decrease to Accumulated other comprehensive loss (AOCL) of $449 million consisting of $421 million for the derecognition of net losses on foreign currency translation adjustments and $28 million associated with employee benefit plans. The distribution of the net liabilities and reduction to AOCL resulted in a net $4.6 billion increase to Other paid-in capital.

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Notes to Condensed Consolidated Financial Statements (unaudited)

The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. In addition, employees and non-employee directors were granted options to purchase shares of Company common stock at the fair market value at the time of grant. In connection with the spin-off of Organon, all outstanding Merck stock options, RSUs and PSUs (whether vested or unvested) were converted into adjusted Merck awards for current and former Merck employees or Organon awards for Organon employees. Such adjusted awards preserved the same intrinsic value and general terms and conditions (including vesting) as were in place immediately prior to the adjustments. Approximately 1.3 million RSUs, 1.9 million stock options and 248 thousand PSUs were converted from Merck awards into Organon awards.

Expenses for curtailments, settlements and termination benefits provided to certain employees were incurred in connection with the spin-off. Additionally, the transfer of employees to Organon triggered remeasurements of some of the Company’s pension plans (see Note 11).

3. Acquisitions, Research Collaborations and License Agreements

The Company continues to pursue acquisitions and the establishment of 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 arrangements, 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.

In ~~November 2020,~~September 2021, Merck and ~~VelosBio,~~Acceleron Pharma Inc. ~~(VelosBio) announced that the companies had~~(Acceleron), a publicly traded biopharmaceutical company, entered into a definitive agreement ~~pursuant~~under which Merck will acquire Acceleron for $180 per share in cash for an approximate total equity value of $11.5 billion. Acceleron is focused on harnessing the power of the transforming growth factor (TGF)-beta superfamily of proteins that is known to ~~which~~play a central role in the regulation of cell growth, differentiation and repair. Acceleron’s lead therapeutic candidate, sotatercept, has a novel mechanism of action with the potential to improve short-term and/or long-term clinical outcomes in patients with pulmonary arterial hypertension (PAH). Sotatercept is in Phase 3 trials as add-on to current standard of care for the treatment of PAH. In addition to sotatercept, Acceleron’s portfolio includes Reblozyl (luspatercept-aamt), a first-in-class erythroid maturation recombinant fusion protein approved in the U.S., Europe, Canada and Australia for the treatment of anemia in certain rare blood disorders. Reblozyl is being developed and commercialized through a global collaboration with Bristol Myers Squibb. Under the terms of the acquisition agreement, Merck, through a subsidiary, ~~will~~initiated a tender offer to acquire all outstanding shares of ~~VelosBio for $2.75 billion,~~Acceleron. The closing of the tender offer is subject to certain conditions, including the tender of shares representing at least a majority of the total number of Acceleron’s outstanding shares, receipt of applicable regulatory approvals, and other customary ~~adjustments. VelosBio~~conditions. The acquisition agreement includes termination provisions providing that (i) in the event Acceleron terminates in order to enter into an agreement with respect to a superior proposal (as defined in the agreement), Acceleron will be required to pay a termination fee of $345 million, and (ii) in the event the acquisition is not consummated due to antitrust conditions, Merck will be required to pay Acceleron a reverse termination fee of $650 million to $750 million depending on the time of termination. The transaction is expected to close in the fourth quarter of 2021.

In April 2021, Merck acquired Pandion Therapeutics, Inc. (Pandion), a clinical-stage biotechnology company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. Pandion is advancing a pipeline of precision immune modulators targeting critical immune control nodes. Total consideration paid of $1.9 billion included $147 million of transaction costs primarily comprised of share-based compensation payments to settle equity awards. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $156 million (primarily cash) and Research and development expenses of $1.7 billion in the first nine months of 2021 related to the transaction. There are no future contingent payments associated with the acquisition.

In March 2021, Merck and Gilead Sciences, Inc. (Gilead) entered into an agreement to jointly develop and commercialize long-acting treatments in HIV that combine Merck’s investigational nucleoside reverse transcriptase translocation inhibitor, islatravir, and Gilead’s investigational capsid inhibitor, lenacapavir. The collaboration will initially focus on long-acting oral formulations and long-acting injectable formulations of these combination products, with other formulations potentially added to the collaboration as mutually agreed. There was no upfront payment made by either party upon entering into the agreement.

Under the terms of the agreement, Gilead and Merck will share operational responsibilities, as well as development, commercialization and marketing costs, and any future revenues. Global development and commercialization costs will be shared 60% Gilead and 40% Merck across the oral and injectable formulation programs. For long-acting oral products, Gilead

- 9 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

will lead commercialization in the U.S. and Merck will lead commercialization in the EU and the rest of the world. For long-acting injectable products, Merck will lead commercialization in the U.S. and Gilead will lead commercialization in the EU and the rest of the world. Gilead and Merck will co-promote in the U.S. and certain other major markets. Merck and Gilead will share global product revenues equally until product revenues surpass certain pre-agreed per formulation revenue tiers. Upon passing $2.0 billion a year in net product sales for the oral combination, the revenue split will adjust to 65% Gilead and 35% Merck for any revenues above the threshold. Upon passing $3.5 billion a year in net product sales for the injectable combination, the revenue split will adjust to 65% Gilead and 35% Merck for any revenues above the threshold.

Beyond the potential combinations of investigational lenacapavir and investigational islatravir, Gilead will have the option to license certain of Merck’s investigational oral integrase inhibitors to develop in combination with lenacapavir. Reciprocally, Merck will have the option to license certain of Gilead’s investigational oral integrase inhibitors to develop in combination with islatravir. Each company may exercise its option for an investigational oral integrase inhibitor of the other company following completion of the first Phase 1 clinical trial of that integrase inhibitor. Upon exercise of an option, the companies will split development costs and revenues, unless the non-exercising company decides to opt-out.

In January 2021, Merck entered into an exclusive license and research collaboration agreement with Artiva Biotherapeutics, Inc. (Artiva) to discover, develop and manufacture CAR-NK cells that target certain solid tumors using Artiva’s proprietary platform. Merck and Artiva agreed to engage in up to three different research programs, each covering a collaboration target. Merck has sole responsibility for all development and commercialization activities (including regulatory filing and approval). Under the terms of the agreement, Merck made an upfront payment of $30 million, which was included in Research and development expenses in the first nine months of 2021, for license and other rights for the first two collaboration targets and agreed to make another upfront payment of $15 million for license and other rights for the third collaboration target when it is selected by Merck and accepted by Artiva. In addition, Artiva is eligible to receive future contingent milestone payments (which span all three collaboration targets), aggregating up to: $217.5 million in developmental milestones, $570 million in regulatory milestones, and $1.05 billion in sales-based milestones. The agreement also provides for Merck to pay tiered royalties ranging from 7% to 14% on future sales.

In December 2020, Merck acquired OncoImmune, a privately held, clinical-stage biopharmaceutical company, ~~committed to developing first-in-class cancer therapies targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1). VelosBio’s~~for an upfront payment of $423 million. OncoImmune’s lead ~~investigational~~therapeutic candidate ~~is VLS-101, an antibody-drug conjugate targeting ROR1 that is currently~~MK-7110 (formerly known as CD24Fc) was being evaluated ~~in a Phase 1 and a Phase 2 clinical trial~~ for the treatment of patients hospitalized with ~~hematologic malignancies~~coronavirus disease 2019 (COVID-19). The transaction was accounted for as an acquisition of an asset. Under the agreement, prior to the completion of the acquisition, OncoImmune spun-out certain rights and ~~solid tumors, respectively. The~~assets unrelated to the MK-7110 program to a new entity owned by the existing shareholders of OncoImmune. In connection with the closing of the ~~transaction,~~acquisition, Merck invested $50 million for a 20% ownership interest in the new entity, which ~~is subject~~was valued at $33 million resulting in a $17 million premium. Merck also recognized other net liabilities of $22 million. The Company recorded Research and development expenses of $462 million in 2020 related to ~~approval under~~this transaction. In 2021, Merck received feedback from the ~~Hart-Scott-Rodino Antitrust Improvements Act~~U.S. Food and ~~other customary conditions, is expected by~~Drug Administration (FDA) that additional data would be needed to support a potential Emergency Use Authorization application and therefore the ~~end~~Company did not expect MK-7110 would become available until the first half of ~~2020.~~2022. Given this timeline and the technical, clinical and regulatory uncertainties, the availability of a number of medicines for patients hospitalized with COVID-19, and the need to concentrate Merck’s resources on accelerating the development and manufacture of the most viable therapeutics and vaccines, Merck decided to discontinue development of MK-7110 for the treatment of COVID-19. Due to the discontinuation, the Company recorded charges of $207 million in the first nine months of 2021, which are reflected in Cost of sales and relate to fixed-asset and materials write-offs, as well as the recognition of liabilities for purchase commitments.

In September 2020, Merck and Seagen Inc. (Seagen, formerly known as Seattle Genetics, Inc.) announced an oncology collaboration to globally develop and commercialize Seagen’s ladiratuzumab vedotin (MK-6440), an investigational antibody-drug conjugate targeting LIV-1, which is currently in Phase 2 clinical ~~trials for breast cancer and other solid tumors.~~trials. The collaboration will pursue a broad joint development program evaluating ladiratuzumab vedotin as monotherapy and in combination with Keytruda (pembrolizumab) in triple-negative breast cancer, hormone receptor-positive breast cancer and other LIV-1-expressing solid tumors. The companies will equally share profits worldwide. Under the terms of the agreement, Merck made an upfront payment of $600 million and a $1.0 billion equity investment in 5 million shares of Seagen common stock at a price of $200 per share. Merck recorded $622 million in Research and development expenses in the third quarter and first nine months of 2020 related to this transaction reflecting the upfront payment as well as a $22 million mark-to-market loss on the purchase commitment (forward contract) relating to the equity shares (calculated based on the closing price of Seagen common stock on September 30, 2020). The closing of the equity investment occurred in October 2020 and resulted in the recognition of a $6 million reduction to Research and development expenses based on the price of Seagen common stock on the closing date. Seagen is also eligible to receive future contingent milestone payments of up to $2.6 billion, including $850 million in development milestones and $1.75 billion in ~~sales~~sales-based milestones.

- 10 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

positive cancers, in Asia, the Middle East and Latin America and other regions outside of the ~~United States,~~U.S., Canada and Europe. Merck will be responsible for marketing applications seeking approval in its territories, supported by the positive results from the HER2CLIMB clinical trial. Merck will also co-fund a portion of the Tukysa global development plan, which encompasses several ongoing and planned trials across HER2-positive cancers, including breast, colorectal, gastric and other cancers set forth in a global product development plan. Merck will solely fund and conduct country-specific clinical trials necessary to support anticipated regulatory applications in its territories. Under the terms of the agreement, Merck made upfront payments aggregating $210 million, which were recorded as Research and development expenses in the third quarter and first nine months of 2020. Seagen is also eligible to receive future contingent regulatory approval milestones of up to $65 million and will receive tiered royalties ranging from 20% to 33% based on annual sales levels of Tukysa in Merck’s territories.

Additionally in September 2020, Merck acquired a biologics manufacturing facility located in Dunboyne, Ireland from Takeda Pharmaceutical Company Limited for €256 million ($302 million). The transaction was accounted for as an acquisition of an asset. Merck recorded property, plant and equipment of $289 million and other net assets of $13 million. There are no future contingent payments associated with the acquisition.

In July 2020, Merck acquired the U.S. rights to Sentinel Flavor Tabs and Sentinel Spectrum Chews from Virbac Corporation for $410 million. Sentinel products provide protection against common parasites in dogs. The transaction was accounted for as an acquisition of an asset. Merck recognized intangible assets of $401 million related to currently marketed products and inventory of $9 million at the acquisition date. The estimated fair values of the identifiable intangible assets related to currently marketed products were determined using an income approach. Actual cash flows are likely to be different than those assumed. The intangible assets related to currently marketed products will be amortized over their estimated useful lives of 15 years. There are no future contingent payments associated with the acquisition.

Also in July 2020, Merck and Ridgeback Biotherapeutics LP (Ridgeback Bio), a closely held biotechnology company, closed a collaboration agreement to develop molnupiravir ~~(MK-4482, formerly known as~~ (MK-4482/EIDD-2801), an orally

~~- 7 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

available antiviral candidate ~~currently~~ in clinical development for the treatment of patients with COVID-19. Merck gained exclusive worldwide rights to develop and commercialize molnupiravir and related molecules. Under the terms of the agreement, Ridgeback Bio received an upfront payment and ~~also~~ is eligible to receive future contingent payments dependent upon the achievement of certain developmental and regulatory approval ~~milestones, as well as a share of~~milestones. Any profits from the ~~net profits of molnupiravir and related molecules, if approved.~~collaboration will be split between the partners equally. Merck and Ridgeback Bio are committed to ensure that any medicines developed for SARS-CoV-2 (the causative agent of COVID-19) will be accessible and affordable globally.

In June 2020, Merck acquired privately held Themis Bioscience GmbH (Themis), a company focused on vaccines (including a COVID-19 vaccine candidate, V591) and immune-modulation therapies for infectious diseases and cancer for $366 million. The acquisition originally provided for Merck ~~may~~to make additional contingent payments of up to $740 million, including up to $80 million for development milestones, up to $260 million for regulatory approval milestones, and up to $400 million for commercial milestones. Themis has a broad pipeline of vaccine candidates and immune-modulatory therapies developed using its innovative measles virus vector platform based on a vector originally developed by scientists at the Institut Pasteur and licensed exclusively to Themis for select viral indications. The acquisition builds upon an ongoing collaboration between the two companies to develop vaccine candidates using the measles virus vector platform and is expected to accelerate the development of the COVID-19 vaccine candidate (V591), which is currently in Phase 1 clinical development.million. The transaction was accounted for as an acquisition of a business. The Company determined the fair value of the contingent consideration was ~~$97~~$85 million at the acquisition date utilizing a probability-weighted estimated cash flow stream using an appropriate discount rate dependent on the nature and timing of the milestone ~~payment.~~payments. Merck recognized intangible assets for in-process research and development (IPR&D) of ~~$136~~$113 million, cash of $59 million, deferred tax assets of ~~$71~~$72 million and other net liabilities of $32 million. The excess of the consideration transferred over the fair value of net assets acquired of ~~$229~~$239 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. Actual cash flows are likely to be different than those assumed. In ~~connection with~~January 2021, the ~~transaction, Merck has entered into~~Company announced it was discontinuing development of V591. As a ~~memorandum~~result, in the fourth quarter of ~~understanding that reflects~~2020, the ~~parties’ commitments~~Company recorded an IPR&D impairment charge of $90 million within Research and development expenses. The Company also recorded a reduction in Research and development expenses resulting from a decrease in the related liability for contingent consideration of $45 million since future contingent milestone payments have been reduced to ~~address~~$450 million in the COVID-19 pandemic by developing, manufacturing and distributing the vaccine on a global basis and with pricing that makes the vaccine both available around the world and accessible to those who need it.

In May 2020, Merck and the International AIDS Vaccine Initiative, Inc. (IAVI), a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges, announced a new collaboration to develop V590, an investigational vaccine against SARS-CoV-2 being studied for the prevention of COVID-19. This vaccine candidate will use the recombinant vesicular stomatitis virus (rVSV) technology that is the basis for Merck’s approved Ebola Zaire virus vaccine, ~~Ervebo~~ (Ebola Zaire Vaccine, Live), which was the first rVSV vaccine approved for use in humans. Under the terms of the agreement, Merck made an upfront payment of $6.5 million and may make additional contingent payments ofaggregate, including up to ~~$100~~$60 million for ~~sales-based~~development milestones, ~~as well as royalty payments. Merck has also signed an agreement with the Biomedical Advanced Research~~up to $196 million for regulatory approval milestones, and ~~Development Authority (BARDA), part of the office of the Assistant Secretary~~up to $194 million for Preparedness and Response within an agency of the United States Department of Health and Human Services, to provide initial funding support for this effort. Under the agreement, IAVI and Merck will work together to advance the development and global clinical evaluation of a SARS-CoV-2 vaccine candidate designed and engineered by IAVI scientists. The vaccine candidate is currently in Phase 1 clinical development. Merck will lead regulatory filings globally. Both organizations will work together to develop the vaccine and make it accessible and affordable globally, if approved.commercial milestones.

In January 2020, Merck acquired ArQule, Inc. (ArQule), a publicly traded biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases. Total consideration paid of $2.7 billion included $138 million of share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of ArQule. The Company incurred $95 million of transaction costs directly related to the acquisition of ArQule, consisting almost entirely of share-based compensation payments to settle non-vested equity awards attributable to postcombination service. These costs were included in Selling, general and administrative expenses in the first nine months of 2020. ArQule’s lead investigational candidate, MK-1026 (formerly known as ARQ 531), is a novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies. The transaction was accounted for as an acquisition of a business.

- 811 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The estimated fair value of assets acquired and liabilities assumed from ArQule is as follows:



($ in millions)	January 16, 2020
Cash and cash equivalents	$	145
IPR&D MK-1026 (formerly ARQ 531) (1)	2,280
Licensing arrangement for ARQ 087	80
Deferred income tax liabilities	~~(389)~~(361)
Other assets and liabilities, net	34
Total identifiable net assets	~~2,150~~2,178
Goodwill (2)	~~540~~512
Consideration transferred	$	2,690

(1)The estimated fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 12.5%. Actual cash flows are likely to be different than those assumed.

(2)The goodwill was allocated to the Pharmaceutical segment and is not deductible for tax purposes.

In July 2019, Merck acquired Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates targeting hypoxia-inducible factor-2α (HIF-2α) for the treatment of patients with cancer and other non-oncology diseases. Peloton’s lead candidate, MK-6482 (formerly known as PT2977), is a novel investigational oral HIF-2α inhibitor in late-stage development for renal cell carcinoma. Merck made an upfront payment of $1.2 billion; additionally, former Peloton shareholders will be eligible to receive $50 million upon U.S. regulatory approval, $50 million upon first commercial sale in the United States, and up to $1.05 billion of sales-based milestones. The transaction was accounted for as an acquisition of an asset. Merck recorded cash of $157 million, deferred tax liabilities of $64 million, and other net liabilities of $6 million at the acquisition date and ~~Research and development~~ ~~expenses of $982 million in the third quarter and first nine months of 2019 related to the transaction.~~

On April 1, 2019, Merck acquired Antelliq Corporation (Antelliq), a leader in digital animal identification, traceability and monitoring solutions. These solutions help veterinarians, farmers and pet owners gather critical data to improve management, health and well-being of livestock and pets. Merck paid $2.3 billion to acquire all outstanding shares of Antelliq and spent $1.3 billion to repay Antelliq’s debt. The transaction was accounted for as an acquisition of a business.

~~The estimated fair value of assets acquired and liabilities assumed from Antelliq is as follows:~~



~~($ in millions)~~	~~April 1, 2019~~
~~Cash and cash equivalents~~	$	31
~~Accounts receivable~~	73
~~Inventories~~	93
~~Property, plant and equipment~~	60
~~Identifiable intangible assets (useful lives ranging from 18-24 years)~~ ~~(1)~~	~~2,689~~
~~Deferred income tax liabilities~~	~~(589)~~
~~Other assets and liabilities, net~~	~~(82)~~
~~Total identifiable net assets~~	~~2,275~~
~~Goodwill~~ ~~(2)~~	~~1,376~~
~~Consideration transferred~~	$	~~3,651~~

~~(1)~~ The estimated fair values of identifiable intangible assets relate primarily to trade names and were determined using an income approach. The future net cash flows were discounted to present value utilizing a discount rate of 11.5%. Actual cash flows are likely to be different than those assumed.

~~(2)~~ The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Animal Health segment. The goodwill is not deductible for tax purposes.

The Company’s results for the first nine months of 2019 include five months of activity for Antelliq. The Company incurred $47 million of transaction costs directly related to the acquisition of Antelliq, consisting largely of advisory fees, which are reflected in ~~Selling, general and administrative~~ ~~expenses in the first nine months of 2019.~~

~~Also in April 2019, Merck acquired Immune Design, a late-stage immunotherapy company employing next-generation~~ ~~in vivo~~ approaches to enable the body’s immune system to fight disease, for $301 million in cash. The transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of $156 million, cash of $83 million and other net assets of $42 million. The excess of the consideration transferred over the fair value of net assets acquired of $20

~~- 9 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

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. Actual cash flows are likely to be different than those assumed.

3.4. Collaborative Arrangements

Merck has entered into collaborative arrangements that provide the Company with varying rights to develop, produce and market products together with its collaborative partners. Both parties in these arrangements are active participants and exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. Merck’s more significant collaborative arrangements are discussed below. For further details refer to Note 4 to the consolidated financial statements included in Merck’s 2020 Form 10‑K.

AstraZeneca

In ~~July~~ 2017, Merck and AstraZeneca PLC (AstraZeneca) entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib) for multiple cancer types. Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor currently approved for certain types of advanced ovarian, breast, pancreatic and prostate cancers. The companies are jointly developing and commercializing Lynparza, both as monotherapy and in combination trials with other potential medicines. Independently, Merck and AstraZeneca will develop and commercialize Lynparza in combinations with their respective PD-1 and PD-L1 medicines, Keytruda and Imfinzi. The companies ~~will~~are also jointly ~~develop~~developing and ~~commercialize~~commercializing AstraZeneca’s Koselugo (selumetinib)~~, an oral, selective inhibitor of MEK, part of the mitogen-activated protein kinase (MAPK) pathway, currently being developed~~ for multiple indications. ~~In April 2020, Koselugo~~was approved by the U.S. Food and Drug Administration (FDA) for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 who have symptomatic, inoperable plexiform neurofibromas. Under the terms of the agreement, AstraZeneca and Merck will share the development and commercialization costs for Lynparza and Koselugo monotherapy and non-PD-L1/PD-1 combination therapy opportunities.

Profits from Lynparza and Koselugo product sales generated through monotherapies or combination therapies are shared equally. ~~Merck will fund all development and commercialization costs of~~ ~~Keytruda~~ ~~in combination with Lynparza or Koselugo. AstraZeneca will fund all development and commercialization costs of Imfinzi in combination with Lynparza or Koselugo.~~ AstraZeneca is the principal on Lynparza and Koselugo sales transactions. Merck records its share of Lynparza and Koselugo product sales, net of cost of sales and commercialization costs, as alliance revenue and its share of development costs associated with the collaboration as part of Research and development expenses. Reimbursements received from AstraZeneca for research and development expenses are recognized as reductions to Research and development costs.

As part of the agreement, Merck made an upfront payment to AstraZeneca ~~of $1.6 billion in 2017~~ and also made payments ~~of $750 million~~ over a multi-year period for certain license options. In addition, the agreement provides for additional contingent payments from Merck to AstraZeneca related to the successful achievement of sales-based and regulatory milestones.

~~In the second quarter~~ As of ~~2020, Merck determined it was probable that sales of Lynparza in the future would trigger $400 million of~~September 30, 2021, sales-based milestone payments ~~from Merck to AstraZeneca. Accordingly, Merck recorded a~~accrued but not yet paid totaled $400 million liability and a corresponding increase to the intangible asset related to Lynparza. Prior to 2020, Merck accrued sales-based milestone payments aggregating $1.0 billion related to Lynparza, of which $200 million and $250 million was paid to AstraZeneca in 2019 and 2018, respectively, and $250 million was paid in the first nine months of 2020.million. Potential future sales-based milestone payments of $2.7 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In the second quarter of 2020, Lynparza received regulatory approvals triggering capitalized milestone payments of $135 million from Merck to AstraZeneca. In 2019 and 2018, Lynparza received regulatory approvals triggering capitalized milestone payments of $60 million and $140 million, respectively, in the aggregate from Merck to AstraZeneca. Potential Additionally, potential future regulatory milestone payments of $1.4 billion remain under the agreement.

The intangible asset balance related to Lynparza (which includes capitalized sales-based and regulatory milestone payments) was ~~$1.3~~$1.1 billion at September 30, ~~2020~~2021 and is included in Other Intangibles, Net ~~on the Consolidated Balance Sheet.~~. The amount is being amortized over its estimated useful life through 2028 as supported by projected future cash flows, subject to impairment testing.

- 1012 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Summarized financial information related to this collaboration is as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020
Alliance revenue - Lynparza	Alliance revenue - Lynparza	$	196	$	123	$	519	$	313	Alliance revenue - Lynparza	$	246	$	196	$	721	$	519
Alliance revenue - Koselugo	Alliance revenue - Koselugo	3		0		3		0		Alliance revenue - Koselugo	6		3		20		3
Total alliance revenue	Total alliance revenue	$	199	$	123	$	522	$	313	Total alliance revenue	$	252	$	199	$	741	$	522

Cost of sales (1)	Cost of sales (1)	41		28		205		120		Cost of sales (1)	42		41		125		205
Selling, general and administrative	Selling, general and administrative	40		36		112		96		Selling, general and administrative	44		40		127		112
Research and development	Research and development	20		44		93		122		Research and development	27		20		87		93

($ in millions)	($ in millions)					September 30, 2020		December 31, 2019		($ in millions)					September 30, 2021		December 31, 2020
Receivables from AstraZeneca included in Other current assets	Receivables from AstraZeneca included in Other current assets					$	197	$	128	Receivables from AstraZeneca included in Other current assets					$	248	$	215
Payables to AstraZeneca included in Accrued and other current liabilities (2)	Payables to AstraZeneca included in Accrued and other current liabilities (2)					309		577		Payables to AstraZeneca included in Accrued and other current liabilities (2)					415		423
Payables to AstraZeneca included in Other Noncurrent Liabilities (2)						400		0

(1) Represents amortization of capitalized milestone payments.

(2) Includes accrued milestone payments.

Eisai

In ~~March~~ 2018, Merck and Eisai Co., Ltd. (Eisai) announced a strategic collaboration for the worldwide co-development and co-commercialization of Lenvima (lenvatinib), an orally available tyrosine kinase inhibitor discovered by Eisai. Lenvima is currently approved for the treatment of certain types of thyroid cancer, hepatocellular carcinoma, in combination with everolimus for certain patients with renal cell carcinoma, and in combination with ~~Keytruda~~ ~~for the treatment of certain patients with endometrial carcinoma.~~ Under the agreement, Merck and Eisai will develop and commercialize Lenvima jointly, both as monotherapy and in combination with Keytruda. Eisai records Lenvima product sales globally (Eisai is the principal on Lenvima sales transactions), and Merck and Eisai share applicable profits equally. Merck records its share of Lenvima product sales, net of cost of sales and commercialization costs, as alliance revenue. Expenses incurred during co-development ~~including for studies evaluating Lenvima as monotherapy,~~ are shared ~~equally~~ by the two companies in accordance with the collaboration agreement and reflected in Research and development expenses. Certain expenses incurred solely by Merck or Eisai are not shareable under the collaboration agreement, including costs incurred in excess of agreed upon caps and costs related to certain combination studies of Keytruda and Lenvima.

Under the agreement, Merck made an upfront payment to Eisai ~~of $750 million~~ and ~~agreed to make~~also made payments ~~of up to $650 million~~over a multi-year period for certain ~~option~~options rights ~~through 2021~~ (of which ~~$325 million was paid in March 2019, $200 million was paid in March 2020 and~~the final $125 million ~~is expected to be paid~~option payment was made in March 2021). In addition, the agreement provides for additional contingent payments from Merck to Eisai related to the successful achievement of sales-based and regulatory milestones.

~~In the second quarter of 2020,~~ Merck ~~determined it was probable that sales of Lenvima in the future would trigger~~made sales-based milestone payments ~~aggregating $370~~of $200 million from Merck to Eisai. Accordingly, Merck recorded a $370 million liability and a corresponding increase to the intangible asset related to Lenvima. Prior to 2020, Merck accrued sales-based milestone payments aggregating $950 million. Of these amounts, $50 million was paid to Eisai ~~in 2019 and an additional $500 million was paid~~ in the first nine months of ~~2020.~~2021. As of September 30, 2021, sales-based milestone payments accrued but not yet paid totaled $600 million. Potential future sales-based milestone payments of ~~$2.7~~$2.6 billion have not yet been accrued as they are not deemed by the Company to be probable at this time.

In ~~2018,~~the third quarter of 2021, Lenvima received a regulatory ~~approvals~~approval triggering a capitalized milestone ~~payments~~payment of ~~$250~~$75 million ~~in the aggregate~~ from Merck to Eisai. Potential future regulatory milestone payments of ~~$135~~$50 million remain under the agreement.

The intangible asset balance related to Lenvima (which includes capitalized sales-based and regulatory milestone payments) was ~~$1.1~~$1.0 billion at September 30, ~~2020~~2021 and is included in Other Intangibles, Net ~~on the Consolidated Balance Sheet.~~. The amount is being amortized over its estimated useful life through 2026 as supported by projected future cash flows, subject to impairment testing.

- 1113 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Summarized financial information related to this collaboration is as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020
Alliance revenue - Lenvima	Alliance revenue - Lenvima	$	142	$	109	$	421	$	280	Alliance revenue - Lenvima	$	188	$	142	$	498	$	421

Cost of sales (1)	Cost of sales (1)	46		23		215		97		Cost of sales (1)	49		46		143		215
Selling, general and administrative	Selling, general and administrative	18		21		48		59		Selling, general and administrative	34		18		88		48
Research and development	Research and development	48		37		168		146		Research and development	43		48		165		168

($ in millions)	($ in millions)					September 30, 2020		December 31, 2019		($ in millions)					September 30, 2021		December 31, 2020
Receivables from Eisai included in Other current assets	Receivables from Eisai included in Other current assets					$	170	$	150	Receivables from Eisai included in Other current assets					$	223	$	157
Payables to Eisai included in Accrued and other current liabilities (2)	Payables to Eisai included in Accrued and other current liabilities (2)					325		700		Payables to Eisai included in Accrued and other current liabilities (2)					600		335
Payables to Eisai included in Other Noncurrent Liabilities (3)	Payables to Eisai included in Other Noncurrent Liabilities (3)					570		525		Payables to Eisai included in Other Noncurrent Liabilities (3)					—		600

(1) Represents amortization of capitalized milestone payments.

(2) Includes accrued milestone and future option payments.

(3) Includes accrued milestone payments.

Bayer AG

In 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 have implemented a joint development and commercialization strategy. The collaboration also includes ~~clinical~~ development of Bayer’s ~~vericiguat,~~Verquvo (vericiguat), which ~~is in development for the potential treatment of worsening heart failure. Vericiguat is currently under review by regulatory authorities~~was approved in the ~~United States,~~U.S. in January 2021, in Japan in June 2021 and in the EU ~~and Japan.~~in July 2021. Under the agreement, Bayer ~~leads commercialization of~~commercializes Adempas in the Americas, while Merck ~~leads commercialization~~commercializes in the rest of the world. For ~~vericiguat, if approved,~~Verquvo, Merck commercializes in the U.S. and Bayer ~~will lead commercialization~~commercializes in the rest of ~~world and Merck will lead in~~ the ~~Americas.~~world. Both companies share in development costs and profits on ~~sales and have the right to co-promote in territories where they are not the lead.~~sales. Merck records sales of Adempas and Verquvo in its marketing territories, as well as alliance revenue. Alliance revenue ~~which is~~represents Merck’s share of profits from ~~the sale of Adempas~~sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs. Cost of sales includes Bayer’s share of profits from sales in Merck’s marketing territories.

In addition, the agreement provides for contingent payments from Merck to Bayer related to the successful achievement of sales-based milestones.

~~Prior to 2020,~~ In the first quarter of 2021, following the approval of Verquvo noted above, Merck ~~accrued $725 million~~determined it was probable that sales of ~~sales-based milestone payments for this collaboration, of which $350 million was paid to Bayer~~Adempas and Verquvo in ~~2018. There is an additional~~the future would trigger the remaining $400 million ~~potential future~~ sales-based milestone payment that ~~has not yet been accrued as it is not deemed by~~was outstanding under this agreement. Accordingly, Merck recorded a liability of $400 million and a corresponding increase to the ~~Company~~intangible assets related to ~~be probable at~~ this ~~time.~~collaboration. Merck also recognized $153 million of cumulative amortization expense related to the recognition of this milestone in the first nine months of 2021.

The intangible asset balance related to ~~this collaboration~~Adempas (which includes the acquired intangible asset balance, as well as capitalized sales-based milestone ~~payments)~~payments attributed to Adempas) was ~~$838~~$869 million at September 30, ~~2020~~2021 and ~~is included in~~ ~~Other Intangibles, Net~~ ~~on the Consolidated Balance Sheet. The amount~~ is being amortized over its estimated useful life through 2027 as supported by projected future cash flows, subject to impairment testing.

~~Summarized financial information~~ The intangible asset balance related to ~~this collaboration~~Verquvo (which reflects the portion of the final sales-based milestone payment that was attributed to Verquvo) was $72 million at September 30, 2021 and is being amortized over its estimated useful life through 2031 as ~~follows:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2020 2019 2020 2019
Alliance revenue - Adempas $ 83 $ 50 $ 216 $ 144
Net sales of Adempas recorded by Merck 55 57 167 158
Total sales $ 138 $ 107 $ 383 $ 302
Cost of sales (1)
29 28 85 86
Selling, general and administrative 19 12 42 31
Research and development 12 31 53 94
($ in millions) September 30, 2020 December 31, 2019
Receivables from Bayer included in Other current assets
$ 70 $ 49
Payables to Bayer included in Other Noncurrent Liabilities (2)
375 375
supported by projected future cash flows, subject to impairment testing.

~~(1)~~ ~~Includes amortization of intangible assets.~~

~~(2)~~ ~~Represents accrued milestone payment.~~

- 1214 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

4.Summarized financial information related to this collaboration is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2021		2020		2021		2020
Alliance revenue - Adempas/Verquvo	$	100	$	83	$	248	$	216
Net sales of Adempas recorded by Merck	59		55		188		167
Net sales of Verquvo recorded by Merck	2		—		3		—
Total sales	$	161	$	138	$	439	$	383

Cost of sales (1)	53		81		328		229
Selling, general and administrative	31		12		84		32
Research and development	16		12		36		53

($ in millions)					September 30, 2021		December 31, 2020
Receivables from Bayer included in Other current assets					$	139	$	65
Payables to Bayer included in Accrued and other current liabilities (2)					467		—

(1) Includes amortization of intangible assets. Amount in the first nine months of 2021 includes $153 million of cumulative amortization as noted above. In addition, cost of sales in all periods now includes Bayer’s share of profits from sales in Merck’s marketing territories.

(2) Includes accrued milestone payment.

5. Restructuring

In ~~early~~ 2019, Merck approved a new global restructuring program (Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization, builds on prior restructuring programs and does not include any actions associated with the ~~planned~~ spin-off of Organon. As the Company continues to evaluate its global footprint and overall operating model, it subsequently identified additional actions under the Restructuring Program, and could identify further actions over time. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately ~~$2.5~~$3.0 billion. The Company estimates that approximately ~~60%~~70% of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately ~~40%~~30% of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects to record charges of approximately $800 million in 2020 related to the Restructuring Program. Actions under previous global restructuring programs have been substantially completed.

The Company recorded total pretax costs of ~~$186~~$168 million and ~~$296~~$185 million in the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$504~~$630 million and ~~$642~~$500 million for the first nine months of ~~2020~~2021 and ~~2019,~~2020, respectively, related to restructuring program activities. Since inception of the Restructuring Program through September 30, ~~2020,~~2021, Merck has recorded total pretax accumulated costs of approximately ~~$1.4~~$2.4 billion. For the full year of 2021, the Company expects to record charges of approximately $700 million related to the Restructuring Program. For segment reporting, restructuring charges are unallocated expenses.

The following tables summarize the charges related to restructuring program activities by type of cost:


		Three Months Ended September 30, 2020								Nine Months Ended September 30, 2020									Three Months Ended September 30, 2021								Nine Months Ended September 30, 2021
($ in millions)	($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total		($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total
Cost of sales	Cost of sales	$	0	$	33	$	5	$	38	$	0	$	89	$	42	$	131	Cost of sales	$	—	$	11	$	37	$	48	$	—	$	32	$	81	$	113
Selling, general and administrative	Selling, general and administrative	0		15		0		15		0		37		0		37		Selling, general and administrative	—		4		1		5		—		8		1		9
Research and development	Research and development	0		18		1		19		0		66		1		67		Research and development	—		7		1		8		—		20		1		21
Restructuring costs	Restructuring costs	61		0		53		114		143		0		126		269		Restructuring costs	17		—		90		107		310		—		177		487
		$	61	$	66	$	59	$	186	$	143	$	192	$	169	$	504		$	17	$	22	$	129	$	168	$	310	$	60	$	260	$	630


		Three Months Ended September 30, 2019								Nine Months Ended September 30, 2019									Three Months Ended September 30, 2020								Nine Months Ended September 30, 2020
($ in millions)	($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total		($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total
Cost of sales	Cost of sales	$	0	$	41	$	21	$	62	$	0	$	139	$	22	$	161	Cost of sales	$	—	$	33	$	5	$	38	$	—	$	89	$	42	$	131
Selling, general and administrative	Selling, general and administrative	0		1		0		1		0		33		0		33		Selling, general and administrative	—		15		—		15		—		37		—		37
Research and development	Research and development	0		(1)		2		1		0		1		3		4		Research and development	—		18		1		19		—		66		1		67
Restructuring costs	Restructuring costs	205		0		27		232		358		0		86		444		Restructuring costs	61		—		52		113		143		—		122		265
		$	205	$	41	$	50	$	296	$	358	$	173	$	111	$	642		$	61	$	66	$	58	$	185	$	143	$	192	$	165	$	500

- 15 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated.

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 the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life 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 ~~2020~~2021 and ~~2019~~2020 includes asset abandonment, facility shut-down and other related costs, as well as pretax gains and losses resulting from the sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note ~~12)~~11) and share-based compensation.

~~- 13 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

The following table summarizes the charges and spending relating to restructuring program activities for the nine months ended September 30, ~~2020:~~2021:


($ in millions)	($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total
Restructuring reserves January 1, 2020		$	690	$	0	$	69	$	759
Restructuring reserves January 1, 2021										Restructuring reserves January 1, 2021	$	567	$	—	$	19	$	586
Expense	Expense	143		192		169		504		Expense	310		60		260		630
(Payments) receipts, net	(Payments) receipts, net	(395)		0		(237)		(632)		(Payments) receipts, net	(305)		—		(155)		(460)
Non-cash activity	Non-cash activity	0		(192)		39		(153)		Non-cash activity	—		(60)		(84)		(144)
Restructuring reserves September 30, 2020 (1)		$	438	$	0	$	40	$	478
Restructuring reserves September 30, 2021 (1)										Restructuring reserves September 30, 2021 (1)	$	572	$	—	$	40	$	612

(1)The remaining cash outlays are expected to be substantially completed by the end of 2023.

5.6. 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 changes 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, Japanese yen and Chinese renminbi. 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 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 Condensed Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or Other comprehensive income (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 unrealized gains or losses on these contracts are recorded in ~~Accumulated other comprehensive income~~AOCL (~~AOCI~~) and reclassified into Sales when the hedged anticipated revenue is recognized. 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~~non-

- 16 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

designated contracts are reported as operating activities in the Condensed 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 each local subsidiary in order to mitigate the effects 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 Condensed 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

~~- 14 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

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 also uses forward exchange contracts to hedge a portion of 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 unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI and remain in ~~AOCI~~AOCL until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded components). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument, rather than using the mark-to-market approach. The cash flows from these contracts are reported as investing activities in the Condensed 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.

The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:


		Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)								Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing									Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income (1)								Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020		2021		2020		2021		2020
Net Investment Hedging Relationships	Net Investment Hedging Relationships																	Net Investment Hedging Relationships
Foreign exchange contracts	Foreign exchange contracts	$	10	$	1	$	15	$	8	$	(4)	$	(8)	$	(15)	$	(23)	Foreign exchange contracts	$	1	$	10	$	(27)	$	15	$	(4)	$	(4)	$	(12)	$	(15)
Euro-denominated notes	Euro-denominated notes	162		(150)		182		(152)		0		0		0		0		Euro-denominated notes	(77)		162		(199)		182		—		—		—		—

(1) No amounts were reclassified from ~~AOCI~~AOCL into income related to the sale of a subsidiary.

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 ~~February 2020,~~January 2021, 5 interest rate swaps with a total notional ~~amounts~~amount of ~~$250 million each~~$1.15 billion matured. These swaps effectively converted the Company’s ~~$1.25~~$1.15 billion, ~~1.85%~~3.875% fixed-rate notes due ~~2020~~2021 to variable rate debt. At September 30, ~~2020,~~2021, the Company was a party to 149 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 as detailed in the table below.

September 30, 2020
($ in millions) Par Value of Debt Number of Interest Rate Swaps Held Total Swap Notional Amount
3.875% notes due 2021 $ 1,150 5 $ 1,150
2.40% notes due 2022 1,000 4 1,000
2.35% notes due 2022 1,250 5 1,250

- 17 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)


	September 30, 2021
($ in millions)	Par Value of Debt		Number of Interest Rate Swaps Held	Total Swap Notional Amount
2.40% notes due 2022	$	1,000	4	$	1,000
2.35% notes due 2022	1,250		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 along with the offsetting fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.

~~- 15 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

The table below presents the location of amounts recorded on the Condensed Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:


		Carrying Amount of Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount					Carrying Amount of Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)	($ in millions)	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019		($ in millions)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt	Loans payable and current portion of long-term debt	$	1,155	$	1,249	$	5	$	(1)	Loans payable and current portion of long-term debt	$	2,274	$	1,150	$	25	$	—
Long-Term Debt	Long-Term Debt	2,309		3,409		62		14		Long-Term Debt	—		2,301		—		53

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:


			September 30, 2020						December 31, 2019								September 30, 2021						December 31, 2020
			Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional				Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
($ in millions)	($ in millions)	Balance Sheet Caption	Asset		Liability				Asset		Liability				($ in millions)		Asset		Liability				Asset		Liability
Derivatives Designated as Hedging Instruments	Derivatives Designated as Hedging Instruments														Derivatives Designated as Hedging Instruments	Balance Sheet Caption
Interest rate swap contracts		Other current assets	$	6	$	—	$	1,150	$	0	$	—	$	0
Interest rate swap contracts	Interest rate swap contracts	Other Assets	63		—		2,250		15		—		3,400		Interest rate swap contracts	Other current assets	$	26	$	—	$	2,250	$	1	$	—	$	1,150
Interest rate swap contracts	Interest rate swap contracts	Accrued and other current liabilities	—		0		0		—		1		1,250		Interest rate swap contracts	Other Assets	—		—		—		54		—		2,250
Foreign exchange contracts	Foreign exchange contracts	Other current assets	30		—		4,120		152		—		6,117		Foreign exchange contracts	Other current assets	224		—		7,138		12		—		3,183
Foreign exchange contracts	Foreign exchange contracts	Other Assets	59		—		1,881		55		—		2,160		Foreign exchange contracts	Other Assets	45		—		1,469		45		—		2,030
Foreign exchange contracts	Foreign exchange contracts	Accrued and other current liabilities	—		104		3,096		—		22		1,748		Foreign exchange contracts	Accrued and other current liabilities	—		15		1,601		—		217		5,049
Foreign exchange contracts	Foreign exchange contracts	Other Noncurrent Liabilities	—		1		157		—		1		53		Foreign exchange contracts	Other Noncurrent Liabilities	—		1		145		—		1		52
			$	158	$	105	$	12,654	$	222	$	24	$	14,728			$	295	$	16	$	12,603	$	112	$	218	$	13,714
Derivatives Not Designated as Hedging Instruments	Derivatives Not Designated as Hedging Instruments														Derivatives Not Designated as Hedging Instruments	Balance Sheet Caption
Foreign exchange contracts	Foreign exchange contracts	Other current assets	$	81	$	—	$	5,455	$	66	$	—	$	7,245	Foreign exchange contracts	Other current assets	$	82	$	—	$	6,333	$	70	$	—	$	7,260
Foreign exchange contracts	Foreign exchange contracts	Accrued and other current liabilities	—		171		8,042		—		73		8,693		Foreign exchange contracts	Accrued and other current liabilities	—		117		9,522		—		307		11,810
Forward contract related to Seagen common stock		Accrued and other current liabilities	—		22		1,000		—		0		0
			$	81	$	193	$	14,497	$	66	$	73	$	15,938			$	82	$	117	$	15,855	$	70	$	307	$	19,070
			$	239	$	298	$	27,151	$	288	$	97	$	30,666			$	377	$	133	$	28,458	$	182	$	525	$	32,784

As noted above, the Company records its derivatives on a gross basis in the Condensed 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:


		September 30, 2020				December 31, 2019					September 30, 2021				December 31, 2020
($ in millions)	($ in millions)	Asset		Liability		Asset		Liability		($ in millions)	Asset		Liability		Asset		Liability
Gross amounts recognized in the condensed consolidated balance sheet	Gross amounts recognized in the condensed consolidated balance sheet	$	239	$	298	$	288	$	97	Gross amounts recognized in the condensed consolidated balance sheet	$	377	$	133	$	182	$	525
Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	(140)		(140)		(84)		(84)		Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	(120)		(120)		(156)		(156)
Cash collateral received		0		0		(34)		0
Cash collateral received/posted										Cash collateral received/posted	(65)		—		—		(36)
Net amounts	Net amounts	$	99	$	158	$	170	$	13	Net amounts	$	192	$	13	$	26	$	333

- 1618 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging ~~relationships:~~relationships (including amounts attributable to discontinued operations):


		Sales				Other (income) expense, net (1)				Other comprehensive income (loss)				Sales				Other (income) expense, net (1)				Other comprehensive income (loss)								Sales						Other (income) expense, net (1)						Other comprehensive income (loss)						Sales						Other (income) expense, net (1)						Other comprehensive income (loss)
		Three Months Ended September 30,				Three Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,								Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		2020		2019		2020		2019		2020		2019		2020				2019		($ in millions)		2021			2020			2021			2020			2021			2020			2021			2020			2021			2020			2021		2020
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	$	12,551	$	12,397	$	(312)	$	35	$	10	$	(28)	$	35,479	$	34,972	$	(630)	$	362	$	(190)			$	155	Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded		$	13,154		$	10,929		$	(450)		$	(312)		$	38		$	10		$	35,183		$	30,570		$	(1,007)		$	(637)		$	1,595	$	(190)
(Gain) loss on fair value hedging relationships	(Gain) loss on fair value hedging relationships																								(Gain) loss on fair value hedging relationships
Interest rate swap contracts	Interest rate swap contracts																								Interest rate swap contracts
Hedged items	Hedged items	—		—		(14)		13		—		—		—		—		54		101		—				—		Hedged items		—			—			(9)			(14)			—			—			—			—			(29)			54			—		—
Derivatives designated as hedging instruments	Derivatives designated as hedging instruments	—		—		0		(6)		—		—		—		—		(76)		(74)		—				—		Derivatives designated as hedging instruments		—			—			(1)			—			—			—			—			—			(1)			(76)			—		—
Impact of cash flow hedging relationships	Impact of cash flow hedging relationships																								Impact of cash flow hedging relationships
Foreign exchange contracts	Foreign exchange contracts																								Foreign exchange contracts
Amount of (loss) gain recognized in OCI on derivatives		—		—		—		—		(195)		186		—		—		—		—		(126)				183
Increase (decrease) in Sales as a result of AOCI reclassifications		(23)		70		—		—		23		(70)		65		189		—		—		(65)				(189)
Amount of gain (loss) recognized in OCI on derivatives																								Amount of gain (loss) recognized in OCI on derivatives	—				—			—			—			72			(195)			—			—			—			—			193			(126)
(Decrease) increase in Sales as a result of AOCL reclassifications																								(Decrease) increase in Sales as a result of AOCL reclassifications	(36)				(23)			—			—			36			23			(219)			65			—			—			219			(65)
Interest rate contracts	Interest rate contracts																								Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives	Amount of gain recognized in Other (income) expense, net on derivatives	—		—		(1)		(1)		—		—		—		—		(3)		(3)		—				—		Amount of gain recognized in Other (income) expense, net on derivatives		—			—			—			(1)			—			—			—			—			(2)			(3)			—		—
Amount of loss recognized in OCI on derivatives	Amount of loss recognized in OCI on derivatives	—		—		—		—		(1)		(1)		—		—		—		—		(3)				(6)		Amount of loss recognized in OCI on derivatives		—			—			—			—			—			(1)			—			—			—			—			(2)		(3)

(1) Interest expense is a component of Other (income) expense, net.

The table below provides information regarding the income statement effects of derivatives not designated as hedging ~~instruments:~~instruments (including amounts attributable to discontinued operations):


			Amount of Derivative Pretax (Gain) Loss Recognized in Income										Amount of Derivative Pretax (Gain) Loss Recognized in Income
			Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	Income Statement Caption	2020		2019		2020		2019		($ in millions)		2021		2020		2021		2020
Derivatives Not Designated as Hedging Instruments	Derivatives Not Designated as Hedging Instruments										Derivatives Not Designated as Hedging Instruments	Income Statement Caption
Foreign exchange contracts (1)	Foreign exchange contracts (1)	Other (income) expense, net	$	(7)	$	(8)	$	(138)	$	112	Foreign exchange contracts (1)	Other (income) expense, net	$	18	$	(7)	$	234	$	(138)
Foreign exchange contracts (2)	Foreign exchange contracts (2)	Sales	7		(11)		4		(7)		Foreign exchange contracts (2)	Sales	(4)		7		6		4
Interest rate contracts (3)	Interest rate contracts (3)	Other (income) expense, net	0		0		9		0		Interest rate contracts (3)	Other (income) expense, net	—		—		—		9
Forward contract related to Seagen common stock	Forward contract related to Seagen common stock	Research and development expenses	22		0		22		0		Forward contract related to Seagen common stock	Research and development	—		22		—		22

(1) These derivative contracts primarily mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates. Amount in the first nine months of 2021 includes a loss on forward exchange contracts entered into in conjunction with the spin-off of Organon.

(2) These derivative contracts serve as economic hedges of forecasted transactions.

(3) These ~~derivatives~~derivative contracts serve as economic hedges against rising treasury rates.

At September 30, ~~2020,~~2021, the Company estimates ~~$155~~$55 million of pretax net unrealized ~~losses~~gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from ~~AOCI~~AOCL 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.

- 1719 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Investments in Debt and Equity Securities

Information on investments in debt and equity securities is as follows:


		September 30, 2020								December 31, 2019									September 30, 2021								December 31, 2020
		Amortized Cost		Gross Unrealized				Fair Value		Amortized Cost		Gross Unrealized				Fair Value			Amortized Cost		Gross Unrealized				Fair Value		Amortized Cost		Gross Unrealized				Fair Value
($ in millions)	($ in millions)			Gains		Losses						Gains		Losses				($ in millions)			Gains		Losses						Gains		Losses
U.S. government and agency securities	U.S. government and agency securities	$	74	$	0	$	0	$	74	$	266	$	3	$	0	$	269	U.S. government and agency securities	$	83	$	—	$	—	$	83	$	84	$	—	$	—	$	84
Corporate notes and bonds																		Corporate notes and bonds	4		—		—		4		—		—		—		—
Foreign government bonds	Foreign government bonds	2		0		0		2		0		0		0		0		Foreign government bonds	2		—		—		2		5		—		—		5
Commercial paper		0		0		0		0		668		0		0		668
Corporate notes and bonds		0		0		0		0		608		13		0		621
Asset-backed securities		0		0		0		0		226		1		0		227
Total debt securities	Total debt securities	$	76	$	0	$	0	$	76	$	1,768	$	17	$	0	$	1,785	Total debt securities	$	89	$	—	$	—	$	89	$	89	$	—	$	—	$	89
Publicly traded equity securities (1)	Publicly traded equity securities (1)							1,477								838		Publicly traded equity securities (1)							1,915								1,787
Total debt and publicly traded equity securities	Total debt and publicly traded equity securities							$	1,553							$	2,623	Total debt and publicly traded equity securities							$	2,004							$	1,876

(1) Unrealized net ~~(gains)~~gains of $90 million and unrealized net losses ~~recognized~~of $109 million were recorded in Other (income) expense, net on equity securities still held at September 30, 2021 in the third quarter and first nine months of 2021, respectively. Unrealized net gains recorded in Other (income) expense, net on equity securities still held at September 30, 2020 were ~~$(43)~~$43 million and ~~$(512)~~$512 million in the third quarter and first nine months of 2020, respectively. ~~Unrealized net losses (gains) recognized in~~ ~~Other (income) expense, net~~ ~~on equity securities still held at September 30, 2019 were $25 million and $(41) million in the third quarter and first nine months of 2019, respectively.~~

At September 30, ~~2020~~2021 and September 30, ~~2019,~~2020, the Company also had ~~$508~~$578 million and ~~$393~~$508 million, respectively, of equity investments without readily determinable fair values included in Other Assets. The Company recognizes unrealized gains on these equity investments based on favorable observable price changes from transactions involving similar investments of the same investee and recognizes unrealized losses based on unfavorable observable price changes. During the first nine monthsof ~~2020,~~2021, the Company ~~recognized~~recorded unrealized gains of $104 million and unrealized losses of $1 million in Other (income) expense, net related to these equity investments held at September 30, 2021. During the first nine monthsof 2020, the Company recorded unrealized gains of $21 million and unrealized losses of $3 million in Other (income) expense, net related to these equity investments held at September 30, 2020. ~~During the first nine months of 2019, the Company recognized unrealized gains of $4 million and unrealized losses of $12 million in~~ ~~Other (income) expense, net~~ ~~related to these investments held at September 30, 2019.~~ Cumulative unrealized gains and cumulative unrealized losses based on observable prices changes for investments in equity investments without readily determinable fair values still held at September 30, ~~2020~~2021 were ~~$128~~$229 million and ~~$24~~$7 million, respectively.

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 assets 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.

- 1820 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:


		Fair Value Measurements Using								Fair Value Measurements Using									Fair Value Measurements Using								Fair Value Measurements Using
		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
($ in millions)	($ in millions)	September 30, 2020								December 31, 2019								($ in millions)	September 30, 2021								December 31, 2020
Assets	Assets																	Assets
Investments	Investments																	Investments
Foreign government bonds	Foreign government bonds	$	0	$	2	$	0	$	2	$	0	$	0	$	0	$	0	Foreign government bonds	$	—	$	2	$	—	$	2	$	—	$	5	$	—	$	5
Commercial paper		0		0		0		0		0		668		0		668
Corporate notes and bonds		0		0		0		0		0		621		0		621
Asset-backed securities (1)		0		0		0		0		0		227		0		227
U.S. government and agency securities		0		0		0		0		0		209		0		209
Publicly traded equity securities	Publicly traded equity securities	1,370		0		0		1,370		518		0		0		518		Publicly traded equity securities	433		—		—		433		780		—		—		780
		1,370		2		0		1,372		518		1,725		0		2,243			433		2		—		435		780		5		—		785
Other assets (2)
Other assets (1)																		Other assets (1)
U.S. government and agency securities	U.S. government and agency securities	74		0		0		74		60		0		0		60		U.S. government and agency securities	83		—		—		83		84		—		—		84
Corporate notes and bonds																		Corporate notes and bonds	4		—		—		4		—		—		—		—
Publicly traded equity securities	Publicly traded equity securities	107		0		0		107		320		0		0		320		Publicly traded equity securities	1,482		—		—		1,482		1,007		—		—		1,007
		181		0		0		181		380		0		0		380			1,569		—		—		1,569		1,091		—		—		1,091
Derivative assets (3)
Derivative assets (2)																		Derivative assets (2)
Forward exchange contracts	Forward exchange contracts	0		116		0		116		0		169		0		169		Forward exchange contracts	—		230		—		230		—		90		—		90
Purchased currency options																		Purchased currency options	—		121		—		121		—		37		—		37
Interest rate swaps	Interest rate swaps	0		69		0		69		0		15		0		15		Interest rate swaps	—		26		—		26		—		55		—		55
Purchased currency options		0		54		0		54		0		104		0		104
		0		239		0		239		0		288		0		288			—		377		—		377		—		182		—		182
Total assets	Total assets	$	1,551	$	241	$	0	$	1,792	$	898	$	2,013	$	0	$	2,911	Total assets	$	2,002	$	379	$	—	$	2,381	$	1,871	$	187	$	—	$	2,058
Liabilities	Liabilities																	Liabilities
Other liabilities	Other liabilities																	Other liabilities
Contingent consideration	Contingent consideration	$	0	$	0	$	829	$	829	$	0	$	0	$	767	$	767	Contingent consideration	$	—	$	—	$	902	$	902	$	—	$	—	$	841	$	841
Derivative liabilities (3)
Derivative liabilities (2)																		Derivative liabilities (2)
Forward exchange contracts	Forward exchange contracts	0		275		0		275		0		95		0		95		Forward exchange contracts	—		132		—		132		—		505		—		505
Forward contract related to Seagen common stock		0		22		0		22		0		0		0		0
Written currency options	Written currency options	0		1		0		1		0		1		0		1		Written currency options	—		1		—		1		—		20		—		20
Interest rate swaps		0		0		0		0		0		1		0		1
		0		298		0		298		0		97		0		97			—		133		—		133		—		525		—		525
Total liabilities	Total liabilities	$	0	$	298	$	829	$	1,127	$	0	$	97	$	767	$	864	Total liabilities	$	—	$	133	$	902	$	1,035	$	—	$	525	$	841	$	1,366

(1)Primarily all of the asset-backed securities were highly rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily 5 years or less.

~~(2)~~ Investments included in other assets are restricted as to use, including for the payment of benefits under employee benefit plans.

~~(3)~~(2) 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.

As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, Cash and cash equivalents included ~~$6.6~~$9.2 billion and ~~$8.9~~$6.8 billion of cash equivalents, respectively (which would be considered Level 2 in the fair value hierarchy).

~~- 19 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

Contingent Consideration

Summarized information about the changes in the fair value of liabilities for contingent consideration associated with business acquisitions is as follows:


		Nine Months Ended September 30,					Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		($ in millions)	2021		2020
Fair value January 1		$	767	$	788
January 1						January 1	$	841	$	767
Additions	Additions	97		0		Additions	—		97
Changes in estimated fair value (1)	Changes in estimated fair value (1)	71		52		Changes in estimated fair value (1)	73		71
Payments	Payments	(106)		(85)		Payments	—		(106)
Fair value September 30 (2)(3)		$	829	$	755
Other						Other	(12)		—
September 30 (2)(3)						September 30 (2)(3)	$	902	$	829

(1) Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net. Includes cumulative translation adjustments.

(2) Balance at September 30, ~~2020~~2021 includes ~~$140~~$289 million recorded as a current liability for amounts expected to be paid within the next 12 months.

(3) At September 30, ~~2020~~2021 and December 31, ~~2019, $637~~2020, $747 million and ~~$625~~$711 million, respectively, of the liabilities relate to the termination of the ~~Sanofi-Pasteur~~Sanofi Pasteur MSD joint venture in 2016. As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024. The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows using a risk-adjusted discount rate of 8% to present value the cash flows.

The additions to contingent consideration in 2020 relate to the acquisition of Themis (see Note 2)3). The payments of contingent consideration in ~~both periods~~2020 relate to liabilities recorded in connection with the termination of the Sanofi-Pasteur MSD joint venture in 2016.

- 21 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

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 September 30, ~~2020,~~2021, was ~~$32.6~~$29.1 billion compared with a carrying value of ~~$28.7~~$26.4 billion and at December 31, ~~2019,~~2020, was ~~$28.8~~$36.0 billion compared with a carrying value of ~~$26.3~~$31.8 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.

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.

The majority of the Company’s accounts receivable arise from product sales in the ~~United States,~~U.S., Europe and China 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 global economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business.

The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored ~~$2.1~~$2.4 billion and ~~$2.7~~$2.1 billion of accounts receivable ~~in the third quarter of~~at September 30, 2021 and December 31, 2020, ~~and the fourth quarter of 2019,~~ respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Consolidated Statement of Cash Flows. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. The net cash flows relating to these collections are reported as financing activities in the Consolidated Statement of Cash Flows. The cost of factoring such accounts receivable was de minimis.

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. Cash collateral received by the Company from various counterparties was ~~$34~~$65 million at ~~December 31, 2019.~~September 30, 2021. The obligation to return such collateral is recorded in Accrued and other current liabilities. ~~NaN cash~~Cash collateral ~~was~~ advanced by the Company to counterparties ~~as of September 30, 2020 or~~was $36 million at December 31, ~~2019.~~2020.

~~- 20 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

6.7. Inventories

Inventories consisted of:


($ in millions)	($ in millions)	September 30, 2020		December 31, 2019		($ in millions)	September 30, 2021		December 31, 2020
Finished goods	Finished goods	$	2,038	$	1,772	Finished goods	$	1,628	$	1,610
Raw materials and work in process	Raw materials and work in process	6,073		5,650		Raw materials and work in process	6,135		5,949
Supplies	Supplies	197		207		Supplies	190		146
Total (approximates current cost)	Total (approximates current cost)	8,308		7,629		Total (approximates current cost)	7,953		7,705
Decrease to LIFO cost		(99)		(171)
Increase (decrease) to LIFO cost						Increase (decrease) to LIFO cost	23		(81)
		$	8,209	$	7,458		$	7,976	$	7,624
Recognized as:	Recognized as:					Recognized as:
Inventories	Inventories	$	6,128	$	5,978	Inventories	$	5,603	$	5,554
Other assets	Other assets	2,081		1,480		Other assets	2,373		2,070

Amounts recognized as Other Assets are comprised almost entirely of raw materials and work in process inventories. At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, these amounts included ~~$1.8~~$1.9 billion and ~~$1.3~~$1.8 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included ~~$288~~$519 million and ~~$168~~$279 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, of inventories produced in preparation for product launches.

- 22 -

~~7. Other~~

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

8. Goodwill and Intangibles

~~During~~In connection with the ~~third quarter~~spin-off of Organon (see Note 2), goodwill was reduced by $1.4 billion. Additionally, other intangibles, on a net basis, were reduced by $519 million, including products and ~~first nine months~~products rights of ~~2019, the Company recorded $612~~$394 million and ~~$693 million, respectively,~~licenses of ~~intangible asset impairment charges related to marketed products within~~ ~~Cost of sales. During the third quarter of 2019, the Company recorded an impairment charge of $612 million related to~~ ~~Sivextro~~ (tedizolid phosphate), a product for the treatment of acute bacterial skin and skin structure infections caused by susceptible isolates of certain Gram-positive microorganisms. As part of a reorganization and reprioritization of its internal sales force, the Company made the decision to cease promotion of ~~Sivextro~~ ~~in the U.S. market by the end of 2019. This decision resulted in reduced cash flow projections for~~ ~~Sivextro, which indicated that the~~ ~~Sivextro~~ intangible asset value was not fully recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair value of the intangible asset related to ~~Sivextro~~ ~~that, when compared with its related carrying value, resulted in the impairment charge noted above.~~

~~8. Long-Term Debt~~

In June 2020, the Company issued $4.5 billion principal amount of senior unsecured notes consisting of $1.0 billion of 0.75% notes due 2026, $1.25 billion of 1.45% notes due 2030, $1.0 billion of 2.35% notes due 2040 and $1.25 billion of 2.45% notes due 2050. Merck used the net proceeds from the offering for general corporate purposes, including without limitation the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities.$125 million.

9. Contingencies

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 including governmental and environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial condition, results of operations or cash flows.

Given the nature of the litigation discussed below 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.

~~- 21 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

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 most product liabilities.

Product Liability Litigation

Fosamax

As previously disclosed, Merck is a defendant in product liability lawsuits in the ~~United States~~U.S. involving Fosamax (Fosamax Litigation). As of September 30, ~~2020,~~2021, approximately ~~3,590~~3,470 cases are pending against Merck in either a federal multidistrict litigation (Femur Fracture MDL) or state court. Plaintiffs in the vast majority of these cases generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of Fosamax.

~~All federal cases involving allegations of Femur Fractures have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL).~~ In ~~the only bellwether case tried to date in the Femur Fracture MDL,~~ ~~Glynn v. Merck, the jury returned a verdict in Merck’s favor. In addition, in June 2013, the 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.~~

In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the 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. Pursuant to the show cause order, in~~ March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In March 2017, the Third Circuit issued a decision reversing the Femur Fracture MDL court’s preemption ruling and remanding the appealed cases back to the Femur Fracture MDL court. In May 2019, the U.S. Supreme Court decided that the Third Circuit had incorrectly concluded that the issue of preemption should be resolved by a jury, and accordingly vacated the judgment of the Third Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the Supreme Court’s opinion. In November 2019, the Third Circuit remanded the cases back to the District Court in order to allow that court to determine in the first instance whether the plaintiffs’ state law claims are preempted by federal law under the standards described by the Supreme Court in its opinion. Briefing on the issue is closed, and the parties await the decision of the District Court.

~~Accordingly, as of September 30, 2020, approximately 970 cases were actively pending in the Femur Fracture MDL.~~

As of September 30, 2020, approximately 2,340 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge James Hyland in Middlesex County. The parties selected an initial group of cases to be reviewed through fact discovery, and Merck has continued to select additional cases to be reviewed.

As of September 30, 2020, approximately 275 cases alleging Femur Fractures have been filed and are pending in California state court. All of the Femur Fracture cases filed in California state court have been coordinated before a single judge in Orange County, California.

~~Additionally, there are 4 Femur Fracture cases pending in other state courts.~~

Discovery is presently stayed in the Femur Fracture MDL and in the state court in California. As part of the spin-off of Organon, Organon is required to indemnify Merck ~~intends~~for all liabilities relating to, ~~defend against these lawsuits.~~arising from, or resulting from the Fosamax Litigation.

Januvia/Janumet

As previously disclosed, Merck is a defendant in product liability lawsuits in the ~~United States~~U.S. involving Januvia and/or Janumet. As of September 30, ~~2020,~~2021, Merck is aware of approximately ~~1,465~~730 product users alleging that Januvia and/or Janumet caused the development of pancreatic cancer and other injuries.

Most claims have been filed in multidistrict litigation before the U.S. District Court for the Southern District of California (MDL). On March 9, 2021, the MDL Court issued an omnibus order granting defendants’ summary judgment motions based on preemption and failure to establish general causation, as well as granting defendants’ motions to exclude

- 23 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

plaintiffs’ expert witnesses. The plaintiffs appealed that order. Since that time, more than half of these claims have been dismissed with prejudice as to Merck, and on October 5, 2021, the U.S. Court of Appeals for the Ninth Circuit dismissed the appeal as to Merck and two of its codefendants.

Outside of the MDL, the majority of claims have been filed in coordinated proceedings before the Superior Court of California, County of Los Angeles (California State Court).

~~In November 2015,~~ On April 6, 2021, the ~~MDL and~~court in California ~~State Court–in separate opinions–granted summary judgment to defendants on grounds of federal preemption.~~

Plaintiffs appealed in both forums. In November 2017, the U.S. Court of Appeals for the Ninth Circuit vacated the judgment and remanded for further discovery. In November 2018, the California state appellate court reversed and remanded on similar grounds. In March 2019, the parties in the MDL and the California coordinated proceedings agreed to coordinate and adopt a schedule for completing discovery on general causation and preemption issues and for renewing summary judgment

~~- 22 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

~~and~~ ~~Daubert~~ ~~motions. Under the stipulated case management schedule, the hearings for~~ ~~Daubert~~ ~~and~~issued an omnibus order granting defendants’ summary judgment motions ~~took place on October 20, 2020.~~and also granting defendants’ motions to exclude plaintiffs’ expert witnesses.

As of September 30, ~~2020,~~2021, 6 product users have claims pending against Merck in state courts other than California, including Illinois. In June 2017, the Illinois trial court denied Merck’s motion for summary judgment based on federal preemption. Merck appealed, and the Illinois appellate court affirmed in December 2018. Merck filed a petition for leave to appeal to the Illinois Supreme Court in February 2019. In April 2019, the Illinois Supreme Court stayed consideration of the pending petition to appeal until the U.S. Supreme Court issued its opinion in Merck Sharp & Dohme Corp. v. Albrecht (relating to the Fosamax matter discussed above). Merck filed the opinion in Albrecht with the Illinois Supreme Court in June 2019. The petition for leave to appeal was decided in September 2019, in which the Illinois Supreme Court directed the intermediate appellate court to reconsider its earlier ruling. The Illinois Appellate Court issued a favorable decision concluding, consistent with Albrecht, that preemption presents a legal question to be resolved by the court. In May 2020, the Illinois Appellate Court issued a mandate to the state trial court, which, as of September 30, 2021, had not scheduled a case management conference or otherwise taken action.

In addition to the claims noted above, the Company has agreed to toll the statute of limitations for approximately 50 additional claims. The Company intends to continue defending against ~~these~~any remaining lawsuits.

~~Vioxx~~

~~As previously disclosed, Merck is a defendant in a lawsuit brought by the Attorney General of Utah alleging that Merck misrepresented the safety of~~ ~~Vioxx. The lawsuit is pending in Utah state court. Utah seeks damages and penalties under the Utah False Claims Act. A bench trial in this matter has been rescheduled for April 6, 2021.~~

Governmental Proceedings

As previously disclosed, 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.

As previously disclosed, from time to time, the Company receives inquiries and is the subject of preliminary investigation activities from competition and other governmental authorities in markets outside the ~~United States.~~U.S. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.

Commercial and Other Litigation

Zetia Antitrust Litigation

As previously disclosed, Merck, MSD, Schering Corporation, Schering-Plough Corporation, and MSP Singapore Company LLC (collectively, the Merck Defendants) are defendants in putative class action and opt-out lawsuits filed in 2018 on behalf of direct and indirect purchasers of Zetia alleging violations of federal and state antitrust laws, as well as other state statutory and common law causes of action. The cases have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Rebecca Beach Smith in the Eastern District of Virginia. In December 2018, the court denied the Merck Defendants’ motions to dismiss or stay the direct purchaser putative class actions pending bilateral arbitration. In August 2019, the district court adopted in full the report and recommendation of the magistrate judge with respect to the Merck Defendants’ motions to dismiss on non-arbitration issues, thereby granting in part and denying in part Merck Defendants’ motions to dismiss. In addition, in June 2019, the representatives of the putative direct purchaser class filed an amended complaint, and in August 2019, retailer opt-out plaintiffs filed an amended complaint. The Merck Defendants moved to dismiss the new allegations in both complaints. In October 2019, the magistrate judge issued a report and recommendation recommending that the district judge grant the motions in their entirety. In December 2019, the ~~district court adopted this report and recommendation in part. The~~ district court granted the Merck Defendants’ motion to dismiss to the extent the motion sought dismissal of claims for overcharges paid by entities that purchased generic ezetimibe from Par Pharmaceutical, Inc. (Par Pharmaceutical) and dismissed any claims for such overcharges. In November 2019, the direct purchaser plaintiffs and the indirect purchaser plaintiffs filed motions for class certification. ~~On June 18,~~In August 2020, the ~~magistrate judge issued a report and recommendation recommending that the~~ district ~~judge grant~~court granted in part the direct purchasers’ motion for class certification and ~~certify~~certified a class of 35 direct ~~purchasers. On August 21, 2020, the district court adopted the report~~purchasers and, ~~recommendation~~ in ~~full, and on~~ November 2, 2020, the U.S. Court of Appeals for the Fourth Circuit granted ~~defendants’~~the Merck Defendants’ motion for permission to appeal the district court’s order. ~~Also, on~~In August ~~14, 2020,~~2021, the ~~magistrate judge recommended that~~Fourth Circuit vacated the ~~court grant~~district court’s class certification order and remanded for further proceedings consistent with the court’s ruling. In September 2021, the direct purchaser plaintiffs filed a renewed motion for class certification ~~filed by the putative indirect purchaser class. The Merck Defendants objected to this report~~ and ~~recommendation and are awaiting a decision from the district court.~~briefing regarding that motion is pending.

~~- 23 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

OnIn August ~~10,~~ 2020, the Merck Defendants filed a motion for summary judgment and other motions, and plaintiffs filed a motion for partial summary judgment, and other motions. Those motions are now fully briefed, and the court ~~will likely~~has heard

- 24 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

argument on certain of the motions. The court may hold ~~a hearing~~additional hearings on the ~~competing~~other motions. Trial in this matter has been adjourned.

Also in August 2020, the magistrate judge recommended that the court grant the motion for class certification filed by the putative indirect purchaser class. The Merck Defendants objected to this report and recommendation. In August 2021, the district court overruled the Merck Defendants’ objections to the report and recommendation and granted certification of a class of indirect purchasers. In September 2021, the Merck Defendants petitioned to appeal the class certification decision to the Fourth Circuit. The Fourth Circuit denied that petition on September 30, 2021.

In September 2020, United Healthcare Services, Inc. filed a lawsuit in the U.S. District Court for the District of Minnesota against the Merck Defendants and others (the UHC Action). The UHC Action makes similar allegations as those made in the Zetia class action. In September 2020, the U.S. Judicial Panel on Multidistrict Litigation transferred the case to the Eastern District of Virginia to proceed with the multidistrict Zetia litigation already in progress. Defendants have filed a motion to dismiss.

In December 2020, Humana Inc. filed a lawsuit in the Superior Court of the State of California, County of San Francisco, against Merck and others, alleging defendants violated state antitrust laws in multiple states. Also, in December 2020, Centene Corporation and others filed a lawsuit in the Superior Court of the State of California, County of San Francisco, against the same defendants as Humana. Both lawsuits allege similar anticompetitive acts to those alleged in the Zetia class action. In July 2021, the California Court ruled on defendants’ Motion to Quash for lack of personal jurisdiction, granting the motion as to the out-of-state claims against defendants, and ordering limited jurisdictional discovery with regard to the California claims. In September 2021, the parties reached an agreement that Humana and Centene would file their claims in New Jersey federal court, seek a transfer of those claims to the multidistrict Zetia litigation already in progress, and subsequently dismiss the actions previously filed in California. The parties jointly sought a stay of the Superior Court action, pending filing of the federal action. The Superior Court granted the stay on September 17, 2021.

Also, on July 16, 2021, Humana and Centene filed actions against the Merck Defendants in New Jersey in the Bergen County Superior Court, re-asserting the claims that were dismissed in their California action. Those complaints have not yet been served, and Humana and Centene have agreed to dismiss those actions once they have filed their complaints in New Jersey federal court.

In June 2021, Kaiser Foundation Health Plan, Inc. similarly filed a lawsuit in the Superior Court of the State of California, County of San Francisco, against the same defendants as Humana and Centene. The Kaiser lawsuit alleges similar anticompetitive acts to those alleged in the Zetia class action. The Kaiser action was removed to the U.S. District Court for the Northern District of California on July 16, 2021. In September 2021, the U.S. Judicial Panel on Multidistrict Litigation transferred the case to the Eastern District of Virginia to proceed with the multidistrict Zetia litigation already in progress.

Patent Litigation

From time to time, generic manufacturers of pharmaceutical products file abbreviated New Drug Applications (NDAs) with the 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. 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 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 acquisitions, potentially significant intangible asset impairment charges.

Bridion — Between January and ~~March~~November 2020, the Company received multiple Paragraph IV Certification Letters under the Hatch-Waxman Act notifying the Company that generic drug companies have filed applications to the FDA seeking pre-patent expiry approval to sell generic versions of Bridion (sugammadex) Injection. In March, April and ~~April~~December 2020, the Company filed patent infringement lawsuits in the U.S. District Courts for the District of New Jersey and the Northern District of West Virginia against those generic companies. All actions in the District of New Jersey have been consolidated. These lawsuits, which assert one or more patents covering sugammadex and methods of using sugammadex, automatically stay FDA approval of the generic applications until June 2023 or until adverse court decisions, if any, whichever may occur earlier.

Mylan Pharmaceuticals Inc., Mylan API US LLC, and Mylan Inc. (Mylan) have filed motions to dismiss in the District of New Jersey for lack of venue and failure to state a claim against certain defendants, and in the Northern District of West Virginia for failure to state a claim against certain defendants. The New Jersey motion has not yet been decided, and the West Virginia action is stayed pending resolution of the New Jersey motion. ~~All New Jersey actions against all defendants have been consolidated.~~

- 25 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

The Company has settled with 3 generic companies providing that these generic companies can bring their generic versions of Bridion to the market in January 2026 (which may be delayed by any applicable pediatric exclusivity) or earlier under certain circumstances.

Januvia, Janumet, Janumet XR — As previously disclosed, the FDA has granted pediatric exclusivity with respect to Januvia, Janumet, and Janumet XR, which provides a further six months of exclusivity in the U.S. beyond the expiration of all patents listed in the FDA’s Orange Book. Adding this exclusivity to the term of the key patent protection extends exclusivity on these products to January 2023. The Company anticipates that sales of Januvia and Janumet in the U.S. will decline significantly after this loss of market exclusivity. However, Januvia, Janumet, and Janumet XR contain sitagliptin phosphate monohydrate and the Company has another patent covering certain phosphate salt and polymorphic forms of sitagliptin (2027 salt/polymorph patent), which, if determined to be valid, would preclude generic manufacturers from making sitagliptin phosphate salt and polymorphic forms until 2027 with the expiration of that patent, plus pediatric exclusivity. In ~~February~~ 2019, Par Pharmaceutical filed suit against the Company in the U.S. District Court for the District of New Jersey, seeking a declaratory judgment of invalidity of ~~a patent owned by~~ the ~~Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026.~~2027 salt/polymorph patent. In response, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Par Pharmaceutical and additional companies that also indicated an intent to market generic versions of Januvia, Janumet, and Janumet XR following expiration of key patent protection, ~~in 2022,~~ but prior to the expiration of the ~~later-granted patent owned by the Company covering certain salt and polymorphic forms of sitagliptin that expires in 2026 (2026~~2027 salt/polymorph ~~patent),~~patent, and a later granted patent owned by the Company covering the Janumet formulation ~~which expires~~where its term plus the pediatric exclusivity ends in ~~2028. Par Pharmaceutical dismissed its case in the U.S. District Court for the District of New Jersey against the~~2029. The Company ~~and will litigate the action in the U.S. District Court for the District of Delaware. The Company~~also filed a patent infringement lawsuit against Mylan in the Northern District of West Virginia. The Judicial Panel ofon Multidistrict Litigation entered an order transferring the Company’s lawsuit against Mylan to the U.S. District Court for the District of Delaware for coordinated and consolidated pretrial proceedings with the other cases pending in that district. ~~The~~

Prior to the beginning of the October 2021 trial in the U.S. District Court for the District of Delaware ~~has scheduled the lawsuits for a single three-day trial~~ on invalidity issues, the Company settled with all defendants scheduled to participate in ~~October 2021. The Court will schedule separate one-day trials on infringement issues if necessary.~~that trial. In the Company’s case against Mylan, the U.S. District Court for the Northern District of West Virginia has ~~conditionally~~ scheduled a ~~three-day~~five-day bench trial in December ~~2021 on all issues.~~ 2021.

In ~~February 2020,~~total, the Company amended its complaint against one defendant, Teva Pharmaceuticals USA, Inc., to add patent infringement claims related to a patent that expires in 2025 and covers certain processes for manufacturing sitagliptin. In July 2020, the Company amended its complaints against two defendants, Teva Pharmaceuticals USA, Inc. and Watson Laboratories, Inc., to add patent infringement claims related to a patent that also expires in 2026 and covers certain amorphous forms of sitagliptin.

~~The~~ Company has settled with 516 generic companies ~~such~~providing that these generic companies can bring their ~~products~~generic versions of Januvia and Janumet to the market in ~~November~~May 2026 or earlier under certain circumstances, and their generic versions of Janumet XR to the market in July 2026 or earlier under certain circumstances.

~~In October~~Additionally, in 2019, Mylan filed a petition for Inter Partes Review (IPR) at the ~~United States~~U.S. Patent and Trademark Office (USPTO) seeking invalidity of some, but not all, of the claims of the ~~2026~~2027 salt/polymorph patent. The USPTO instituted IPR proceedings in May 2020, finding a reasonable likelihood that the challenged claims are not valid. A trial ~~is scheduled for~~was held in February 2021 and a final decision ~~is expected~~was rendered in May ~~2021. After institution, 3 additional IPR petitions~~2021, holding that all of the challenged claims were not invalid. Mylan has appealed the USPTO’s decision to the U.S. Court of Appeals for the Federal Circuit.

On March 1, 2021, the Company filed ~~by Teva~~a patent infringement lawsuit in the U.S. District Court for the District of Delaware against Zydus Worldwide DMCC, Zydus Pharmaceuticals ~~USA, Inc., Dr. Reddy’s Laboratories,~~(USA) Inc., and ~~Sun Pharmaceutical Industries~~Cadila Healthcare Ltd.~~, as well as related entities, which requested joinder with Mylan’s IPR proceedings. If~~ (collectively, Zydus).In that lawsuit, the ~~challenges are successful, the unchallenged claims~~Company alleged infringement of the ~~2026~~2027 salt/polymorph patent ~~will remain valid, subject to~~based on the ~~court proceedings described above.~~

~~- 24 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~filing of Zydus’s application seeking approval under 21 U.S.C. § 355(b)(2) of its sitagliptin tablets. ~~(continued)~~

The U.S. District Court for the District of Delaware has set a three-day bench trial in this matter beginning on October 31, 2022.

In Germany, ~~two~~ generic companies have sought the revocation of the Supplementary Protection Certificate (SPC) for Janumet. If the generic companies are successful, Janumet could lose market exclusivity in Germany at the same time as ~~early as July~~the expiry of Januvia pediatric market exclusivity in September 2022. A hearing was held in June 2021 and the court decided that the SPC for Janumet is invalid, which decision the Company has appealed. Challenges to the Janumet SPC have also occurred in the following European countries: Austria, Czech Republic, Finland, France, Hungary, Italy, Portugal, Romania, Slovakia, and ~~Finland, and could occur in other European countries.~~Sweden.

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 condition, 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

- 26 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

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 September 30, ~~2020~~2021 and December 31, ~~2019~~2020 of approximately ~~$255~~$225 million and ~~$240~~$235 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.

10. Equity


		Three Months Ended September 30,																	Three Months Ended September 30,
		Common Stock			Other Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Non- controlling Interests		Total			Common Stock			Other Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Non- controlling Interests		Total
($ and shares in millions except per share amounts)	($ and shares in millions except per share amounts)	Shares	Par Value								Shares	Cost						($ and shares in millions except per share amounts)	Shares	Par Value								Shares	Cost
Balance at July 1, 2019		3,577	$	1,788	$	39,484	$	45,295	$	(5,362)	1,010	$	(53,570)	$	102	$	27,737
Net income attributable to Merck & Co., Inc.		—	—		—		1,901		—		—	—		—		1,901
Other comprehensive loss, net of taxes		—	—		—		—		(28)		—	—		—		(28)
Cash dividends declared on common stock ($0.55 per share)		—	—		—		(1,392)		—		—	—		—		(1,392)
Treasury stock shares purchased		—	—		—		—		—		17	(1,405)		—		(1,405)
Share-based compensation plans and other		—	—		77		—		—		(1)	50		—		127
Net income attributable to noncontrolling interests		—	—		—		—		—		—	—		6		6
Distributions attributable to noncontrolling interests		—	—		—		—		—		—	—		(21)		(21)
Balance at September 30, 2019		3,577	$	1,788	$	39,561	$	45,804	$	(5,390)	1,026	$	(54,925)	$	87	$	26,925
Balance at July 1, 2020	Balance at July 1, 2020	3,577	$	1,788	$	39,373	$	49,724	$	(6,393)	1,048	$	(56,850)	$	102	$	27,744	Balance at July 1, 2020	3,577	$	1,788	$	39,373	$	49,724	$	(6,393)	1,048	$	(56,850)	$	102	$	27,744
Net income attributable to Merck & Co., Inc.	Net income attributable to Merck & Co., Inc.	—	—		—		2,941		—		—	—		—		2,941		Net income attributable to Merck & Co., Inc.	—	—		—		2,941		—		—	—		—		2,941
Other comprehensive income, net of taxes	Other comprehensive income, net of taxes	—	—		—		—		10		—	—		—		10		Other comprehensive income, net of taxes	—	—		—		—		10		—	—		—		10
Cash dividends declared on common stock ($0.61 per share)	Cash dividends declared on common stock ($0.61 per share)	—	—		—		(1,558)		—		—	—		—		(1,558)		Cash dividends declared on common stock ($0.61 per share)	—	—		—		(1,558)		—		—	—		—		(1,558)
Share-based compensation plans and other	Share-based compensation plans and other	—	—		116		—		—		(1)	35		—		151		Share-based compensation plans and other	—	—		116		—		—		(1)	35		—		151
Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	—	—		—		—		—		—	—		4		4		Net income attributable to noncontrolling interests	—	—		—		—		—		—	—		4		4
Distributions attributable to noncontrolling interests	Distributions attributable to noncontrolling interests	—	—		—		—		—		—	—		(22)		(22)		Distributions attributable to noncontrolling interests	—	—		—		—		—		—	—		(22)		(22)
Balance at September 30, 2020	Balance at September 30, 2020	3,577	$	1,788	$	39,489	$	51,107	$	(6,383)	1,047	$	(56,815)	$	84	$	29,270	Balance at September 30, 2020	3,577	$	1,788	$	39,489	$	51,107	$	(6,383)	1,047	$	(56,815)	$	84	$	29,270
Balance at July 1, 2021																		Balance at July 1, 2021	3,577	$	1,788	$	44,039	$	48,777	$	(4,628)	1,044	$	(56,682)	$	94	$	33,388
Net income attributable to Merck & Co., Inc.																		Net income attributable to Merck & Co., Inc.	—	—		—		4,567		—		—	—		—		4,567
Other comprehensive income, net of taxes																		Other comprehensive income, net of taxes	—	—		—		—		38		—	—		—		38
Cash dividends declared on common stock ($0.65 per share)																		Cash dividends declared on common stock ($0.65 per share)	—	—		—		(1,653)		—		—	—		—		(1,653)
Treasury stock shares purchased																		Treasury stock shares purchased	—	—		—		—		—		8	(583)		—		(583)
Share-based compensation plans and other																		Share-based compensation plans and other	—	—		110		—		—		—	21		—		131
Net income attributable to noncontrolling interests																		Net income attributable to noncontrolling interests	—	—		—		—		—		—	—		4		4
Distributions attributable to noncontrolling interests																		Distributions attributable to noncontrolling interests	—	—		—		—		—		—	—		(29)		(29)
Balance at September 30, 2021																		Balance at September 30, 2021	3,577	1,788		44,149		51,691		(4,590)		1,052	(57,244)		69		35,863

- 2527 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)


		Nine Months Ended September 30,																	Nine Months Ended September 30,
		Common Stock			Other Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Non- controlling Interests		Total			Common Stock			Other Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Non- controlling Interests		Total
($ and shares in millions except per share amounts)	($ and shares in millions except per share amounts)	Shares	Par Value								Shares	Cost						($ and shares in millions except per share amounts)	Shares	Par Value								Shares	Cost
Balance at January 1, 2019		3,577	$	1,788	$	38,808	$	42,579	$	(5,545)	985	$	(50,929)	$	181	$	26,882
Net income attributable to Merck & Co., Inc.		—	—		—		7,487		—		—	—		—		7,487
Other comprehensive income, net of taxes		—	—		—		—		155		—	—		—		155
Cash dividends declared on common stock ($1.65 per share)		—	—		—		(4,262)		—		—	—		—		(4,262)
Treasury stock shares purchased		—	—		1,000		—		—		54	(4,730)		—		(3,730)
Share-based compensation plans and other		—	—		(247)		—		—		(13)	734		—		487
Net loss attributable to noncontrolling interests		—	—		—		—		—		—	—		(73)		(73)
Distributions attributable to noncontrolling interests		—	—		—		—		—		—	—		(21)		(21)
Balance at September 30, 2019		3,577	1,788		39,561		45,804		(5,390)		1,026	(54,925)		87		26,925
Balance at January 1, 2020	Balance at January 1, 2020	3,577	$	1,788	$	39,660	$	46,602	$	(6,193)	1,038	$	(55,950)	$	94	$	26,001	Balance at January 1, 2020	3,577	$	1,788	$	39,660	$	46,602	$	(6,193)	1,038	$	(55,950)	$	94	$	26,001
Net income attributable to Merck & Co., Inc.	Net income attributable to Merck & Co., Inc.	—	—		—		9,161		—		—	—		—		9,161		Net income attributable to Merck & Co., Inc.	—	—		—		9,161		—		—	—		—		9,161
Other comprehensive loss, net of taxes	Other comprehensive loss, net of taxes	—	—		—		—		(190)		—	—		—		(190)		Other comprehensive loss, net of taxes	—	—		—		—		(190)		—	—		—		(190)
Cash dividends declared on common stock ($1.83 per share)	Cash dividends declared on common stock ($1.83 per share)	—	—		—		(4,656)		—		—	—		—		(4,656)		Cash dividends declared on common stock ($1.83 per share)	—	—		—		(4,656)		—		—	—		—		(4,656)
Treasury stock shares purchased	Treasury stock shares purchased	—	—		—		—		—		16	(1,281)		—		(1,281)		Treasury stock shares purchased	—	—		—		—		—		16	(1,281)		—		(1,281)
Share-based compensation plans and other	Share-based compensation plans and other	—	—		(171)		—		—		(7)	416		—		245		Share-based compensation plans and other	—	—		(171)		—		—		(7)	416		—		245
Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	—	—		—		—		—		—	—		12		12		Net income attributable to noncontrolling interests	—	—		—		—		—		—	—		12		12
Distributions attributable to noncontrolling interests	Distributions attributable to noncontrolling interests	—	—		—		—		—		—	—		(22)		(22)		Distributions attributable to noncontrolling interests	—	—		—		—		—		—	—		(22)		(22)
Balance at September 30, 2020	Balance at September 30, 2020	3,577	$	1,788	$	39,489	$	51,107	$	(6,383)	1,047	$	(56,815)	$	84	$	29,270	Balance at September 30, 2020	3,577	1,788		39,489		51,107		(6,383)		1,047	(56,815)		84		29,270
Balance at January 1, 2021																		Balance at January 1, 2021	3,577	$	1,788	$	39,588	$	47,362	$	(6,634)	1,047	$	(56,787)	$	87	$	25,404
Net income attributable to Merck & Co., Inc.																		Net income attributable to Merck & Co., Inc.	—	—		—		9,291		—		—	—		—		9,291
Other comprehensive income, net of taxes																		Other comprehensive income, net of taxes	—	—		—		—		1,595		—	—		—		1,595
Cash dividends declared on common stock ($1.95 per share)																		Cash dividends declared on common stock ($1.95 per share)	—	—		—		(4,962)		—		—	—		—		(4,962)
Treasury stock shares purchased																		Treasury stock shares purchased	—	—		—		—		—		11	(822)		—		(822)
Spin-off of Organon & Co.																		Spin-off of Organon & Co.	—	—		4,643		—		449		—	—		(1)		5,091
Share-based compensation plans and other																		Share-based compensation plans and other	—	—		(82)		—		—		(6)	365		—		283
Net income attributable to noncontrolling interests																		Net income attributable to noncontrolling interests	—	—		—		—		—		—	—		12		12
Distributions attributable to noncontrolling interests																		Distributions attributable to noncontrolling interests	—	—		—		—		—		—	—		(29)		(29)
Balance at September 30, 2021																		Balance at September 30, 2021	3,577	1,788		44,149		51,691		(4,590)		1,052	(57,244)		69		35,863

11. ~~Share-Based Compensation Plans~~

~~The following table provides the amounts of share-based compensation cost recorded in the Condensed Consolidated Statement of Income:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2020 2019 2020 2019
Pretax share-based compensation expense $ 126 $ 101 $ 354 $ 306
Income tax benefit (17) (14) (48) (42)
Total share-based compensation expense, net of taxes $ 109 $ 87 $ 306 $ 264

~~During the first nine months of 2020, the Company granted 7 million RSUs with a weighted-average grant date fair value of $77.83 per RSU and during the first nine~~months of 2019 granted 5 million RSUs with a weighted-average grant date fair value of $80.03 per RSU. During the first nine months of 2020, the Company granted 773 thousand PSUs with a weighted-average grant date fair value of $75.22 per PSU and during the first nine~~months of 2019 granted 609 thousand PSUs with a weighted-average grant date fair value of $90.50 per PSU.~~

During the first nine months of 2020, the Company granted 4 million stock options with a weighted-average exercise price of $77.67 per option and during the first nine months of 2019 granted 3 million stock options with a weighted-average exercise price of $80.05 per option. The weighted-average fair value of options granted during the first nine months of 2020 and 2019 was $9.93 and $10.63 per option, respectively, and was determined using the following assumptions:

~~- 26 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

Nine Months Ended
September 30,
2020 2019
Expected dividend yield 3.1 % 3.2 %
Risk-free interest rate 0.4 % 2.4 %
Expected volatility 22.1 % 18.7 %
Expected life (years) 5.8 5.9

At September 30, 2020, there was $800 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 2.1 years. For segment reporting, share-based compensation costs are unallocated expenses.

~~12.~~ Pension and Other Postretirement Benefit Plans

The Company has defined benefit pension plans covering eligible employees in the ~~United States~~U.S. and in certain of its international subsidiaries. The net periodic benefit cost of such plans (including certain costs reported as part of discontinued operations) consisted of the following components:


		Three Months Ended September 30,								Nine Months Ended September 30,									Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019					2021				2020				2021				2020
($ in millions)	($ in millions)	U.S.		International		U.S.		International		U.S.		International		U.S.		International		($ in millions)	U.S.		International		U.S.		International		U.S.		International		U.S.		International
Service cost	Service cost	$	96	$	77	$	76	$	58	$	270	$	225	$	221	$	178	Service cost	$	104	$	75	$	96	$	76	$	302	$	254	$	270	$	222
Interest cost	Interest cost	107		35		115		44		323		103		343		133		Interest cost	102		33		107		35		305		92		323		102
Expected return on plan assets	Expected return on plan assets	(193)		(104)		(202)		(106)		(581)		(310)		(613)		(320)		Expected return on plan assets	(188)		(105)		(193)		(104)		(568)		(313)		(581)		(309)
Amortization of unrecognized prior service credit	Amortization of unrecognized prior service credit	(12)		(3)		(12)		(3)		(37)		(9)		(37)		(9)		Amortization of unrecognized prior service credit	(9)		(3)		(12)		(3)		(29)		(12)		(37)		(9)
Net loss amortization	Net loss amortization	75		32		43		16		228		94		113		47		Net loss amortization	75		32		75		32		218		110		228		94
Termination benefits	Termination benefits	1		1		3		0		5		2		7		1		Termination benefits	2		—		1		1		54		3		5		2
Curtailments	Curtailments	1		0		5		0		4		(1)		6		0		Curtailments	(1)		—		1		—		15		(27)		4		(1)
Settlements	Settlements	2		0		0		0		11		2		0		0		Settlements	139		—		2		—		139		2		11		2
		$	77	$	38	$	28	$	9	$	223	$	106	$	40	$	30		$	224	$	32	$	77	$	37	$	436	$	109	$	223	$	103

~~The Company anticipates that in 2020 it will contribute approximately $200 million and $375 million~~

- 28 -

Notes to ~~its U.S. and international pension plans, respectively, of which $184 million and $123 million, respectively, was contributed in the first nine months of the year.~~Condensed Consolidated Financial Statements (unaudited) (continued)

The Company provides medical benefits, principally to its eligible U.S. retirees and similar benefits to their dependents, through its other postretirement benefit plans. The net credit of such plans consisted of the following components:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020
Service cost	Service cost	$	13	$	12	$	39	$	36	Service cost	$	11	$	13	$	37	$	39
Interest cost	Interest cost	14		17		43		52		Interest cost	12		14		34		43
Expected return on plan assets	Expected return on plan assets	(19)		(18)		(56)		(54)		Expected return on plan assets	(20)		(19)		(59)		(56)
Amortization of unrecognized prior service credit	Amortization of unrecognized prior service credit	(18)		(20)		(54)		(59)		Amortization of unrecognized prior service credit	(16)		(18)		(48)		(54)
Net gain amortization	Net gain amortization	(5)		(3)		(13)		(7)		Net gain amortization	(12)		(5)		(30)		(13)
Termination benefits	Termination benefits	0		1		0		1		Termination benefits	—		—		37		—
Curtailments	Curtailments	0		(3)		(1)		(4)		Curtailments	(1)		—		(29)		(1)
		$	(15)	$	(14)	$	(42)	$	(35)		$	(26)	$	(15)	$	(58)	$	(42)

Net periodic benefit cost (credit) for pension and other postretirement benefit plans in the first nine months of 2021 includes expenses for curtailments, settlements and termination benefits provided to certain employees in connection with the spin-off of Organon.

In connection with restructuring actions (see Note 4)5), termination charges were recorded on pension plans related to expanded eligibility for certain employees ~~exiting~~exiting Merck. Also, in connection with these restructuring actions, curtailments ~~were recorded on pension and other postretirement benefit plans~~ and settlements were recorded on ~~certain~~pension plans. In addition, lump sum payments to U.S. ~~and international~~ pension ~~plans as reflected~~plan participants triggered a partial settlement resulting in a charge of approximately $125 million in the ~~tables above.~~third quarter and first nine months of 2021. This partial settlement triggered a remeasurement of some of the Company’s U.S. pension plans. This remeasurement, which was calculated using discount rates and asset values as of September 30, 2021, resulted in a net increase of $160 million to net pension liabilities and also resulted in a related adjustment to AOCL.

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note ~~13)~~12), with the exception of certain amounts for termination benefits, curtailments and

~~- 27 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions or in Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests if related to the spin-off of Organon (each as noted ~~above.~~above).

The transfer of employees to Organon in connection with the spin-off triggered remeasurements of some of the Company’s pension plans. These remeasurements, which were calculated using discount rates and asset values as of the date of the spin-off, resulted in a $1.7 billion reduction to net pension liabilities primarily due to higher discount rates. In addition, $99 million of net pension liabilities were transferred to Organon. The remeasurements and plan transfers also resulted in a related adjustment to AOCL (see Note 15).

~~13.~~12. Other (Income) Expense, Net

Other (income) expense, net, consisted of:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020
Interest income	Interest income	$	(9)	$	(61)	$	(48)	$	(225)	Interest income	$	(7)	$	(9)	$	(27)	$	(48)
Interest expense	Interest expense	203		231		624		674		Interest expense	196		203		597		624
Exchange losses	Exchange losses	10		38		89		166		Exchange losses	46		10		202		89
Income from investments in equity securities, net (1)	Income from investments in equity securities, net (1)	(360)		(16)		(964)		(50)		Income from investments in equity securities, net (1)	(683)		(360)		(1,535)		(964)
Net periodic defined benefit plan (credit) cost other than service cost		(88)		(128)		(259)		(409)
Net periodic defined benefit plan cost (credit) other than service cost										Net periodic defined benefit plan cost (credit) other than service cost	40		(88)		(159)		(259)
Other, net	Other, net	(68)		(29)		(72)		206		Other, net	(42)		(68)		(85)		(79)
		$	(312)	$	35	$	(630)	$	362		$	(450)	$	(312)	$	(1,007)	$	(637)

(1) Includes net realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds. Unrealized gains and losses from investments that are directly owned are determined at the end of the reporting period, while ownership interests in investment funds are accounted for on a one quarter lag.

The ~~decline in interest income~~Company estimates that gains of approximately $540 million will be recorded in the ~~third~~fourth quarter ~~and first nine months~~ of ~~2020 reflects lower investments and lower interest rates. The lower exchange losses~~2021 from ownership interests in the first nine months of 2020 reflect losses on forward exchange contracts in 2019 related to the acquisition of Antelliq. The increase in income from investments in equity securities, net, in both the third quarter and first nine months of 2020 was driven primarily by the recognition of unrealized gains on certain investments, most of which relate to Moderna, Inc.

~~Other, net (as reflected in the table above) in the first nine months of 2019 includes $162 million of goodwill impairment charges related to certain businesses in the Healthcare Services segment.~~investment funds.

Interest paid for the nine months ended September 30, 2021 and 2020 was $570 million and ~~2019 was~~ $605 million, ~~and $629 million,~~ respectively.

- 29 -

~~14.~~

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

13. Taxes on Income

The effective income tax rates ~~of 14.1%~~from continuing operations were 13.2% and ~~18.7%~~14.0% for the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~14.9%~~14.4% and ~~14.5%~~15.1% for the first nine months of 2021 and 2020, ~~and 2019, respectively, reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings.~~respectively. The effective ~~income~~ tax rates from continuing operations in the third quarter and first nine months of ~~2019 also~~2021 reflect the beneficial impact of the settlement of a foreign tax matter. The effective income tax rate from continuing operations for the first nine months of 2021 reflects the unfavorable ~~impact~~effect of a charge for the acquisition of ~~Peloton~~Pandion for which no tax benefit was recognized, ~~and the favorable impact of product mix on the estimated 2019 full-year tax rate. In addition, the effective income tax rate for the first nine months of 2019 reflects the favorable impact of~~as well as a ~~$360 million~~ net tax benefit of $207 million related to the settlement of certain federal income tax ~~matters.~~matters as discussed below.

In the first quarter of ~~2019,~~2021, the Internal Revenue Service (IRS) concluded its examinations of Merck’s ~~2012-2014~~2015-2016 U.S. federal income tax returns. As a result, the Company was required to make a payment of ~~$107 million.~~$190 million (of which $172 million related to Merck continuing operations and $18 million related to Organon discontinued operations). The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a ~~$360~~$236 million net tax benefit in the first nine months of ~~2019.~~2021 (of which $207 million related to Merck continuing operations and $29 million related to Organon discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under ~~examination, partially offset by additional reserves for tax positions not previously reserved for.~~examination.

~~- 28 -~~

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

~~15.~~14. Earnings Per Share

The calculations of earnings per share are as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ and shares in millions except per share amounts)	($ and shares in millions except per share amounts)	2020		2019		2020		2019		($ and shares in millions except per share amounts)	2021		2020		2021		2020
Net income attributable to Merck & Co., Inc.		$	2,941	$	1,901	$	9,161	$	7,487
Net Income from Continuing Operations Attributable to Merck & Co., Inc.										Net Income from Continuing Operations Attributable to Merck & Co., Inc.	$	4,567	$	2,324	$	8,525	$	7,136
Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests										Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests	—		617		766		2,025
Net Income Attributable to Merck & Co., Inc.										Net Income Attributable to Merck & Co., Inc.	$	4,567	$	2,941	$	9,291	$	9,161
Average common shares outstanding	Average common shares outstanding	2,529		2,558		2,530		2,572		Average common shares outstanding	2,530		2,529		2,531		2,530
Common shares issuable (1)	Common shares issuable (1)	9		14		11		15		Common shares issuable (1)	6		9		8		11
Average common shares outstanding assuming dilution	Average common shares outstanding assuming dilution	2,538		2,572		2,541		2,587		Average common shares outstanding assuming dilution	2,536		2,538		2,539		2,541
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders		$	1.16	$	0.74	$	3.62	$	2.91
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders		$	1.16	$	0.74	$	3.61	$	2.89
Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders:										Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations										Income from Continuing Operations	$	1.81	$	0.92	$	3.37	$	2.82
Income from Discontinued Operations										Income from Discontinued Operations	—		0.24		0.30		0.80
Net Income										Net Income	$	1.81	$	1.16	$	3.67	$	3.62
Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders:										Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders:
Income from Continuing Operations										Income from Continuing Operations	$	1.80	$	0.92	$	3.36	$	2.81
Income from Discontinued Operations										Income from Discontinued Operations	—		0.24		0.30		0.80
Net Income										Net Income	$	1.80	$	1.16	$	3.66	$	3.61

(1)Issuable primarily under share-based compensation plans.

For the third quarter of 2021 and 2020, ~~and 2019, 5~~8 million and 35 million, respectively, and for the first nine months of 2021 and 2020, ~~and 2019, 5~~10 million and 25 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.

~~16. Other Comprehensive Income (Loss)~~

~~Changes in~~
~~AOCI~~ ~~by component are as follows:~~

Three Months Ended September 30,
($ in millions) Derivatives Investments Employee
Benefit
Plans Cumulative
Translation
Adjustment Accumulated Other
Comprehensive
Income (Loss)
Balance July 1, 2019, net of taxes $ 66 $ 48 $ (3,530) $ (1,946) $ (5,362)
Other comprehensive income (loss) before reclassification adjustments, pretax 186 8 (4) (84) 106
Tax (39) 0 0 (33) (72)
Other comprehensive income (loss) before reclassification adjustments, net of taxes 147 8 (4) (117) 34
Reclassification adjustments, pretax (71) (1) (25) (2) 21 (3) 0 (75)
Tax 15 0 (2) 0 13
Reclassification adjustments, net of taxes (56)

(25)

19

0 (62)
Other comprehensive income (loss), net of taxes 91 (17) 15 (117) (28)
Balance September 30, 2019, net of taxes $ 157 $ 31 $ (3,515) $ (2,063) $ (5,390)
Balance July 1, 2020, net of taxes $ 15 $ 0 $ (4,162) $ (2,246) $ (6,393)
Other comprehensive income (loss) before reclassification adjustments, pretax (195) 0 2 50 (143)
Tax 41 0 1 35 77
Other comprehensive income (loss) before reclassification adjustments, net of taxes (154) 0 3 85 (66)
Reclassification adjustments, pretax 22 (1) 0 72 (3) 0 94
Tax (5) 0 (13) 0 (18)
Reclassification adjustments, net of taxes 17

0

59

0 76
Other comprehensive income (loss), net of taxes (137) 0 62 85 10
Balance September 30, 2020, net of taxes $ (122) $ 0 $ (4,100) $ (2,161) $ (6,383)

- 2930 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Nine Months Ended September 30,
($ in millions) Derivatives Investments Employee
Benefit
Plans Cumulative
Translation
Adjustment Accumulated Other
Comprehensive
Income (Loss)
Balance January 1, 2019, net of taxes $ 166 $ (78) $ (3,556) $ (2,077) $ (5,545)
Other comprehensive income (loss) before reclassification adjustments, pretax 183 139 (5) 47 364
Tax (38) 0 6 (33) (65)
Other comprehensive income (loss) before reclassification adjustments, net of taxes 145 139 1 14 299
Reclassification adjustments, pretax (195) (1) (30) (2) 49 (3) 0 (176)
Tax 41 0 (9) 0 32
Reclassification adjustments, net of taxes (154) (30) 40 0 (144)
Other comprehensive income (loss), net of taxes (9) 109 41 14 155
Balance September 30, 2019, net of taxes $ 157 $ 31 $ (3,515) $ (2,063) $ (5,390)
Balance January 1, 2020, net of taxes $ 31 $ 18 $ (4,261) $ (1,981) $ (6,193)
Other comprehensive income (loss) before reclassification adjustments, pretax (126) 3 (19) (220) (362)
Tax 27 0 12 40 79
Other comprehensive income (loss) before reclassification adjustments, net of taxes (99) 3 (7) (180) (283)
Reclassification adjustments, pretax (68) (1) (21) (2) 210 (3) 0 121
Tax 14 0 (42) 0 (28)
Reclassification adjustments, net of taxes (54) (21) 168 0 93
Other comprehensive income (loss), net of taxes (153) (18) 161 (180) (190)
Balance September 30, 2020, net of taxes $ (122) $ 0 $ (4,100) $ (2,161) $ (6,383)
15. Other Comprehensive Income (Loss)

Changes in each component of other comprehensive income (loss) are as follows:


	Three Months Ended September 30,
($ in millions)	Derivatives			Investments		Employee Benefit Plans			Foreign Currency Translation Adjustment		Accumulated Other Comprehensive Income (Loss)
Balance July 1, 2020, net of taxes	$	15		$	—	$	(4,162)		$	(2,246)	$	(6,393)
Other comprehensive income (loss) before reclassification adjustments, pretax	(195)			—		2			50		(143)
Tax	41			—		1			35		77
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(154)			—		3			85		(66)
Reclassification adjustments, pretax	22		(1)	—		72		(3)	—		94
Tax	(5)			—		(13)			—		(18)
Reclassification adjustments, net of taxes	17			—		59			—		76
Other comprehensive income (loss), net of taxes	(137)			—		62			85		10
Balance September 30, 2020, net of taxes	$	(122)		$	—	$	(4,100)		$	(2,161)	$	(6,383)
Balance July 1, 2021, net of taxes	$	(26)		$	—	$	(3,028)		$	(1,574)	$	(4,628)
Other comprehensive income (loss) before reclassification adjustments, pretax	72			—		(24)			(96)		(48)
Tax	(16)			—		16			12		12
Other comprehensive income (loss) before reclassification adjustments, net of taxes	56			—		(8)			(84)		(36)
Reclassification adjustments, pretax	36		(1)	—		68		(3)	—		104
Tax	(8)			—		(22)			—		(30)
Reclassification adjustments, net of taxes	28			—		46			—		74
Other comprehensive income (loss), net of taxes	84			—		38			(84)		38
Balance September 30, 2021, net of taxes	$	58		$	—	$	(2,990)		$	(1,658)	$	(4,590)


	Nine Months Ended September 30,
($ in millions)	Derivatives			Investments			Employee Benefit Plans			Foreign Currency Translation Adjustment		Accumulated Other Comprehensive Income (Loss)
Balance January 1, 2020, net of taxes	$	31		$	18		$	(4,261)		$	(1,981)	$	(6,193)
Other comprehensive income (loss) before reclassification adjustments, pretax	(126)			3			(19)			(220)		(362)
Tax	27			—			12			40		79
Other comprehensive income (loss) before reclassification adjustments, net of taxes	(99)			3			(7)			(180)		(283)
Reclassification adjustments, pretax	(68)		(1)	(21)		(2)	210		(3)	—		121
Tax	14			—			(42)			—		(28)
Reclassification adjustments, net of taxes	(54)			(21)			168			—		93
Other comprehensive income (loss), net of taxes	(153)			(18)			161			(180)		(190)
Balance September 30, 2020, net of taxes	$	(122)		$	—		$	(4,100)		$	(2,161)	$	(6,383)
Balance January 1, 2021, net of taxes	$	(266)		$	—		$	(4,540)		$	(1,828)	$	(6,634)
Other comprehensive income (loss) before reclassification adjustments, pretax	193			—			1,739			(167)		1,765
Tax	(41)			—			(385)			(84)		(510)
Other comprehensive income (loss) before reclassification adjustments, net of taxes	152			—			1,354			(251)		1,255
Reclassification adjustments, pretax	218		(1)	—			210		(3)	—		428
Tax	(46)			—			(42)			—		(88)
Reclassification adjustments, net of taxes	172			—			168			—		340
Other comprehensive income (loss), net of taxes	324			—			1,522			(251)		1,595
Spin-off of Organon (see Note 2)	—			—			28			421		449
Balance September 30, 2021, net of taxes	$	58		$	—		$	(2,990)		$	(1,658)	$	(4,590)

(1) ~~Relates~~Primarily relates to foreign currency cash flow hedges that were reclassified from ~~AOCI~~AOCL to Sales.

(2) Represents net realized ~~(gains) losses~~gains on the sales of available-for-sale debt securities that were reclassified from ~~AOCI~~AOCL 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 ~~12)~~11).

- 31 -

~~17.~~

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

16. Segment Reporting

The Company’s operations are principally managed on a products basis and include 32 operating segments, which are the Pharmaceutical ~~Animal Health and Healthcare Services segments. The Pharmaceutical~~ and Animal Health segments, both of which are ~~the only~~ reportable segments.

The Pharmaceutical segment includes human health pharmaceutical and vaccine 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. Human health 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 vaccine 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.

The Animal Health segment discovers, develops, manufactures and markets a wide range of veterinary pharmaceutical and vaccine products, as well as health management solutions and services, for the prevention, treatment and control of disease in all major livestock and companion animal species. The Company also offers an extensive suite of digitally connected identification, traceability and monitoring products. The Company sells its products to veterinarians, distributors and animal producers.

The Company previously had a Healthcare Services segment that provided services and solutions ~~that focus~~focused on engagement, health analytics and clinical services to improve the value of care delivered to patients. The Company ~~has been in~~divested the ~~process of divesting the~~remaining businesses in ~~the Healthcare Services segment. The remaining businesses were divested~~this segment during the first quarter of 2020.

- 3032 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Sales of the Company’s products were as follows:


		Three Months Ended September 30,												Nine Months Ended September 30,																Three Months Ended September 30,																		Nine Months Ended September 30,
		2020						2019						2020						2019										2021									2020									2021									2020
($ in millions)	($ in millions)	U.S.		Int’l		Total		U.S.		Int’l		Total		U.S.		Int’l		Total		U.S.		Int’l				Total		($ in millions)		U.S.			Int’l			Total			U.S.			Int’l			Total			U.S.			Int’l			Total			U.S.			Int’l		Total
Pharmaceutical:	Pharmaceutical:																								Pharmaceutical:
Oncology	Oncology																								Oncology
Keytruda	Keytruda	$	2,157	$	1,559	$	3,715	$	1,743	$	1,327	$	3,070	$	6,106	$	4,281	$	10,387	$	4,525	$	3,448			$	7,973	Keytruda		$	2,580		$	1,954		$	4,534		$	2,157		$	1,559		$	3,715		$	7,108		$	5,501		$	12,609		$	6,106		$	4,281	$	10,387
Alliance revenue - Lynparza (1)	Alliance revenue - Lynparza (1)	107		89		196		71		53		123		297		223		519		186		126				313		Alliance revenue - Lynparza (1)		129			117			246			107			89			196			371			350			721			297			223		519
Alliance revenue - Lenvima (1)	Alliance revenue - Lenvima (1)	82		60		142		65		44		109		270		152		421		169		112				280		Alliance revenue - Lenvima (1)		114			74			188			82			60			142			287			211			498			270			152		421
Emend		8		31		39		42		56		98		18		96		115		173		163				336
Vaccines	Vaccines																								Vaccines
Gardasil/Gardasil 9	Gardasil/Gardasil 9	579		608		1,187		761		558		1,320		1,209		1,732		2,941		1,579		1,464				3,044		Gardasil/Gardasil 9		839			1,154			1,993			579			608			1,187			1,605			2,539			4,144			1,209			1,732		2,941
ProQuad/M-M-R II/Varivax	ProQuad/M-M-R II/Varivax	437		139		576		482		141		623		1,033		356		1,390		1,325		469				1,794		ProQuad/M-M-R II/Varivax		537			125			661			437			139			576			1,255			371			1,626			1,033			356		1,390
Pneumovax 23	Pneumovax 23	276		99		375		179		58		237		478		270		748		428		164				592		Pneumovax 23		181			97			277			276			99			375			354			247			600			478			270		748
RotaTeq	RotaTeq	114		96		210		102		78		180		355		246		601		360		203				564		RotaTeq		135			92			227			114			96			210			364			229			593			355			246		601
Vaqta	Vaqta	32		19		51		36		26		62		79		60		139		103		65				167		Vaqta		32			16			48			32			19			51			80			58			138			79			60		139
Hospital Acute Care	Hospital Acute Care																								Hospital Acute Care
Bridion	Bridion	162		157		320		133		151		284		412		431		843		381		437				817		Bridion		181			188			369			162			157			320			545			551			1,096			412			431		843
Prevymis																								Prevymis	39				57			96			32			46			77			111			159			270			87			113			200
Noxafil	Noxafil	13		66		79		77		100		177		27		220		247		268		291				560		Noxafil		19			45			64			13			66			79			48			149			197			27			220		247
Prevymis		32		46		77		22		23		45		87		113		200		60		55				115
Primaxin	Primaxin	1		73		74		2		75		77		2		187		189		2		204				207		Primaxin		—			69			70			1			73			74			—			194			194			2			187		189
Cancidas																								Cancidas	1				56			56			1			49			50			4			164			168			2			147			148
Invanz	Invanz	1		50		51		(1)		58		57		7		152		159		30		176				206		Invanz		(2)			55			53			1			50			51			(2)			159			157			7			152		159
Cancidas		1		49		50		0		62		62		2		147		148		5		187				191
Cubicin		11		28		39		14		38		52		36		80		116		78		129				207
Zerbaxa	Zerbaxa	20		23		43		20		15		35		57		54		112		45		43				88		Zerbaxa		(1)			(1)			(2)			20			23			43			(5)			(6)			(11)			57			54		112
Immunology	Immunology																								Immunology
Simponi	Simponi	0		209		209		0		203		203		0		615		615		0		625				625		Simponi		—			203			203			—			209			209			—			619			619			—			615		615
Remicade	Remicade	0		82		82		0		101		101		0		242		242		0		322				322		Remicade		—			73			73			—			82			82			—			233			233			—			242		242
Neuroscience	Neuroscience																								Neuroscience
Belsomra	Belsomra	18		63		81		23		57		80		67		177		244		68		155				223		Belsomra		23			58			81			18			63			81			56			183			238			67			177		244
Virology	Virology																								Virology
Isentress/Isentress HD	Isentress/Isentress HD	92		113		205		102		149		250		243		403		646		304		449				752		Isentress/Isentress HD		77			112			189			92			113			205			222			368			590			243			403		646
Zepatier		6		22		28		24		59		83		38		83		122		96		208				304
Cardiovascular	Cardiovascular																								Cardiovascular
Zetia		(1)		103		103		5		142		147		(4)		389		384		11		432				443
Vytorin		3		44		47		5		52		57		9		130		139		11		219				231
Atozet		0		111		111		0		97		97		0		348		348		0		283				283
Alliance revenue - Adempas (2)		78		5		83		48		2		50		200		16		216		137		7				144
Alliance revenue-Adempas/Verquvo (2)																								Alliance revenue-Adempas/Verquvo (2)	73				27			100			78			5			83			222			26			248			200			16			216
Adempas	Adempas	0		55		55		0		57		57		0		167		167		0		158				158		Adempas		—			59			59			—			55			55			—			188			188			—			167		167
Diabetes	Diabetes																								Diabetes
Januvia	Januvia	342		479		821		367		440		807		1,110		1,339		2,449		1,223		1,317				2,539		Januvia		365			487			852			342			479			821			997			1,448			2,445			1,110			1,339		2,449
Janumet	Janumet	105		400		506		129		375		503		361		1,138		1,499		462		1,105				1,567		Janumet		86			401			487			105			400			506			244			1,205			1,449			361			1,138		1,499
Women’s Health
Implanon/Nexplanon		137		52		189		136		62		199		374		142		515		421		160				581
NuvaRing		24		34		58		202		39		241		85		98		184		593		107				700
Diversified Brands
Singulair		4		78		82		11		140		152		14		324		338		24		479				503
Cozaar/Hyzaar		5		86		91		6		110		116		17		275		292		16		313				329
Arcoxia		0		68		68		0		72		72		0		204		204		0		221				221
Nasonex		0		41		41		4		55		58		9		152		161		2		224				226
Follistim AQ		20		31		50		27		35		62		60		76		136		80		102				182
Other pharmaceutical (3)	Other pharmaceutical (3)	352		834		1,186		343		804		1,149		1,144		2,334		3,478		1,037		2,394				3,431		Other pharmaceutical (3)		262			308			572			193			333			526			745			957			1,704			706			969		1,675
Total Pharmaceutical segment sales	Total Pharmaceutical segment sales	5,218		6,102		11,320		5,180		5,914		11,095		14,202		17,452		31,654		14,202		17,016				31,218		Total Pharmaceutical segment sales		5,670			5,826			11,496			4,842			4,872			9,714			14,611			16,103			30,714			13,108			13,690		26,797
Animal Health:	Animal Health:																								Animal Health:
Livestock	Livestock	164		594		758		144		582		726		448		1,697		2,145		406		1,601				2,007		Livestock		190			675			864			165			593			758			508			1,996			2,503			448			1,697		2,145
Companion Animals	Companion Animals	234		228		462		193		203		396		676		714		1,390		560		704				1,264		Companion Animals		277			276			553			234			228			462			855			948			1,804			676			714		1,390
Total Animal Health segment sales	Total Animal Health segment sales	398		822		1,220		337		785		1,122		1,124		2,411		3,535		966		2,305				3,271		Total Animal Health segment sales		467			951			1,417			399			821			1,220			1,363			2,944			4,307			1,124			2,411		3,535
Other segment sales (4)	Other segment sales (4)	0		0		0		46		0		46		23		0		23		133		1				133		Other segment sales (4)		—			—			—			—			—			—			—			—			—			23			—		23
Total segment sales	Total segment sales	5,616		6,924		12,540		5,563		6,699		12,263		15,349		19,863		35,212		15,301		19,322				34,622		Total segment sales		6,137			6,777			12,913			5,241			5,693			10,934			15,974			19,047			35,021			14,255			16,101		30,355
Other (5)	Other (5)	9		2		11		10		125		134		47		221		267		19		330				350		Other (5)		139			101			241			9			(14)			(5)			192			(30)			162			46			168		215
		$	5,625	$	6,926	$	12,551	$	5,573	$	6,824	$	12,397	$	15,396	$	20,084	$	35,479	$	15,320	$	19,652			$	34,972			$	6,276		$	6,878		$	13,154		$	5,250		$	5,679		$	10,929		$	16,166		$	19,017		$	35,183		$	14,301		$	16,269	$	30,570

U.S. plus international may not equal total due to rounding.

(1) Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 3)4).

(2) Alliance revenue represents Merck’s share of profits from sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 3)4).

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

(4) Represents sales for the Healthcare Services segment. All the businesses in the Healthcare Services segment were fully divested asin the first quarter of ~~March 31,~~ 2020.

(5) Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other for the three and nine months ended September 30, 2021 also includes $135 million and $185 million, respectively, related to the achievement of milestones for an out-licensed product that triggered contingent payments to Merck.

- 3133 -

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

Product sales are recorded net of the provision for discounts, including chargebacks, which are customer discounts that occur when a contracted customer purchases through an intermediary wholesale purchaser, and rebates that are 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. These discounts, in the aggregate, reduced U.S. sales by ~~$3.4~~$3.1 billion and ~~$3.0~~$2.9 billion for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$9.6~~$9.1 billion and ~~$8.6~~$8.3 billion for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Consolidated sales by geographic area where derived are as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020
United States	United States	$	5,625	$	5,573	$	15,396	$	15,320	United States	$	6,276	$	5,250	$	16,166	$	14,301
Europe, Middle East and Africa	Europe, Middle East and Africa	3,454		3,189		10,059		9,452		Europe, Middle East and Africa	3,342		2,946		9,912		8,537
China	China	1,016		914		2,715		2,423		China	1,307		791		3,004		2,060
Japan	Japan	828		919		2,506		2,639		Japan	638		671		1,929		1,875
Asia Pacific (other than China and Japan)	Asia Pacific (other than China and Japan)	735		756		2,129		2,217		Asia Pacific (other than China and Japan)	613		545		1,782		1,560
Latin America	Latin America	604		671		1,670		1,889		Latin America	599		499		1,631		1,374
Other	Other	289		375		1,004		1,032		Other	379		227		759		863
		$	12,551	$	12,397	$	35,479	$	34,972		$	13,154	$	10,929	$	35,183	$	30,570

A reconciliation of segment profits to Income ~~before taxes~~from Continuing Operations Before Taxes is as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020
Segment profits:	Segment profits:									Segment profits:
Pharmaceutical segment	Pharmaceutical segment	$	7,974	$	7,747	$	22,010	$	21,437	Pharmaceutical segment	$	8,606	$	7,026	$	22,450	$	19,235
Animal Health segment	Animal Health segment	451		423		1,336		1,243		Animal Health segment	505		459		1,629		1,347
Other segment	Other segment	(1)		(2)		1		(2)		Other segment	—		(1)		—		1
Total segment profits	Total segment profits	8,424		8,168		23,347		22,678		Total segment profits	9,111		7,484		24,079		20,583
Other profits	Other profits	(12)		101		188		226		Other profits	141		(28)		29		135
Unallocated:	Unallocated:									Unallocated:
Interest income	Interest income	9		61		48		225		Interest income	7		9		27		48
Interest expense	Interest expense	(203)		(231)		(624)		(674)		Interest expense	(196)		(203)		(597)		(624)
Depreciation and amortization		(395)		(382)		(1,173)		(1,169)
Amortization										Amortization	(360)		(406)		(1,231)		(1,393)
Depreciation										Depreciation	(358)		(367)		(1,031)		(1,105)
Research and development	Research and development	(3,272)		(3,110)		(7,364)		(7,045)		Research and development	(2,312)		(3,231)		(8,775)		(7,251)
Amortization of purchase accounting adjustments		(285)		(329)		(879)		(1,105)
Restructuring costs	Restructuring costs	(114)		(232)		(269)		(444)		Restructuring costs	(107)		(113)		(487)		(265)
Other unallocated, net	Other unallocated, net	(724)		(1,699)		(2,490)		(4,019)		Other unallocated, net	(660)		(439)		(2,044)		(1,720)
		$	3,428	$	2,347	$	10,784	$	8,673		$	5,266	$	2,706	$	9,970	$	8,408

Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as selling, general and administrative expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred in Merck Research Laboratories, the Company’s research and development division that focuses on human health-related activities, 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 intangible assets and purchase accounting adjustments are not allocated to segments.

Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing sales.

Other unallocated, net, includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration, and other miscellaneous income or expense items.

- 3234 -

~~Notes to Condensed Consolidated Financial Statements (unaudited)~~ ~~(continued)~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Planned~~ Spin-Off of ~~Women’s Health, Biosimilars and Established Brands into New Company~~Organon & Co.

~~In February 2020,~~On June 2, 2021, Merck ~~announced its intention to~~completed the spin-off of products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The established brands included in the transaction ~~consist~~consisted of dermatology, non-opioid pain management, respiratory, ~~and~~ select cardiovascular products, ~~including~~ ~~Zetia~~ ~~(ezetimibe) and~~ ~~Vytorin~~ ~~(ezetimibe and simvastatin),~~ as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs ~~will~~ continue to be owned and developed within Merck as planned. Organon will have development capabilities initially focused on late-stage development and life-cycle management and is expected over time to develop research capabilities in selected therapeutic areas. The ~~spin-off is expected to be completed in the second quarter of 2021, subject to market and certain other conditions. Subsequent to the spin-off, the~~ historical results of the women’s health, biosimilars and established brands businesses ~~will be~~that were contributed to Organon in the spin-off have been reflected as discontinued operations in the Company’s consolidated financial ~~statements.~~statements through the date of the spin-off (see Note 2 to the condensed consolidated financial statements).

~~Recent~~Other Developments

~~Management~~

In October 2020, Merck announced that Dr. Roger M. Perlmutter will be retiring as Executive Vice President and President, Merck Research Laboratories (MRL). Dr. Perlmutter will be succeeded by Dr. Dean Y. Li, effective January 1, 2021. Dr. Perlmutter will remain as Non-Executive Chairman, MRL through June 30, 2021 to facilitate a seamless transition.

Business Developments

Below is a summary of significant ~~2020~~ business development ~~activity.~~activity thus far in 2021. See Note 23 to the condensed consolidated financial statements for additional information.

In ~~November 2020,~~January 2021, Merck entered into an exclusive license and research collaboration agreement with Artiva Biotherapeutics, Inc. (Artiva) to discover, develop and manufacture CAR-NK cells that target certain solid tumors using Artiva’s proprietary platform. Merck and ~~VelosBio, Inc. (VelosBio) announced that the companies had entered into~~Artiva agreed to engage in up to three different research programs, each covering a ~~definitive agreement pursuant to which~~collaboration target. Merck ~~through a subsidiary, will acquire~~has sole responsibility for all outstanding shares of VelosBio for $2.75 billion, subject to certain customary adjustments. VelosBio is a privately held clinical-stage biopharmaceutical company committed to developing first-in-class cancer therapies targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1). VelosBio’s lead investigational candidate is VLS-101, an antibody-drug conjugate targeting ROR1 that is currently being evaluated in a Phase 1development and ~~a Phase 2 clinical trial for the treatment of patients with hematologic malignancies~~commercialization activities (including regulatory filing and solid tumors, respectively. The closing of the transaction, which is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions, is expected by the end of 2020.

In September 2020, Merck and Seagen Inc. (Seagen, formerly known as Seattle Genetics, Inc.) announced an oncology collaboration to globally develop and commercialize Seagen’s ladiratuzumab vedotin (MK-6440), an investigational antibody-drug conjugate targeting LIV-1, which is currently in Phase 2 clinical trials for breast cancer and other solid tumors. The companies will equally share profits worldwide.approval). Under the terms of the agreement, Merck made an upfront payment of ~~$600~~$30 million, which was included in Research and ~~a $1.0 billion equity investment~~development expenses in 5the first nine months of 2021, for license and other rights for the first two collaboration targets and agreed to make another upfront payment of $15 million ~~shares of Seagen common stock at a price of $200 per share. The closing of~~for license and other rights for the ~~equity investment occurred in October 2020. Seagen~~third collaboration target when it is ~~also~~selected by Merck and accepted by Artiva. In addition, Artiva is eligible to receive future contingent milestone payments ~~dependent upon the achievement of certain developmental~~ and ~~sales-based milestones.~~

Concurrent with the above transaction, Seagen granted Merck an exclusive license to commercialize Tukysa (tucatinib), a small molecule tyrosine kinase inhibitor, for the treatment of HER2-positive cancers, in Asia, the Middle East and Latin America and other regions outside of the United States, Canada and Europe. Under the terms of the agreement, Merck made upfront payments aggregating $210 million. Seagen is also eligible to receive future contingent regulatory approval milestones and will receive tiered royalties on ~~sales of Tukysa in Merck’s territories.~~

~~Additionally in September 2020, Merck acquired a biologics manufacturing facility located in Dunboyne, Ireland from Takeda Pharmaceutical Company Limited for €256 million ($302 million).~~future sales.

~~Also, in July 2020,~~March 2021, Merck and ~~Ridgeback Biotherapeutics LP (Ridgeback Bio), a closely held biotechnology company, closed a collaboration~~Gilead Sciences, Inc. (Gilead) entered into an agreement to develop molnupiravir (MK-4482, formerly known as EIDD-2801), an orally available antiviral candidate currently in clinical development for the treatment of patients with COVID-19. Merck gained exclusive worldwide rights tojointly develop and commercialize ~~molnupiravir~~long-acting treatments in HIV that combine Merck’s investigational nucleoside reverse transcriptase translocation inhibitor, islatravir, and ~~related molecules. Under~~Gilead’s investigational capsid inhibitor, lenacapavir. The collaboration will initially focus on long-acting oral formulations and long-acting injectable formulations of these combination products, with other formulations potentially added to the ~~terms of the agreement, Ridgeback Bio received an~~collaboration as mutually agreed. There was no upfront payment ~~and also is eligible to receive future contingent payments dependent~~made by either party upon entering into the ~~achievement of certain developmental and regulatory approval milestones, as well as a share of the net profits of molnupiravir and related molecules, if approved.~~

~~- 33 -~~

agreement.

In ~~June 2020,~~April 2021, Merck acquired ~~privately held Themis Bioscience GmbH (Themis)~~Pandion Therapeutics, Inc. (Pandion), a clinical-stage biotechnology company ~~focused on vaccines and immune-modulation therapies~~developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases, for ~~infectious diseases and cancer for $366 million. Merck may make additional contingent payments dependent upon the achievement~~total consideration of certain developmental, regulatory approval and commercial milestones. The acquisition builds upon an ongoing collaboration between the two companies to develop vaccine candidates using the measles virus vector platform and$1.9 billion. Pandion is ~~expected to accelerate the development~~advancing a pipeline of ~~the COVID-19 vaccine candidate (V591), which is currently in Phase 1 clinical development.~~precision immune modulators targeting critical immune control nodes.

In ~~May 2020,~~September 2021, Merck and ~~the International AIDS Vaccine Initiative,~~Acceleron Pharma Inc. (IAVI), a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges, announced a new collaboration to develop V590, an investigational vaccine against SARS-CoV-2 being studied for the prevention of COVID-19, which is currently in Phase 1 clinical development. Under the terms of the agreement, Merck made an upfront payment of $6.5 million and may make additional contingent payments dependent upon the achievement of certain sales-based milestones, as well as royalties.

~~In January 2020, Merck acquired ArQule, Inc. (ArQule)~~(Acceleron), a publicly traded biopharmaceutical company, entered into a definitive agreement under which Merck will acquire Acceleron for $180 per share in cash for an approximate total equity value of $11.5 billion. Acceleron is focused on ~~kinase inhibitor discovery~~harnessing the power of the transforming growth factor (TGF)-beta superfamily of proteins that is known to play a central role in the regulation of cell growth, differentiation and ~~development for~~repair. Under the ~~treatment~~terms of ~~patients with cancer~~the acquisition agreement, Merck, through a subsidiary, initiated a tender offer to acquire all outstanding shares of Acceleron. The closing of the tender offer is subject to certain conditions, including the tender of shares representing at least a majority of the total number of Acceleron’s outstanding shares, receipt of applicable regulatory approvals, and other ~~diseases, for total consideration~~customary conditions. The transaction is expected to close in the fourth quarter of $2.7 billion. ArQule’s lead investigational candidate, MK-1026 (formerly known as ARQ 531), is a novel, oral Bruton’s tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies.2021.

Coronavirus Disease 2019 (COVID-19) Update

Overall, in response to the COVID-19 pandemic, Merck is focused on protecting the safety of its employees, ensuring that its supply of medicines and vaccines reaches its patients, contributing its scientific expertise to the development of ~~vaccine~~an antiviral therapy, supporting efforts to expand manufacturing capacity and ~~antiviral approaches,~~supply of SARS-CoV-2/COVID-19 medicines and vaccines (see below), and supporting health care providers and Merck’s communities. Although COVID-19-related disruptions ~~to patients’ ability to access health care providers~~ negatively affected results for the third quarter and first nine months of ~~2020,~~2021, Merck ~~remains confident in the fundamental~~continues to experience strong global underlying demand ~~for~~across its ~~products and its prospects for long-term growth.~~business.

In the third quarter and first nine months of 2021, the estimated negative impact of the COVID-19 pandemic to Merck’s sales was approximately $350 million and $1.3 billion, respectively, all of which related to the Pharmaceutical segment. In the third quarter and first nine months of 2020, the estimated negative impact of the COVID-19 pandemic to Merck’s Pharmaceutical sales was ~~estimated to be~~ approximately ~~$475 million. The negative impact to Animal Health sales was immaterial. The negative impact to sales in the first nine months~~$400 million and $1.7 billion, respectively. Roughly 75% of ~~2020 was approximately $2.0 billion for the~~ Merck’s

- 35 -

Pharmaceutical segment and $50 million for the Animal Health segment. Merck assumes that the majority of the negative impact from the COVID-19 pandemic occurred in the second quarter of 2020. However, the Company expects some residual negative impacts in the fourth quarter, largely in Europe and certain emerging markets. In addition, the phasing of the recovery of ~~Gardasil~~ 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) demand is slower than originally anticipated, in particular in the United States due to lower back-to-school demand. Accordingly, for the full-year 2020, including the impact for the first nine months, Merck expects an unfavorable impact to sales of approximately $2.35 billion (excluding the impact of foreign exchange) due to the COVID-19 pandemic, comprised of approximately $2.3 billion for Pharmaceutical revenue and approximately $50 million for Animal Health revenue.

~~Roughly two-thirds of Merck’s Pharmaceutical~~ revenue is comprised of physician-administered products, which, despite strong underlying demand, ~~were~~have been affected by social distancing measures and fewer well ~~visits~~visits.

In April 2021, Merck announced it was discontinuing the development of MK-7110 (formerly known as CD24Fc) for the treatment of hospitalized patients with COVID-19 (see Note 3 to the condensed consolidated financial statements). This decision resulted in charges of $207 million to Cost of sales in the first nine months of 2021.

Operating expenses reflect a minor positive effect in the third quarter and ~~delays~~first nine months of 2021 as investments in ~~elective surgeries~~COVID-19-related research programs largely offset the favorable impact of lower spending in other areas due to the COVID-19 pandemic. These impacts, as well as the prioritization of COVID-19 patients at health care providers, have resulted in reduced administration of many of the Company’s human health products, in particular for its vaccines, including ~~Gardasil~~ ~~9, as well as for~~ ~~Keytruda~~ ~~(pembrolizumab) and~~ ~~Implanon/Nexplanon~~ (etonogestrel implant). Access to healthcare providers remains reduced, although improved from the second quarter. Merck anticipates reduced demand for its physician-administered products while pandemic-related access measures remain in place. In addition, declines in elective surgeries negatively affected the demand for ~~Bridion~~ ~~(sugammadex) Injection in the year-to-date period. Sales of~~ ~~Pneumovax~~ ~~23 (pneumococcal vaccine polyvalent) increased due to heightened awareness of pneumococcal vaccination during the COVID-19 pandemic and ahead of flu season.~~

Operating expenses were positively affected in the third quarter and first nine months of 2020 by approximately ~~$115~~$100 million and ~~$540~~$500 million, respectively, primarily driven by lower promotional and selling costs, as well as lower research and development expenses ~~net~~due to the COVID-19 pandemic.

Merck continues to believe that global health systems and patients have largely adapted to the impacts of ~~investments in COVID-19-related antiviral~~the COVID-19 pandemic, and ~~vaccine research programs.~~that while certain negative impacts will persist, the trend will continue to improve. For the ~~full-year 2020,~~full year of 2021, Merck ~~expects~~assumes a net ~~favorable~~unfavorable impact to ~~operating expenses~~sales of ~~approximately $625 million reflecting continued lower spending~~less than 3% due to the COVID-19 pandemic, ~~partially offset~~all of which relates to the Pharmaceutical segment.

In November 2021, the Medicines and Healthcare products Regulatory Agency in the United Kingdom (U.K.) granted authorization for molnupiravir (MK-4482, EIDD-2801), an investigational oral antiviral medicine, for the treatment of mild-to-moderate COVID-19 in adults with a positive SARS-CoV-2 diagnostic test and who have at least one risk factor for developing severe illness. The authorization is based on positive results from a planned interim analysis from the Phase 3 MOVe-OUT clinical trial, which evaluated molnupiravir in non-hospitalized, unvaccinated adult patients with laboratory-confirmed mild-to-moderate COVID-19, symptom onset within five days of study randomization and at least one risk factor associated with poor disease outcomes. In the U.K., Lagevrio is the planned trademark for molnupiravir. In October 2021, Merck submitted an Emergency Use Authorization (EUA) application to the U.S. Food and Drug Administration (FDA) for molnupiravir for the treatment of mild-to-moderate COVID-19 in adults who are at risk for progressing to severe COVID-19 and/or hospitalization. The FDA subsequently announced a November 30, 2021 meeting of its Antimicrobial Drugs Advisory Committee to discuss the available data supporting the use of molnupiravir to treat mild-to-moderate COVID-19 in adults who have tested positive for COVID-19 and who are at high risk of progression to severe COVID-19, including hospitalization or death. Also in October 2021, the European Medicines Agency (EMA) initiated a rolling review for molnupiravir. Merck plans to work with the Committee for Medicinal Products for Human Use (CHMP) of the EMA to complete the rolling review process to facilitate initiating the formal review of the Marketing Authorization Application. Merck is developing molnupiravir in collaboration with Ridgeback Biotherapeutics LP (Ridgeback Bio). The companies are actively working with other regulatory agencies worldwide to submit applications for emergency use or marketing authorization in the coming months. In anticipation of the results from the MOVe-OUT trial and the potential for regulatory authorization or approval, Merck has been producing molnupiravir at risk. Merck expects to produce 10 million courses of treatment by ~~spending~~the end of 2021, with at least 20 million additional courses expected to be produced in 2022. In June 2021, Merck announced a procurement agreement with the U.S. government under which Merck will supply approximately 1.7 million courses of molnupiravir to the U.S. government upon EUA or approval from the FDA, which will be delivered in scheduled increments. This procurement of molnupiravir will be supported in whole or in part with federal funds. Additionally, Merck has entered into supply and advance purchase commitments for molnupiravir with other governments worldwide, including Australia, South Korea and New Zealand pending regulatory authorization, as well as the U.K., and is currently in discussions with other governments. If approved, Merck will be the principal on ~~COVID-19-related antiviral~~sales transactions, recognizing sales and ~~vaccine research programs.~~related costs, with profit sharing amounts recorded within Cost of sales. Profits from the collaboration will be split equally between the partners.

Merck is committed to providing timely access to molnupiravir globally, if it is authorized or approved, and intends to implement a tiered pricing approach based on World Bank country income criteria to reflect countries’ relative ability to finance their health response to the pandemic. As part of its commitment to widespread global access, Merck has entered into non-exclusive voluntary licensing agreements for molnupiravir with established Indian generic manufacturers. Merck and the Medicines Patent Pool (MPP) also signed a voluntary licensing agreement to facilitate affordable global access for molnupiravir. Under the terms of the agreement, the MPP will be permitted to further license non-exclusive sublicenses to manufacturers and diversify the manufacturing base for the supply of quality-assured or WHO-prequalified molnupiravir to countries covered by the MPP license, subject to local regulatory authorization. Merck, Ridgeback Bio and Emory University will not receive royalties for sales of molnupiravir under this agreement (molnupiravir was invented at Emory University and licensed to Ridgeback Bio) for as long as COVID-19 remains classified as a Public Health Emergency of International Concern by the World Health Organization. These agreements will help expand access to molnupiravir in more than 100 low- and middle-income countries.

In March 2021, Merck announced it had entered into multiple agreements to support efforts to expand manufacturing capacity and supply of SARS-CoV-2/COVID-19 medicines and vaccines. The Biomedical Advanced Research and Development Authority (BARDA), a division of the Office of the Assistant Secretary for Preparedness and Response

- 36 -

within the U.S. Department of Health and Human Services, will provide Merck with funding to adapt and make available a number of existing manufacturing facilities for the production of SARS-CoV-2/COVID-19 vaccines and medicines. Merck has also entered into agreements to support the manufacturing and supply of Johnson & Johnson’s SARS-CoV-2/COVID-19 vaccine. Merck will use its facilities in the U.S. to produce drug substance, formulate and fill vials of Johnson & Johnson’s vaccine.

Pricing

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. ~~In the United States, pricing pressure continues on many of the Company’s products.~~ Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s ~~revenue~~

~~- 34 -~~

sales performance in the first nine months of ~~2020~~2021 was negatively affected by other cost-reduction measures taken by governments and other ~~third-parties~~third parties to lower health care costs. In the U.S., the Biden Administration and Congress continue to discuss legislation designed to control health care costs, including the cost of drugs. The Company anticipates all of these actions and additional actions in the future will continue to negatively affect ~~revenue~~sales performance.

Operating Results

Sales


		Three Months Ended September 30,						% Change Excluding Foreign Exchange				Nine Months Ended September 30,												% Change Excluding Foreign Exchange			Three Months Ended September 30,												% Change Excluding Foreign Exchange					Nine Months Ended September 30,											% Change Excluding Foreign Exchange
($ in millions)	($ in millions)	2020		2019		% Change				2020				2019				% Change				($ in millions)	2021					2020					% Change				2021							2020			% Change
United States	United States	$	5,625	$	5,573	1	%			1	%			$	15,396			$	15,320			—	%				—		%	United States	$	6,276		$	5,250			20		%			20		%	$	16,166		$	14,301				13		%			13	%
International	International	6,926		6,824		1	%	4	%			20,084				19,652				2	%			5	%	International	6,878					5,679			21	%				18		%			19,017			16,269			17		%			13		%
Total	Total	$	12,551	$	12,397	1	%	2	%			$	35,479			$	34,972			1	%			3	%	Total	$	13,154				$	10,929		20	%			19		%			$	35,183		$	30,570		15		%			13		%

U.S. plus international may not equal total due to rounding.

Worldwide sales ~~were $12.6~~grew 20% to $13.2 billion ~~and $35.5 billion for~~in the third quarter of 2021 and rose 15% to $35.2 billion in the first nine months of ~~2020, respectively, representing growth of 1% compared with the same prior year periods. Sales growth~~2021. Revenue performance in both periods ~~was~~ primarily ~~driven by~~reflects higher sales in the oncology franchise ~~reflecting~~largely driven by strong growth of Keytruda~~, as well as~~ (pembrolizumab) and increased alliance revenue from Lynparza (olaparib) and Lenvima (lenvatinib)~~. Also contributing to revenue growth were~~, as well as higher sales ~~of certain~~in the vaccines ~~including~~franchise, primarily attributable to growth in ~~Pneumovax~~Gardasil ~~23,~~(Human Papillomavirus Quadrivalent [Types 6, 11, 16 and ~~higher~~18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), Varivax (Varicella Virus Vaccine Live) and ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live). Higher sales of certain hospital acute care products, including Bridion (sugammadex) Injection and Prevymis (letermovir) ~~and~~ ~~Bridion. Higher~~, as well as higher sales of Animal Health products also ~~contributed to~~drove revenue growth in the third quarter and first nine months of ~~2020.~~

~~Sales growth in both periods was partially offset by the ongoing effects of generic competition for certain products including women’s health product~~ ~~NuvaRing~~ ~~(etonogestrel/ethinyl estradiol vaginal ring), hospital acute care product~~ ~~Noxafil~~ ~~(posaconazole), oncology products~~ ~~Emend~~ ~~(aprepitant)/Emend~~ ~~(fosaprepitant dimeglumine) for Injection, cardiovascular products~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~, as well as products within the diversified brands franchise. The diversified brands franchise includes certain products that are approaching the expiration of their marketing exclusivity or that are no longer protected by patents in developed markets. Lower2021. Additionally, sales ~~of certain vaccines including human papillomavirus (HPV) vaccines~~ ~~Gardasil~~ ~~(Human Papillomavirus Quadrivalent [Types 6,11,16 and 18] Vaccine, Recombinant)/Gardasil~~ ~~9 and pediatric vaccines~~ ~~ProQuad~~ ~~(Measles, Mumps, Rubella and Varicella Virus Vaccine Live),~~ ~~M-M-R~~ ~~II (Measles, Mumps and Rubella Virus Vaccine Live) and~~ ~~Varivax~~ ~~(Varicella Virus Vaccine Live), as well as lower sales of virology products~~ ~~Zepatier~~ ~~(elbasvir and grazoprevir) and~~ ~~Isentress/Isentress~~HD ~~(raltegravir) also partially offset revenue growth~~ in the third quarter and first nine months of ~~2020.~~2021 also benefited from the achievement of milestones for an out-licensed product that triggered contingent payments to Merck. As discussed above, the COVID-19 pandemic unfavorably affected sales in the third quarter and first nine months of ~~2020.~~2021, but to a lesser extent than in the comparable periods of 2020 which benefited year-over-year sales growth.

Revenue growth in both periods was partially offset by lower sales of Pneumovax 23 (pneumococcal vaccine polyvalent) and the suspension of sales of hospital acute care product Zerbaxa (ceftolozane and tazobactam) for injection. Lower sales of diabetes product Janumet (sitagliptin/metformin HCl) also partially offset revenue growth in the first nine months of 2021.

See Note 1716 to the condensed consolidated financial statements for details on sales of the Company’s products. A discussion of performance for select products in the franchises follows.

- 37 -

Pharmaceutical Segment

Oncology


		Three Months Ended September 30,						% Change Excluding Foreign Exchange				Nine Months Ended September 30,										% Change Excluding Foreign Exchange			Three Months Ended September 30,												% Change Excluding Foreign Exchange					Nine Months Ended September 30,											% Change Excluding Foreign Exchange
($ in millions)	($ in millions)	2020		2019		% Change				2020			2019			% Change				($ in millions)	2021					2020					% Change				2021							2020			% Change
Keytruda	Keytruda	$	3,715	$	3,070	21	%			21	%		$	10,387		$	7,973			30	%				31		%	Keytruda	$	4,534		$	3,715			22		%			21		%	$	12,609		$	10,387				21		%			19	%
Alliance Revenue - Lynparza (1)	Alliance Revenue - Lynparza (1)	196		123		59	%	58	%			519			313			66	%			67	%	Alliance Revenue - Lynparza (1)	246					196			25	%				25		%			721			519			39		%			35		%
Alliance Revenue - Lenvima (1)	Alliance Revenue - Lenvima (1)	142		109		30	%	29	%			421			280			50	%			50	%	Alliance Revenue - Lenvima (1)	188					142			32	%			30		%			498			421			18		%			15		%
Emend		39		98		(60)	%	(59)	%			115			336			(66)	%			(65)	%

(1) Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 34 to the condensed consolidated financial statements).

Keytruda is an anti-PD-1 (programmed death receptor-1) therapy that has been approved as monotherapy for the treatment of certain patients with cervical cancer, classical Hodgkin lymphoma (cHL), cutaneous squamous cell carcinoma (cSCC), esophageal cancer, gastric or gastroesophageal junction adenocarcinoma, head and neck squamous cell carcinoma (HNSCC), hepatocellular carcinoma (HCC), non-small-cell lung cancer (NSCLC), ~~small-cell lung cancer (SCLC),~~ melanoma, Merkel cell carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) cancer including MSI-H/dMMR colorectal cancer, primary mediastinal large B-cell lymphoma, ~~(PMBCL),~~tumor mutational burden-high (TMB-H) solid tumors, and urothelial ~~carcinoma.~~carcinoma including non-muscle invasive bladder cancer. Keytruda is also approved for the treatment of certain patients in combination with chemotherapy for metastatic squamous and nonsquamous NSCLC, in combination with chemotherapy for esophageal cancer, in combination with chemotherapy for gastric cancer, in combination with chemotherapy for HNSCC, in combination with chemotherapy for triple-negative-breast cancer (TNBC), in combination with axitinib for renal cell carcinoma (RCC), and in combination with Lenvima for both endometrial

~~- 35 -~~

~~carcinoma.~~ carcinoma and RCC. The Keytruda clinical development program includes studies across a broad range of cancer ~~types (see~~types. See “Research and ~~Development” below).~~

~~In January 2020, the U.S. Food and Drug Administration (FDA) approved~~ ~~Keytruda~~ as monotherapy for the treatment of certain patients with Bacillus Calmette-Guerin (BCG)-unresponsive, high-risk, non-muscle invasive bladder cancer (NMIBC) based on the results of the KEYNOTE-057 trial.

~~In April 2020, the FDA granted accelerated approval for an additional recommended dosage of 400 mg every six weeks (Q6W) for~~ ~~Keytrudaacross all adult indications,~~ ~~including monotherapy and combination therapy. This new dosage option is available in addition to the current dose of 200 mg every three weeks (Q3W).~~

~~In June 2020, the FDA granted accelerated approval for~~ ~~Keytruda~~ as monotherapy for the treatment of adult and pediatric patients with unresectable or metastatic tumor mutational burden-high (TMB-H) (≥10 mutations/megabase) solid tumors, as determined by an FDA-approved test, that have progressed following prior treatment and who have no satisfactory alternative treatment options based in part on the results of the KEYNOTE-158 trial.

~~Also in June 2020, the FDA approved~~ ~~Keytruda~~ ~~as monotherapy both for the treatment of patients with recurrent or metastatic cSCC that is not curable by surgery or radiation based on data from the Phase 2 KEYNOTE-629 trial and~~ ~~for the first-line treatment of patients with unresectable or metastatic MSI-H or mismatch repair deficient colorectal cancer based on results from the Phase 3 KEYNOTE-177 trial.~~

~~In October 2020, the FDA approved an expanded label for~~ ~~Keytruda~~ ~~as monotherapy for the treatment of adult patients with relapsed or refractory cHL. The approval is based on results from the Phase 3 KEYNOTE-204 trial in which~~ ~~Keytruda~~ ~~significantly reduced the risk of disease progression or death compared to brentuximab vedotin. The FDA also approved an updated pediatric indication for~~ ~~Keytruda~~ ~~for the treatment of pediatric patients with refractory cHL or cHL that has relapsed after two or more lines of therapy.~~ ~~Keytruda~~ was previously approved under the FDA’s accelerated approval process for the treatment of adult and pediatric patients with refractory cHL, or who have relapsed after three or more prior lines of therapy based on data from the KEYNOTE-087 trial. In accordance with accelerated approval regulations, continued approval was contingent upon verification and description of clinical benefit; these accelerated approval requirements have been fulfilled with the data from KEYNOTE-204.

~~In June 2020,~~ ~~Keytruda~~ was approved by the National Medical Products Administration (NMPA) in China as monotherapy for the second-line treatment of patients with locally advanced or metastatic esophageal squamous cell carcinoma (ESCC) whose tumors express PD-L1 (Combined Positive Score [CPS] ≥10). This indication was granted based on the Phase 3 KEYNOTE-181 trial, including data from an extension of the global study in Chinese patients.

~~In August 2020,~~ ~~Keytruda~~ was approved by the Japan Pharmaceuticals and Medical Devices Agency (PMDA) as monotherapy for the treatment of patients whose tumors are PD-L1-positive, and have radically unresectable, advanced or recurrent ESCC who have progressed after chemotherapy. The approval was based on results from the Phase 3 KEYNOTE-181 trial. Additionally, ~~Keytruda~~ was approved by the Japan PMDA for use at an additional recommended dosage of 400 mg Q6W, including monotherapy and combination therapy. This new dosage option is available in addition to the current dose of 200 mg Q3W.Development Update” below.

Global sales of Keytruda grew ~~21%~~22% and ~~30%~~21% in the third quarter and first nine months of ~~2020,~~2021, respectively. Sales growth in both periods was driven by higher demand as the Company continues to launch Keytruda with multiple new indications globally, although the COVID-19 pandemic had a dampening effect on growing ~~demand.~~demand negatively affecting the number of new patients starting treatment. Sales in the ~~United States~~U.S. continue to build across the multiple approved indications, in particular for the treatment of advanced NSCLC as monotherapy, and in combination with chemotherapy for both nonsquamous and squamous metastatic NSCLC, along with uptake in the RCC, ~~adjuvant melanoma, HNSCC, bladder~~TNBC, MSI-H cancer, esophageal cancer and ~~endometrial carcinoma~~HNSCC indications. ~~Uptake of the Q6W dosing regimen in the United States benefited sales in 2020.~~ Keytruda sales growth in international markets was driven by continued uptake ~~in approved~~predominately for the NSCLC, HNSCC and RCC indications, particularly in ~~the European Union (EU).~~Europe. Sales growth in the third quarter and first nine months of ~~2020~~2021 was partially offset by ~~declines~~lower pricing in ~~Japan due~~Europe, China and Japan.

In March 2021, the FDA approved Keytruda for the treatment of certain patients with locally advanced or metastatic esophageal or gastroesophageal junction carcinoma that is not amenable to ~~pricing. Pursuant to~~surgical resection or definitive chemoradiation in combination with chemotherapy. The approval was based on the results of the KEYNOTE-590 trial.

In May 2021, the FDA approved Keytruda in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic human epidermal growth factor receptor 2 (HER2) positive gastric or gastroesophageal junction adenocarcinoma based on the results of the KEYNOTE-811 trial. This indication is approved under accelerated approval based on tumor response rate and durability of response; continued approval for this indication may be contingent upon verification and description of clinical benefit in the confirmatory trials.

In July 2021, the FDA approved Keytruda for the treatment of patients with high-risk, early-stage TNBC in combination with chemotherapy as neoadjuvant treatment and then continued as a ~~re-pricing rule,~~single agent as adjuvant treatment after surgery, based on the ~~Japanese government reduced~~KEYNOTE-522 trial. Additionally, the ~~price~~FDA converted the accelerated approval of Keytruda in combination with chemotherapy for the treatment of patients with locally recurrent unresectable or metastatic TNBC whose tumors express PD-L1 that was originally granted in 2020 to a full (regular) approval based on confirmatory data from KEYNOTE-522.

Also in July 2021, the FDA approved Keytruda as monotherapy for the treatment of patients with locally advanced cSCC that is not curable by ~~17.5% effective February 2020.~~ surgery or radiation based on data from the KEYNOTE-629 trial.

Additionally, in July 2021, the FDA approved the combination of Keytruda plus Lenvima for the treatment of patients with advanced endometrial carcinoma that is not MSI-H or dMMR, who have disease progression following prior systemic therapy in any setting and are not candidates for curative surgery or radiation. The approval for this population is based on results from the KEYNOTE-775/Study 309 trial, which was the confirmatory trial for the accelerated approval by the FDA in 2019.

In August 2021, Merck announced a label update for Keytruda for its indication in first-line advanced urothelial carcinoma (bladder cancer) in the U.S. The FDA has converted this indication from an accelerated to a full (regular) approval.

- 38 -

In addition, as part of the label update, this indication has been revised to be for the treatment of patients with locally advanced or metastatic urothelial carcinoma who are not eligible for any platinum-containing chemotherapy.

Also in August 2021, the FDA approved the combination of Keytruda and Lenvima for the first-line treatment of adult patients with advanced RCC based on results from the KEYNOTE-581 trial/Study 307 trial.

In October 2021, the FDA approved Keytruda in combination with chemotherapy, with or without bevacizumab, for the treatment of patients with persistent, recurrent or metastatic cervical cancer based on the KEYNOTE-826 trial. Additionally, the FDA converted the accelerated approval of Keytruda as a single agent for the treatment of patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy to a regular approval based on confirmatory data from KEYNOTE-826. This approval was originally granted in June 2018 based on results from the KEYNOTE-158 trial.

In March 2021, Merck announced it was voluntarily withdrawing the U.S. indication for Keytruda for the treatment of patients with metastatic SCLC with disease progression on or after platinum-based chemotherapy and at least one other prior line of therapy. The withdrawal of this indication was done in consultation with the FDA and does not affect other indications for Keytruda. Accelerated approval for this indication was granted in 2019 and was contingent upon completion of the post-marketing requirement establishing superiority of Keytruda as determined by overall survival (OS). As announced in January 2020, KEYNOTE-604, the confirmatory Phase 3 trial for this indication, met one of its dual primary endpoints of progression-free survival (PFS) but did not reach statistical significance for the other primary endpoint of OS.

In July 2021, Merck announced that it plans to voluntarily withdraw the U.S. accelerated approval indication for Keytruda for the treatment of patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma whose tumors express PD-L1, with disease progression on or after two or more prior lines of therapy. The decision was made in consultation with the FDA following the Oncologic Drugs Advisory Committee evaluation of this third-line gastric cancer indication for Keytruda as a monotherapy because it failed to meet its post-marketing requirement of demonstrating an OS benefit in a Phase 3 study. The withdrawal of this indication was done in consultation with the FDA and does not affect other indications for Keytruda. As agreed with the FDA, Merck will initiate the withdrawal in January 2022.

In January 2021, Keytruda was ~~subject to another price reduction of 20.9%~~approved by the European Commission (EC) as a first-line treatment in ~~April 2020 under a provision~~adult patients with MSI-H or dMMR colorectal cancer based on the results of the ~~Japanese pricing rules.~~KEYNOTE-177 study.

In March 2021, the EC approved an expanded label for Keytruda as monotherapy for the treatment of adult and pediatric patients aged 3 years and older with relapsed or refractory cHL who have failed autologous stem cell transplant (ASCT) or following at least two prior therapies when ASCT is not a treatment option. This approval is based on results from the KEYNOTE-204 and KEYNOTE-087 trials. This is the first pediatric approval for Keytruda in the European Union (EU).

In May 2021, the EC approved the addition of the 400 mg every six weeks (Q6W) dosing regimen to indications where Keytruda is administered in combination with other anticancer agents.

Also in May 2021, the EC approved an update to the European label for Keytruda to include data from KEYNOTE-361. In the EU, Keytruda is approved for the treatment of adult patients with advanced or metastatic urothelial carcinoma (bladder cancer) who are not eligible for cisplatin-containing chemotherapy and whose tumors express PD-L1. This approval was based on KEYNOTE-052; KEYNOTE-361 was conducted as part of a post-marketing commitment following the initial approval of Keytruda for these patients.

In June 2021, the EC approved Keytruda in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic carcinoma of the esophagus or HER2-negative gastroesophageal junction adenocarcinoma in adults whose tumors express PD-L1. This approval was based on results from the KEYNOTE-590 trial.

In October 2021, the EC approved Keytruda in combination with chemotherapy for the first-line treatment of locally recurrent unresectable or metastatic TNBC in adults whose tumors express PD-L1 and who have not received prior chemotherapy for metastatic disease based on the KEYNOTE-355 trial.

In August 2021, Keytruda received two new approvals from the Japan Pharmaceuticals and Medical Devices Agency: for the treatment of patients with PD-L1-positive, hormone receptor-negative and HER2-negative, inoperable or recurrent breast cancer, based on the results of the KEYNOTE-355 trial; and as a monotherapy for the treatment of patients with unresectable, advanced or recurrent MSI-H colorectal cancer, based on results of the KEYNOTE-177 trial.

In June 2021, Keytruda was approved by the China National Medical Products Administration (NMPA) as a first-line treatment in adult patients with MSI-H or dMMR colorectal cancer that is KRAS, NRAS and BRAF (all wild-type) based on the results of the KEYNOTE-177 study. In September 2021, Keytruda was approved by the China NMPA in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic carcinoma of the esophagus or gastroesophageal junction based on the KEYNOTE-590 trial.

- 39 -

Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 34 to the condensed consolidated financial statements),. Lynparza is approved for the treatment of certain types of advanced ovarian, breast, pancreatic and prostate cancers. Alliance revenue related to Lynparza increased ~~59%~~25% and ~~66%~~39% in the third quarter and first nine months of ~~2020,~~2021, respectively. Sales growth in both periods was largely driven by continued uptake across the multiple approved indications in the ~~United States, the EU~~U.S. and ~~China. In May 2020, the FDA approved Lynparza~~Europe. Higher demand in combination with bevacizumab as a first-line maintenance treatment of certain adult patients with advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial responseChina also contributed to ~~first-line platinum-based chemotherapy based on the results from the Phase 3 PAOLA-1 trial. In November 2020, Lynparza was~~

~~- 36 -~~

~~approved~~sales growth in the EU for the maintenance treatment of adult patients with advanced high-grade epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or parital response following completion of first-line platinum-based chemotherapy in combination with bevacizumab and whose cancer is associated with homologous recombination deficiency (HRD)-positive status defined by either a breast cancer susceptibility gene 1/2 (~~BRCA~~1/2) mutation and/or genomic instability based on the results from the PAOLA-1 trial. Also in May 2020, the FDA approved Lynparza for the treatment of adult patients with deleterious or suspected deleterious germline or somatic homologous recombination repair (HRR) gene-mutated metastatic castration-resistant prostate cancer (mCRPC) who have progressed following prior treatment with enzalutamide or abiraterone based on positive results from the Phase 3 PROfound trial.year-to-date period. In ~~November 2020,~~June 2021, Lynparza was ~~approved~~granted conditional approval in ~~the EU~~China as monotherapy for the treatment of ~~adult patients with mCRPC and~~ ~~BRCA~~1/2 mutations (germline and/or somatic) who have progressed following a prior therapy that included a new hormonal agent based on the PROfound trial. In July 2020, Lynparza was approved in the EU as a monotherapy for the maintenance treatment ofcertain previously treated adult patients with germline or somatic BRCA~~1/2 mutations who have~~-mutated metastatic ~~adenocarcinoma of the pancreas and have not progressed after a minimum of 16 weeks of platinum treatment within a first-line chemotherapy regimen~~castration-resistant prostate cancer based on the results ~~from~~of the ~~Phase 3 POLO~~PROfound trial.

Lenvima is an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai Co., Ltd. (Eisai) (see Note 34 to the condensed consolidated financial statements),. Lenvima is approved for the treatment of certain types of thyroid cancer, RCC, HCC, in combination with everolimus for certain patients with RCC, in combination with Keytruda for the treatment of certain patients with endometrial carcinoma, and in combination with Keytruda for the treatment of certain patients with ~~endometrial carcinoma.~~RCC. Alliance revenue related to Lenvima grew ~~30%~~32% and ~~50%~~18% in the third quarter and first nine months of ~~2020,~~2021, respectively. Sales growth in both periods ~~was primarily due to~~reflects higher demand in ~~the United States,~~ China and the ~~EU.~~U.S.

~~Global sales of~~ ~~Emend, for the prevention of chemotherapy-induced nausea and vomiting, declined 60% and 66%~~In June 2021, Koselugo (selumetinib) was granted conditional approval in the third quarter and first nine months of 2020, respectively. The sales declines were primarily driven by lower demand and pricing in the United States due to generic competition, including recent generic competition for ~~Emend~~ ~~for Injection following U.S. patent expiry in September 2019. Also contributing to the sales declines in the third quarter and first nine months of 2020 was lower demand in the~~ EU ~~as a result of generic competition for the oral formulation of~~ ~~Emend~~ ~~following loss of market exclusivity in May 2019. U.S. market exclusivity for the oral formulation of~~ ~~Emend~~ ~~previously expired in 2015. Generic competition for~~ ~~Emend~~ ~~for Injection in Japan following loss of exclusivity also contributed to the sales declines in the third quarter and first nine months of 2020.~~ ~~Emend~~ ~~for Injection lost market exclusivity in major European markets in August 2020. The Company anticipates that sales of~~ ~~Emend~~ ~~for Injection in these markets will decline significantly in future periods.~~

~~In April 2020, the FDA approved Koselugo (selumetinib)~~ for the treatment of pediatric patients ~~two~~three years of age and older with neurofibromatosis type 1 ~~(NF1)~~ who have symptomatic, inoperable plexiform neurofibromas ~~(PN). The FDA approval is~~ based on positive results from the National Cancer Institute ~~(NCI)~~ Cancer Therapy Evaluation ~~Program (CTEP)-sponsored Phase 2~~Program-sponsored SPRINT Stratum 1 ~~trial coordinated~~trial. Koselugo was approved by the ~~NCI’s Center for Cancer Research, Pediatric Oncology Branch. This~~FDA in April 2020. Koselugo is part of the ~~first regulatory approval of a medicine~~same collaboration with AstraZeneca referenced above that includes Lynparza.

In August 2021, the FDA approved Welireg (belzutifan), an oral hypoxia-inducible factor-2 alpha (HIF-2α) inhibitor, for the treatment of ~~NF1 PN, a rare and debilitating genetic condition. Koselugo is being jointly developed and commercialized~~adult patients with ~~AstraZeneca globally (see Note 3~~von Hippel-Lindau (VHL) disease who require therapy for associated RCC, central nervous system hemangioblastomas, or pancreatic neuroendocrine tumors, not requiring immediate surgery. The approval was based on results from the open-label Study 004 trial. Welireg was obtained as part of Merck’s 2019 acquisition of Peloton Therapeutics, Inc. (Peloton). Pursuant to the ~~condensed consolidated financial statements).~~acquisition agreement, Merck made a $50 million capitalized milestone payment to former Peloton shareholders upon first commercial sale of Welireg in the U.S.

Vaccines


		Three Months Ended September 30,						% Change Excluding Foreign Exchange				Nine Months Ended September 30,										% Change Excluding Foreign Exchange			Three Months Ended September 30,												% Change Excluding Foreign Exchange					Nine Months Ended September 30,											% Change Excluding Foreign Exchange
($ in millions)	($ in millions)	2020		2019		% Change				2020			2019			% Change				($ in millions)	2021					2020					% Change				2021							2020			% Change
Gardasil/Gardasil 9	Gardasil/Gardasil 9	$	1,187	$	1,320	(10)	%			(10)	%		$	2,941		$	3,044			(3)	%				(2)		%	Gardasil/Gardasil 9	$	1,993		$	1,187			68		%			63		%	$	4,144		$	2,941				41		%			35	%
ProQuad	ProQuad	218		232		(6)	%	(6)	%			507			588			(14)	%			(14)	%	ProQuad	244					218			12	%				12		%			598			507			18		%			17		%
M-M-R II	M-M-R II	115		121		(5)	%	(6)	%			287			443			(35)	%			(35)	%	M-M-R II	127					115			11	%			10		%			295			287			3		%			2		%
Varivax	Varivax	243		270		(10)	%	(9)	%			595			763			(22)	%			(21)	%	Varivax	290					243			19	%			19		%			733			595			23		%			23		%
Pneumovax 23	Pneumovax 23	375		237		58	%	58	%			748			592			26	%			27	%	Pneumovax 23	277					375			(26)	%			(26)		%			600			748			(20)		%			(21)		%
RotaTeq																								RotaTeq	227					210			8	%			7		%			593			601			(1)		%			(3)		%

Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of ~~HPV, declined 10%~~human papillomavirus (HPV), grew 68% and 3%41% in the third quarter and first nine months of ~~2020, respectively,~~2021, respectively. Sales growth in both periods was driven primarily ~~due to lower~~by strong global demand, particularly in China which also benefited from increased supply, and in the ~~United States and Hong Kong, SAR, PRC attributable to~~U.S. which also benefited from the ~~COVID-19 pandemic, partially offset by higher volumes~~timing of public sector purchases. Higher pricing in China and ~~in the EU.~~

~~The Company anticipates that in the fourth quarter of 2020 it will replenish the doses of~~ ~~Gardasil~~ ~~9 borrowed from~~ the U.S. ~~Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile~~also contributed to sales growth in ~~the fourth quarter of 2019. The replenishment will result in the recognition of approximately $120 million in sales and a reversal of the related liability.~~

~~In June 2020, the FDA approved an expanded indication for~~ ~~Gardasil~~ ~~9 for the prevention of oropharyngeal and other head and neck cancers caused by HPV Types 16, 18, 31, 33, 45, 52, and 58. The oropharyngeal and head and neck~~

~~- 37 -~~

~~cancer indication was approved under accelerated approval based on effectiveness in preventing HPV-related anogenital disease.~~

~~In July 2020,~~ ~~Silgard~~ 9 aqueous suspension for intramuscular injection syringes (recombinant adsorbed 9-valent Human Papillomavirus virus-like particles vaccine) were approved for use in women and girls by the Ministry of Health, Labor and Welfare in Japan.both periods.

Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, ~~declined 6%~~grew 12% and ~~14%~~18% in the third quarter and first nine months of ~~2020,~~2021, respectively, primarily due to ~~lower demand~~higher sales in the ~~United States resulting from~~U.S. reflecting higher demand driven by the ongoing COVID-19 pandemic ~~partially offset by~~recovery, as well as higher pricing.

Worldwide sales of M‑M‑R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, ~~declined 35%~~grew 11% and 3% in the third quarter and first nine months of ~~2020~~2021, respectively, primarily ~~driven by lower demand~~due to higher sales in the ~~United States resulting from fewer measles outbreaks in 2020 compared with 2019, coupled with~~U.S. reflecting the ~~unfavorable impact of the~~ongoing COVID-19 pandemic recovery inclusive of higher public sector mix of business. Lower demand and lower government tenders in international markets partially offset ~~by higher pricing. Additionally, the~~M‑M‑R II sales ~~decline~~growth in ~~the first nine months of 2020 reflects lower demand in Brazil.~~both periods.

Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), ~~declined 10%~~grew 19% and ~~22%~~23% in the third quarter and first nine months of ~~2020, respectively. The sales declines reflect lower demand~~2021, respectively, primarily reflecting the ongoing COVID-19 pandemic recovery and higher pricing in the ~~United States resulting from the COVID-19 pandemic, partially offset by higher pricing. The~~U.S. Higher government tenders in Brazil also contributed to Varivax sales ~~decline in~~growth for the first nine months of ~~2020 was also attributable to lower government tenders in Brazil.~~2021.

- 40 -

Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, ~~grew 58%~~declined 26% and ~~26%~~20% in the third quarter and first nine months of ~~2020,~~2021, respectively, primarily ~~due to higher volumes~~driven by lower demand in the ~~United States~~U.S. reflecting prioritization of COVID-19 vaccination.

Global sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and in the EU attributable in part to heightened awareness of pneumococcal vaccination during the COVID-19 pandemic and ahead of flu season. Higher pricing in the United States also contributed to sales growthchildren, grew 8% in the third quarter ~~and~~of 2021 largely attributable to higher public sector purchases in the U.S., partially offset by lower demand in certain international markets. Worldwide sales of RotaTeq declined 1% in the first nine months of ~~2020.~~2021 reflecting lower demand in certain international markets, partially offset by higher public sector purchases in the U.S.

In July 2021, the FDA approved Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine) for active immunization for the prevention of invasive disease caused by 15 Streptococcus pneumoniae serotypes in adults 18 years of age and older. The approval was based on data from seven clinical studies assessing safety, tolerability, and immunogenicity in adults. In October 2021, the U.S. Centers for Disease Control and Prevention’s (CDC’s) Advisory Committee on Immunization Practices (ACIP) voted to provisionally recommend vaccination either with a sequential regimen of Vaxneuvance followed by Pneumovax 23, or with a single dose of 20-valent pneumococcal conjugate vaccine both for adults 65 years and older and for adults ages 19 to 64 with certain underlying medical conditions. These provisional recommendations will be reviewed by the director of the CDC and the U.S. Department of Health and Human Services, and final recommendations will become official when published in the CDC’s Morbidity and Mortality Weekly Report. In September 2021, Merck announced a settlement and license agreement with Pfizer Inc., (Pfizer) resolving all worldwide patent infringement litigation related to the use of Merck’s investigational and licensed pneumococcal conjugate vaccine (PCV) products, including Vaxneuvance. Under the terms of the agreement, Merck will make certain regulatory milestone payments to Pfizer, as well as royalty payments on the worldwide sales of its PCV products. The Company will pay royalties of 7.25% of net sales of all Merck PCV products through 2026; and 2.5% of net sales of all Merck PCV products from 2027 through 2035.

Vaxelis (Diphtheria and Tetanus Toxoids and Acellular Pertussis, Inactivated Poliovirus, Haemophilus b Conjugate and Hepatitis B Vaccine), developed as part of a U.S.-based partnership between Merck and Sanofi Pasteur, is now available in the U.S. for active immunization of children six weeks through four years of age to help prevent diphtheria, tetanus, pertussis, poliomyelitis, hepatitis B, and invasive disease due to Haemophilus influenzae type b. In February 2021, the CDC’s ACIP included Vaxelis as a combination vaccine option in the CDC’s Recommended Child and Adolescent Immunization Schedule. Sales of Vaxelis in the U.S. are made through the U.S.-based Merck/Sanofi Pasteur partnership, the results of which are reflected in equity income from affiliates included in Other (income) expense, net. Supply sales to the partnership are recorded within Sales. Vaxelis is also approved in the EU where it is marketed directly by Merck and Sanofi Pasteur.

Hospital Acute Care


		Three Months Ended September 30,						% Change Excluding Foreign Exchange		Nine Months Ended September 30,						% Change Excluding Foreign Exchange			Three Months Ended September 30,						% Change Excluding Foreign Exchange				Nine Months Ended September 30,										% Change Excluding Foreign Exchange
($ in millions)	($ in millions)	2020		2019		% Change				2020		2019		% Change				($ in millions)	2021		2020		% Change				2021			2020			% Change
Bridion	Bridion	$	320	$	284	13	%	13	%	$	843	$	817	3	%	4	%	Bridion	$	369	$	320	16	%			15	%		$	1,096		$	843			30	%			27	%
Prevymis																		Prevymis	96		77		23	%	22	%			270			200			35	%			31	%
Noxafil	Noxafil	79		177		(55)	%	(55)	%	247		560		(56)	%	(55)	%	Noxafil	64		79		(19)	%	(20)	%			197			247			(20)	%			(23)	%
Prevymis		77		45		72	%	69	%	200		115		74	%	74	%
Cubicin		39		52		(26)	%	(25)	%	116		207		(44)	%	(43)	%
Zerbaxa																		Zerbaxa	(2)		43		(105)	%	(105)	%			(11)			112			(110)	%			(110)	%

Worldwide sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, grew ~~13%~~16% and 3%30% in the third quarter and first nine months of ~~2020,~~2021, respectively, ~~primarily attributable~~due to higher demand globally, particularly in the ~~United States. Fewer elective surgeries as a result of~~U.S. and Europe, attributable in part to the COVID-19 pandemic ~~unfavorably affected demand~~recovery. Bridion was also approved by the FDA in ~~2020.~~

~~Global sales of~~ ~~Noxafil~~,June 2021 for ~~the prevention of invasive fungal infections, declined 55%~~pediatric patients aged 2 years and 56% in the third quarter and first nine months of 2020, respectively, primarily due to generic competition in the United States and in the EU. The patents that provided U.S. market exclusivity for certain forms of ~~Noxafil~~ ~~representing the majority of U.S.~~ ~~Noxafil~~ ~~sales expired in July 2019. Additionally, the patent for~~ ~~Noxafil~~ ~~expired in a number of major European markets in December 2019. Accordingly, the Company is experiencing volume and pricing declines in~~ ~~Noxafil~~ ~~sales in these markets as a result of generic competition and expects the declines to continue.~~older undergoing surgery.

Worldwide sales of Prevymis, a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogenic hematopoietic stem cell transplant, grew ~~72%~~23% and ~~74%~~35% in the third quarter and first nine months of ~~2020,~~2021, respectively, due to continued uptake since launch in several international markets, particularly in Europe and the EUU.S. Prevymis was approved by the EC in January 2018 and by the FDA in ~~the United States.~~November 2017.

Global sales of ~~Cubicin~~Noxafil ~~(daptomycin for injection)~~(posaconazole), an ~~I.V. antibiotic~~antifungal agent for ~~complicated skin~~the prevention of certain invasive fungal infections, declined 19% and ~~skin structure infections or bacteremia when caused by designated susceptible organisms, declined 26% and 44%~~20% in the third quarter and first nine months of ~~2020,~~2021, respectively, primarily due to ~~ongoing~~ generic competition in ~~the EU and~~Europe, partially offset by higher demand in ~~the United States.~~

~~In June 2020, the FDA approved a supplemental New Drug Application (NDA)~~China. The patent that provided market exclusivity for ~~Recarbrio~~Noxafil ~~(imipenem, cilastatin,~~in a number of major European markets expired in December 2019. As a result, the Company is experiencing lower demand for Noxafil in these markets as a result of generic competition and ~~relebactam) for~~expects the treatment of patients 18 years of age and older with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP), caused by certain susceptible Gram-negative microorganisms.

~~Zerbaxa~~ (ceftolozane and tazobactam) is indicated for the treatment of HABP/VABP caused by certain susceptible Gram-negative microorganisms, and for the treatment of certain complicated urinary tract and intra-abdominal infections. The COVID-19 pandemic is unfavorably affecting sales of ~~Zerbaxa, particularly in the United States. An increased focus on more stringent cleaning protocols at hospitals, along with visitor restrictions, have reduced patients’ exposure~~decline to ~~developing HABP/~~continue.

- 3841 -

~~VABP, resulting in a smaller population~~In December 2020, the Company temporarily suspended sales of ~~patients that need to be treated with~~ Zerbaxa~~. These factors resulted in lower cash flow forecasts~~, a combination antibacterial and beta-lactamase inhibitor for the treatment of certain bacterial infections, and subsequently issued a product recall, following the identification of product sterility issues. The Company expects a phased resupply for Zerbaxa beginning with the U.S. market in the ~~United States, which constituted a triggering event requiring the evaluation~~fourth quarter of ~~the~~ ~~Zerbaxa~~ ~~intangible asset for impairment. Although the “step one” impairment test that was performed indicated that the intangible asset related to~~ ~~Zerbaxa~~ ~~remains recoverable, in the event that these trends depress sales of~~ ~~Zerbaxa~~ ~~to a greater extent than anticipated by the Company, or in the event other circumstances arise that further reduce global cash flow projections for~~ ~~Zerbaxa, the Company may record an intangible asset impairment charge in the future and such charge could be material. The carrying value of~~ ~~Zerbaxa~~ ~~was $2.2 billion at September 30, 2020.~~2021.

Immunology


		Three Months Ended September 30,						% Change Excluding Foreign Exchange				Nine Months Ended September 30,										% Change Excluding Foreign Exchange		Three Months Ended September 30,											% Change Excluding Foreign Exchange			Nine Months Ended September 30,							% Change Excluding Foreign Exchange
($ in millions)	($ in millions)	2020		2019		% Change				2020			2019			% Change				($ in millions)	2021				2020					% Change			2021					2020			% Change
Simponi	Simponi	$	209	$	203	3	%			—	%		$	615		$	625			(2)	%			(1)		%	Simponi	$	203		$	209		(3)		%	(5)		%	$	619	$	615	1		%	(5)	%
Remicade		82		101		(19)	%	(20)	%			242			322			(25)	%			(24)	%

Sales of Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), declined 2%3% in the third quarter of 2021 and increased 1% in the first nine ~~month of 2020 primarily driven by lower demand in the EU due to the uptake of biosimilars for a competing product, partially offset by the timing of shipments in Russia.~~

~~Sales of~~ ~~Remicade~~ ~~(infliximab)~~, ~~a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), declined 19% and 25% in the third quarter and first nine~~ months of ~~2020, respectively, driven by ongoing biosimilar competition~~2021. Excluding the effect of foreign exchange, sales performance in ~~the~~both periods was largely attributable to lower pricing in Company’s marketing territories in ~~Europe.~~Europe, partially offset by higher volumes. Sales of Simponi are being unfavorably affected by biosimilar competition for competing products. The Company ~~lost market exclusivity for~~expects this competition will continue to unfavorably affect sales of ~~Remicade~~Simponi.

The Company’s marketing rights with respect to Simponi will revert to Janssen Pharmaceuticals, Inc. in ~~major European markets in 2015 and no longer has market exclusivity in any~~the second half of ~~its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.~~2024.

Virology


		Three Months Ended September 30,						% Change Excluding Foreign Exchange				Nine Months Ended September 30,										% Change Excluding Foreign Exchange		Three Months Ended September 30,											% Change Excluding Foreign Exchange			Nine Months Ended September 30,							% Change Excluding Foreign Exchange
($ in millions)	($ in millions)	2020		2019		% Change				2020			2019			% Change				($ in millions)	2021				2020					% Change			2021					2020			% Change
Isentress/Isentress HD	Isentress/Isentress HD	$	205	$	250	(18)	%			(18)	%		$	646		$	752			(14)	%			(12)		%	Isentress/Isentress HD	$	189		$	205		(8)		%	(7)		%	$	590	$	646	(9)		%	(9)	%
Zepatier		28		83		(67)	%	(67)	%			122			304			(60)	%			(59)	%

Global combined sales of Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, declined ~~18%~~8% and ~~14%~~9% in the third quarter and first nine months of ~~2020,~~2021, respectively, primarily ~~driven by~~due to competitive pressure particularly in Europe and the ~~United States and in the EU, as well as the timing of shipments in Brazil.~~

~~Global sales of~~U.S. The Company expects competitive pressure for ~~Zepatier~~Isentress/Isentress HD, a treatment for adult patients with chronic hepatitis C virus genotype (GT) 1 or GT4 infection, declined 67% and 60% in the third quarter and first nine months of 2020, respectively, driven by lower demand globally due to ~~competition and declining patient volumes, coupled with the impact of the COVID-19 pandemic.~~continue.

Cardiovascular

Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2020 2019 % Change 2020 2019 % Change
Zetia/Vytorin $ 150 $ 204 (27) % (26) % $ 523 $ 674 (22) % (21) %
Atozet 111 97 14 % 12 % 348 283 23 % 25 %
Rosuzet 32 32 1 % — % 94 97 (3) % (1) %
Alliance Revenue - Adempas (1)
83 50 67 % 67 % 216 144 50 % 50 %
Adempas 55 57 (5) % (7) % 167 158 6 % 6 %


	Three Months Ended September 30,						% Change Excluding Foreign Exchange		Nine Months Ended September 30,						% Change Excluding Foreign Exchange
($ in millions)	2021		2020		% Change				2021		2020		% Change
Alliance Revenue - Adempas/Verquvo (1)	$	100	$	83	20	%	20	%	$	248	$	216	15	%	15	%
Adempas	59		55		7	%	8	%	188		167		13	%	7	%

(1) Alliance revenue represents Merck’s share of profits from sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 34 to the condensed consolidated financial statements).

~~Combined global sales of~~ ~~Zetia~~ ~~(marketed in most countries outside the United States as~~ ~~Ezetrol) and~~ ~~Vytorin~~ ~~(marketed outside the United States as~~ ~~Inegy), medicines for lowering LDL cholesterol, declined 27% in the third quarter of 2020, primarily due to lower sales of~~ ~~Ezetrol~~ ~~in Japan. The patent that provided market exclusivity for~~ ~~Ezetrol~~ ~~in Japan expired in September 2019 and generic competition began in June 2020. Accordingly, the Company is experiencing a rapid and~~

~~- 39 -~~

~~substantial decline in~~ ~~Ezetrol~~ ~~sales in Japan and expects the decline to continue. Higher demand for~~ ~~Ezetrol in China partially offset the sales decline in the third quarter of 2020. Combined global sales of~~ ~~Zetia~~ ~~and~~ ~~Vytorin~~ ~~declined 22% in the first nine months of 2020 primarily due to generic competition for~~ ~~Ezetrol~~ ~~and~~ ~~Inegy~~ ~~in the EU and~~ ~~Ezetrol~~ ~~in Japan. The EU patents for~~ ~~Ezetrol~~ ~~and~~ ~~Inegy~~ expired in April 2018 and April 2019, respectively. The sales decline in the first nine months of 2020 was also attributable to lower pricing following loss of exclusivity in Australia in 2018. Higher demand for ~~Ezetrol~~ ~~in China partially offset the sales decline in the first nine months of 2020.~~

~~Sales of~~ ~~Atozet~~ (ezetimibe and atorvastatin) (marketed outside of the United States), a medicine for lowering LDL cholesterol, grew 14% and 23% in the third quarter and first nine months of 2020, respectively, primarily due to higher demand in most markets, particularly in the EU, Japan and other countries in the Asia Pacific region.

Adempas (riociguat), a cardiovascular drug for the treatment of certain types of pulmonary arterial hypertension, is part of a worldwide ~~clinical development~~ collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Adempas (see Note 34 to the condensed consolidated financial statements). ~~Revenue from Adempas includes Merck’s share of profits~~Alliance revenue from the ~~sale of Adempas in Bayer’s marketing territories, which~~collaboration grew ~~67%~~20% and ~~50%~~15% in the third quarter and first nine months of ~~2020, respectively, as well as~~2021, respectively. Revenue from the collaboration also includes sales of Adempas in Merck’s marketing territories, which ~~declined 5%~~grew 7% and 13% in the third quarter and ~~grew 6% in the~~ first nine months of ~~2020.~~2021, respectively, primarily reflecting higher demand.

In January 2021, the FDA approved Verquvo (vericiguat), an sGC stimulator, to reduce the risk of cardiovascular death and heart failure hospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in adults with symptomatic chronic heart failure and reduced ejection fraction. Verquvo was also approved in Japan in June 2021 and in the EU in July 2021. The approvals were based on the results of the VICTORIA trial. Verquvo is part of the same collaboration with Bayer referenced above that includes Adempas.

- 42 -

Diabetes


		Three Months Ended September 30,						% Change Excluding Foreign Exchange			Nine Months Ended September 30,							% Change Excluding Foreign Exchange	Three Months Ended September 30,											% Change Excluding Foreign Exchange			Nine Months Ended September 30,							% Change Excluding Foreign Exchange
($ in millions)	($ in millions)	2020		2019		% Change			2020			2019		% Change		($ in millions)	2021			2020					% Change			2021					2020			% Change
Januvia/Janumet	Januvia/Janumet	$	1,327	$	1,311	1	%		2	%		$	3,948	$	4,106	(4)	%		(3)		%	Januvia/Janumet	$	1,339		$	1,327		1		%	—		%	$	3,895	$	3,948	(1)		%	(4)	%

Worldwide combined sales of Januvia (sitagliptin) and Janumet~~(sitagliptin/metformin HCl)~~, medicines that help lower blood sugar levels in adults with type 2 diabetes, ~~grew~~declined 1% in the third quarter of 2020 driven primarily by higher demand in certain international markets, particularly in China, partially offset by continued pricing pressure in the United States. Global combined sales of ~~Januvia~~ ~~and~~ ~~Janumet~~ ~~declined 4%~~ in the first nine months of ~~2020. The decline was~~2021 primarily due to continued pricing pressure ~~in the United States~~ and lower demand in the ~~EU, partially~~U.S., largely offset by higher demand in ~~certain international markets, particularly in China.~~China and Latin America. The Company expects U.S. pricing pressure to continue. Januvia and Janumet will lose market exclusivity in the U.S. in January 2023. The ~~patents~~supplementary patent certificates that provide market exclusivity for Januvia and Janumet in the ~~United States~~EU expire in ~~July 2022 (although six-month pediatric exclusivity may extend this date). The patent that provides market exclusivity for~~ ~~Januvia~~ ~~in the EU expires in July 2022 (although pediatric exclusivity has recently been granted which may extend this date to~~ September 2022 and ~~the Company is applying in individual countries for the extensions). The supplementary patent certificate that provides market exclusivity for~~ ~~Janumet~~ ~~in the EU expires in~~ April ~~2023.~~2023, respectively. The Company anticipates sales of Januvia and Janumet in these markets will decline substantially after ~~these patent expiries.~~loss of market exclusivity.

~~Women’s~~

Animal Health Segment


	Three Months Ended September 30,						% Change Excluding Foreign Exchange		Nine Months Ended September 30,						% Change Excluding Foreign Exchange
($ in millions)	2021		2020		% Change				2021		2020		% Change
Livestock	$	864	$	758	14	%	12	%	$	2,503	$	2,145	17	%	14	%
Companion Animal	553		462		20	%	18	%	1,804		1,390		30	%	26	%

~~Global sales~~Sales of ~~Implanon/Nexplanon, a single-rod subdermal contraceptive implant, declined 5% in the third quarter of 2020 primarily driven by lower demand in Latin America. Worldwide sales of~~ ~~Implanon/Nexplanon~~ ~~declined 11% in the first nine months of 2020 primarily due to lower demand in the United States~~livestock products grew 14% and ~~in the EU resulting from the COVID-19 pandemic.~~

~~Worldwide sales of~~ ~~NuvaRing, a vaginal contraceptive product, declined 76% and 74%~~17% in the third quarter and first nine months of ~~2020,~~2021, respectively, primarily due to ~~generic competition in the United States. The patent that provided U.S. market exclusivity~~higher demand for ~~NuvaRing~~ ~~expired in April 2018~~ruminant products, including animal health intelligence solutions for animal identification, monitoring and ~~generic competition began in December 2019. Accordingly, the Company is experiencing a rapid~~traceability, as well as higher demand for poultry and ~~substantial decline in U.S.~~ ~~NuvaRing~~ ~~sales and expects the decline to continue.~~

~~Biosimilars~~

~~- 40 -~~

Biosimilar products are marketed by the Company pursuant to an agreement with Samsung Bioepis Co., Ltd. (Samsung) to develop and commercialize multiple pre-specified biosimilar candidates. Currently, the Company markets Renflexis (infliximab-abda), a biosimilar to Remicade (infliximab) for the treatment of certain inflammatory diseases; Ontruzant (trastuzumab-dttb), a biosimilar to Herceptin (trastuzumab) for the treatment of human epidermal growth factor receptor 2 (HER2)-positive breast cancer and HER2 overexpressing gastric cancer; and Brenzys (etanercept biosimilar), a biosimilar to Enbrel for the treatment of certain inflammatory diseases. Merck’s commercialization territories under the agreement vary by product.swine products. Sales of ~~biosimilars~~companion animal products grew ~~45%~~20% and ~~20%~~30% in the third quarter and first nine months of ~~2020,~~2021, respectively, primarily due to the launch of Ontruzant in Brazil in August 2020 and continued post-launch uptake of Renflexis in the United States and Canada. Sales growth in the first nine months of 2020 was partially offset by lower sales of Brenzys in Brazil.

In August 2020, the EC granted marketing authorization for Aybintio (bevacizumab) for the treatment of metastatic carcinoma of the colon or rectum, metastatic breast cancer, NSCLC, advanced and/or metastatic RCC, epithelial ovarian, fallopian tube and primary peritoneal cancer and cervical cancer. An application seeking approval of Aybintio in the United States was filed in September 2019.

~~Animal Health Segment~~

~~Sales of livestock products grew 5% and 7% in the third quarter and first nine months of 2020, respectively, primarily driven by~~ higher demand for ruminant, swine and poultry products. Sales growth in the first nine months of 2020 was also driven by the April 2019 acquisition of Antelliq Corporation (Antelliq) (see Note 2 to the condensed consolidated financial statements). Sales of companion animal products grew 17% in the third quarter of 2020 and 10% in the first nine months of 2020 primarily driven by higher demand forparasiticides, including the Bravecto (fluralaner) line of products, as well as higher demand for ~~companion animal~~ vaccines.

Costs, Expenses and Other

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Cost of sales $ 3,481 $ 3,990 (13) % $ 9,952 $ 10,443 (5) %
Selling, general and administrative 2,450 2,589 (5) % 7,383 7,726 (4) %
Research and development 3,390 3,204 6 % 7,721 7,324 5 %
Restructuring costs 114 232 (51) % 269 444 (39) %
Other (income) expense, net (312) 35 * (630) 362 *
$ 9,123 $ 10,050 (9) % 24,695 26,299 (6) %

* Greater than 100%.


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in millions)	2021		2020		% Change		2021		2020		% Change
Cost of sales	$	3,450	$	3,013	15	%	$	9,752	$	8,589	14	%
Selling, general and administrative	2,336		2,060		13	%	6,804		6,336		7	%
Research and development	2,445		3,349		(27)	%	9,177		7,609		21	%
Restructuring costs	107		113		(5)	%	487		265		84	%
Other (income) expense, net	(450)		(312)		44	%	(1,007)		(637)		58	%
	$	7,888	$	8,223	(4)	%	25,213		22,162		14	%

Cost of Sales

Cost of sales ~~declined 13%~~increased 15% and 5%14% in the third quarter and first nine months of ~~2020,~~2021, respectively. Cost of sales includes the amortization of intangible assets recorded in connection with ~~business~~ acquisitions, collaborations, and licensing arrangements, which totaled ~~$270~~$346 million and ~~$320~~$403 million in the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$843 million~~$1.2 billion and ~~$1.1~~$1.4 billion for the first nine months of 2021 and 2020, respectively. Costs in the first nine months of ~~2020 and 2019, respectively. Cost of sales~~2021 also includes the amortization of amounts capitalized in connection with collaborations of $117 million and $81 million in the third quarter of 2020 and 2019, respectively, and $509 million and $307 million in the first nine months of 2020 and 2019, respectively. Additionally, costs include ~~intangible asset impairment~~ charges of ~~$612~~$225 million ~~and $693 million in the third quarter and first nine months of 2019, respectively,~~ related to ~~marketed products. The Company may recognize additional impairment charges in~~ the ~~future related to intangible assets that were measured at fair value and capitalized in connection with business acquisitions and such charges could be material.~~discontinuation of COVID-19 development programs. Also included in cost of sales are expenses associated with restructuring activities which amounted to ~~$38~~$48 million and ~~$62~~$38 million in the third quarter of 2021 and 2020, respectively, and ~~2019, respectively,~~$113 million and $131 million ~~and $161 million in~~for the first nine months of ~~2020~~2021 and ~~2019,~~2020, 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.

~~- 41 -~~

Gross margin was ~~72.3%~~73.8% in the third quarter of ~~2020~~2021 compared with ~~67.8%~~72.4% in the third quarter of ~~2019.~~2020. The gross margin ~~improvement~~increase reflects lower ~~intangible asset impairment charges (noted above), the favorable effect~~amortization of product mix and lower restructuring costs, partially offset by the unfavorable effects of pricing pressure, inventory write-offs and foreign exchange. Gross margin was 71.9% in the first nine months of 2020 compared with 70.1% in the first nine months of 2019. The gross margin improvement was primarily driven by lower impairment charges and amortization related to intangible assets (noted above), as well as the favorable effect of product mix, ~~and lower restructuring costs,~~ partially offset by higher manufacturing costs, including asset write-offs. Gross margin was 72.3% in the first nine months of 2021 compared with 71.9% in the first nine months of 2020. The gross margin increase reflects lower amortization of intangible assets and the favorable effect of product mix, partially offset by higher costs associated with COVID-19 development programs, including charges related to the discontinuation of certain COVID-19 development programs, as well as the unfavorable effects of pricing pressure, ~~royalties,~~higher manufacturing ~~variances,~~costs and ~~inventory write-offs.~~foreign exchange.

- 43 -

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses ~~declined 5%~~increased 13% and 4%7% in the third quarter and first nine months of ~~2020,~~2021, respectively, primarily due to ~~lower~~higher administrative ~~and selling~~ costs, including ~~reduced travel~~compensation and ~~fewer meetings, due~~benefits, higher promotional expenses in ~~part to~~support of the ~~COVID-19 pandemic, and~~Company’s key growth pillars, as well as the ~~favorable~~unfavorable effect of foreign ~~exchange, partially offset by costs related~~exchange. The COVID-19 pandemic contributed to ~~the planned spin-off of Organon. Transaction costs related to the acquisition of ArQule also partially offset the decline in SG&A expenses~~lower spending in the ~~first nine months of 2020 (see Note 2 to the condensed consolidated financial statements).~~prior year periods.

Research and Development

Research and development (R&D) expenses ~~grew 6% and 5%~~declined 27% in the third quarter ~~and first nine months~~ of ~~2020, respectively,~~2021 primarily ~~driven by higher~~due to lower upfront payments related to collaborations, partially offset by higher oncology and ~~license agreements (see Note 2 to the condensed consolidated financial statements), increased~~COVID-19 clinical development spending, increased investment in discovery research and early drug development, ~~spending,~~ as well as higher ~~restructuring costs, partially offset by a charge~~compensation and benefit costs. R&D expenses increased 21% in ~~2019 for~~ the ~~acquisition~~first nine months of ~~Peloton Therapeutics, Inc. (Peloton) (see Note 2~~2021 primarily due to ~~the condensed consolidated financial statements), lower costs associated with the~~higher upfront payments related to acquisitions and collaborations, as well as higher clinical development spending and increased investment in discovery research and early drug development. The COVID-19 pandemic ~~(net of~~contributed to lower spending ~~on COVID-19-related vaccine and antiviral research programs), and~~in the ~~favorable effect of foreign exchange.~~prior year periods.

R&D expenses are comprised of the costs directly incurred by ~~MRL,~~Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were $1.8 billion and $1.6 billion in ~~both~~ the third quarter of 2021 and 2020, respectively, and ~~2019, and $4.7~~$5.3 billion and ~~$4.4~~$4.6 billion in the first nine months of ~~2020~~2021 and ~~2019,~~2020, respectively. Also included in R&D expenses are Animal Health research costs, licensing costs and costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, which in the aggregate were approximately ~~$645~~$710 million and ~~$655~~$625 million for the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~were~~$2.1 billion and $1.9 billion in both the first nine months of 2020 and 2019. In 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 business acquisitions. The Company recorded a net reduction in expenses of $48 million and $36 million in the first nine months of 2021 and 2020, ~~and 2019, respectively, related to the changes in these estimates.~~respectively. Additionally, R&D expenses ~~also reflect $19 million and $67 million~~in the first nine months of ~~accelerated depreciation costs in connection with restructuring activities~~2021 include a $1.7 billion charge for the acquisition of Pandion as noted above. R&D expenses in the third quarter and first nine months of 2020 ~~respectively.~~include charges of $832 million related to transactions with Seagen Inc. (Seagen) (see Note 3 to the condensed consolidated financial statements).

Restructuring Costs

In ~~early~~ 2019, Merck approved a new global restructuring program (Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization, builds on prior restructuring programs and does not include any actions associated with the ~~planned~~ spin-off of Organon. As the Company continues to evaluate its global footprint and overall operating model, it subsequently identified additional actions under the Restructuring Program, and could identify further actions over time. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately ~~$2.5~~$3.0 billion. The Company expects to record charges of approximately ~~$800~~$700 million in ~~2020~~2021 related to the Restructuring Program. The Company anticipates the actions under the Restructuring Program towill result in annual net cost savings of approximately $900 million by the end of 2023. ~~Actions under previous global restructuring programs have been substantially completed.~~

Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were ~~$114~~$107 million and ~~$232~~$113 million for the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$269~~were $487 million and ~~$444~~$265 million infor the first nine months of ~~2020~~2021 and ~~2019,~~2020, respectively. Separation costs incurred were 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. Also included in restructuring costs are asset abandonment, facility 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. For segment reporting, restructuring costs are unallocated expenses.

Additional costs associated with the Company’s restructuring activities are included in Cost of sales, Selling, general and administrative expenses and Research and development costs. The Company recorded aggregate pretax costs of

~~- 42 -~~

~~$186~~ $168 million and ~~$296~~$185 million in the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$504~~$630 million and ~~$642~~$500 million, infor the first nine months of ~~2020~~2021 and ~~2019,~~2020, respectively, related to restructuring program activities (see Note 45 to the condensed consolidated financial statements).

Other (Income) Expense, Net

Other (income) expense, net, was $450 million of income in the third quarter of 2021 compared with $312 million of income in the third quarter of 2020 primarily due to higher income from investments in equity securities, net, largely related to higher realized and unrealized gains on certain investments, partially offset by higher pension settlement costs. Other income (expense), net, was $1.0 billion of income in the first nine months of 2021 compared with $637 million of income in the first nine months of 2020 primarily due to higher income from investments in equity securities, net, largely related to higher realized and unrealized gains on certain investments including the disposition in 2021 of the Company’s ownership

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interest in Preventice Solutions Inc. (Preventice) as a result of the acquisition of Preventice by Boston Scientific. The favorability in the year-to-date period was partially offset by higher pension settlement costs.

For details on the components of Other (income) expense, net, see Note 1312 to the condensed consolidated financial statements.


Segment Profits	Segment Profits									Segment Profits
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	($ in millions)	2020		2019		2020		2019		($ in millions)	2021		2020		2021		2020
Pharmaceutical segment profits	Pharmaceutical segment profits	$	7,974	$	7,747	$	22,010	$	21,437	Pharmaceutical segment profits	$	8,606	$	7,026	$	22,450	$	19,235
Animal Health segment profits	Animal Health segment profits	451		423		1,336		1,243		Animal Health segment profits	505		459		1,629		1,347
Other non-reportable segment profits	Other non-reportable segment profits	(1)		(2)		1		(2)		Other non-reportable segment profits	—		(1)		—		1
Other	Other	(4,996)		(5,821)		(12,563)		(14,005)		Other	(3,845)		(4,778)		(14,109)		(12,175)
Income before taxes		$	3,428	$	2,347	$	10,784	$	8,673
Income from continuing operations before taxes										Income from continuing operations before taxes	$	5,266	$	2,706	$	9,970	$	8,408

Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as SG&A expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as SG&A ~~expenses~~ and ~~research and development costs~~R&D expenses directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, ~~research and development~~R&D expenses incurred by MRL, 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 costs related to restructuring activities and acquisition and divestiture-related costs, including the amortization of intangible assets and amortization purchase accounting adjustments, intangible asset impairment charges, and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Additionally, segment profits do not reflect other expenses from corporate and manufacturing cost centers and other miscellaneous income or expense. These unallocated items 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.

Pharmaceutical segment profits ~~grew 3% in both the third quarter~~increased 22% and ~~first nine months of 2020 driven primarily by higher sales, as well as lower administrative and selling costs. Animal Health segment profits grew 6% and 7%~~17% in the third quarter and first nine months of ~~2020,~~2021, respectively, reflecting higher sales and ~~lower promotional costs,~~the favorable effect of foreign exchange, partially offset by higher ~~R&D costs~~administrative and promotional costs. Animal Health segment profits grew 10% and 21% in the ~~unfavorable effect~~third quarter and first nine months of ~~foreign exchange.~~2021, respectively, reflecting higher sales, partially offset by higher promotional, selling and administrative costs.

Taxes on Income

~~Net Loss Attributable to Noncontrolling Interests~~

Net loss attributable to noncontrolling interests of $73 million for the first nine months of 2019 includes the portion of goodwill impairment charges related to certain businesses in the Healthcare Services segment that are attributable to noncontrolling interests.

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~~Net Income and Earnings per Common Share~~

Net income attributable to Merck & Co., Inc. was $2.9 billion for the third quarter of 2020 compared with $1.9 billion for the third quarter of 2019 and was $9.2 billion for the first nine months of 2020 compared with $7.5 billion for the first nine months of 2019. Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders (EPS) for the third quarter of 2020 were $1.16 compared with $0.74 in the third quarter of 2019 and were $3.61 for the first nine months of 2020 compared with $2.89 for the first nine months of 2019.examination.

Non-GAAP Income and Non-GAAP EPS from Continuing Operations

Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance that Merck is providing because management believes this information enhances investors’ understanding of the Company’s 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 and divestiture-related costs, restructuring costs, income and losses from investments in equity securities, and certain other items.

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These excluded items are significant components in understanding and assessing financial performance. 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 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. In addition, senior management’s annual compensation is derived in part using non-GAAP pretax income. 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. The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net income and EPS prepared in accordance with generally accepted accounting principles in the ~~United States~~U.S. (GAAP).

A reconciliation between GAAP financial measures and non-GAAP financial measures (from continuing operations) is as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions except per share amounts) 2020 2019 2020 2019
Income before taxes as reported under GAAP $ 3,428 $ 2,347 $ 10,784 $ 8,673
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs 508 975 1,551 2,183
Restructuring costs 186 296 504 642
Other items:
Charges for collaborations and acquisitions (1)
1,082 982 1,082 982
Other (1) — (17) 48
Non-GAAP income before taxes 5,203 4,600 13,904 12,528
Taxes on income as reported under GAAP 483 440 1,611 1,259
Estimated tax benefit on excluded items (2)
356 281 616 555
Adjustment to tax benefits recorded in conjunction with the 2015 Cubist Pharmaceuticals, Inc. acquisition (67) — (67) —
Net tax benefit from the settlement of certain federal income tax matters — — — 360
Tax charge related to finalization of treasury regulations for the Tax Cuts and Job Act of 2017 — — — (67)
Non-GAAP taxes on income 772 721 2,160 2,107
Non-GAAP net income 4,431 3,879 11,744 10,421
Less: Net income (loss) attributable to noncontrolling interests as reported under GAAP 4 6 12 (73)
Acquisition and divestiture-related costs attributable to noncontrolling interests — — — 89
Non-GAAP net income attributable to noncontrolling interests 4 6 12 16
Non-GAAP net income attributable to Merck & Co., Inc. $ 4,427 $ 3,873 $ 11,732 $ 10,405
EPS assuming dilution as reported under GAAP $ 1.16 $ 0.74 $ 3.61 $ 2.89
EPS difference 0.58 0.77 1.01 1.13
Non-GAAP EPS assuming dilution $ 1.74 $ 1.51 $ 4.62 $ 4.02


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions except per share amounts)	2021		2020		2021		2020
Income from continuing operations before taxes as reported under GAAP	$	5,266	$	2,706	$	9,970	$	8,408
Increase (decrease) for excluded items:
Acquisition and divestiture-related costs	445		447		1,445		1,600
Restructuring costs	168		185		630		500
Income from investments in equity securities, net	(684)		(346)		(1,503)		(944)
Other items:
Charge for the acquisition of Pandion	—		—		1,704		—
Charges for the discontinuation of COVID-19 development programs	—		—		225		—
Charges for the formation of collaborations (1)	—		1,082		—		1,082
Other	(87)		(1)		(26)		(17)
Non-GAAP income from continuing operations before taxes	5,108		4,073		12,445		10,629
Taxes on income from continuing operations as reported under GAAP	695		380		1,436		1,271
Estimated tax (expense) benefit on excluded items (2)	(30)		272		86		411
Net tax benefit from the settlement of certain federal income tax matters	—		—		207		—
Adjustment to tax benefits recorded in conjunction with the 2015 Cubist Pharmaceuticals, Inc. acquisition	—		(67)		—		(67)
Non-GAAP taxes on income from continuing operations	665		585		1,729		1,615
Non-GAAP net income from continuing operations	4,443		3,488		10,716		9,014
Less: Net income attributable to noncontrolling interests as reported under GAAP	4		2		9		1
Non-GAAP net income from continuing operations attributable to Merck & Co., Inc.	$	4,439	$	3,486	$	10,707	$	9,013
EPS from continuing operations assuming dilution as reported under GAAP	$	1.80	$	0.92	$	3.36	$	2.81
EPS difference	(0.05)		0.45		0.86		0.74
Non-GAAP EPS from continuing operations assuming dilution	$	1.75	$	1.37	$	4.22	$	3.55

(1) ~~Amount in 2020 includes~~Includes $832 million related to transactions with ~~Seagen. Amount in 2019 represents a charge for the acquisition of Peloton. See~~Seagen (see Note 23 to the condensed consolidated financial ~~statements.~~statements).

(2) The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.

~~- 44 -~~

Acquisition and Divestiture-Related Costs

Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with ~~business~~ acquisitions and divestitures. These amounts include the amortization of intangible assets and amortization of purchase accounting adjustments to inventories, as well as intangible asset impairment charges, and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Also excluded are integration, transaction, and certain other costs associated with ~~business~~ acquisitions and divestitures. Non-GAAP income and non-GAAP EPS also exclude amortization of intangible assets related to collaborations and licensing arrangements.

Restructuring Costs

Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 45 to the condensed 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 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, facility shut-down and other related costs, as well as

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employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs.

Income and Losses from Investments in Equity Securities

Non-GAAP income and non-GAAP EPS exclude realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds.

Certain Other Items

Non-GAAP income and non-GAAP EPS exclude certain other items. These items are adjusted for after evaluating them on an individual basis, considering their quantitative and qualitative aspects. Typically, these consist of items that are unusual in nature, significant to the results of a particular period or not indicative of future operating results. Excluded from non-GAAP income and non-GAAP EPS in 2021 is a charge for the acquisition of Pandion, charges related to the discontinuation of COVID-19 development programs (see Note 3 to the condensed consolidated financial statements) and a net tax benefit related to the settlement of certain federal income tax matters (see Note 13 to the condensed consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2020 are upfront payments related to ~~licensing arrangements and~~ collaborations, including ~~the~~ transactions with Seagen (see Note 23 to the condensed consolidated financial statements), and an adjustment to tax benefits recorded in conjunction with the 2015 Cubist Pharmaceuticals, Inc. acquisition. Excluded from non-GAAP income and non-GAAP EPS in 2019 is a charge for the acquisition of Peloton (see Note 2 to the condensed consolidated financial statements), a net tax benefit related to the settlement of certain federal income tax matters (see Note 14 to the condensed consolidated financial statements) and a tax charge related to the finalization of U.S. treasury regulations related to the Tax Cuts and Jobs Act of 2017.

Research and Development Update

MK-4482 (EIDD-2801), molnupiravir, is an investigational oral antiviral medicine, for the treatment of mild-to-moderate COVID-19 in adults who are at risk for progressing to severe COVID-19 and/or hospitalization. In ~~July 2020,~~October 2021, Merck submitted an EUA application to the FDA ~~accepted~~ for ~~priority review~~molnupiravir based on positive results from a planned interim analysis of the ~~NDA for vericiguat, an orally administered sGC stimulator, to reduce~~Phase 3 MOVe-OUT clinical trial in which molnupiravir significantly reduced the risk of ~~cardiovascular~~hospitalization or death ~~and heart failure hospitalization following a worsening heart failure event~~ in at risk, non-hospitalized adult patients with ~~symptomatic chronic heart failure~~mild-to-moderate COVID-19. The FDA subsequently announced a November 30, 2021 meeting of its Antimicrobial Drugs Advisory Committee to discuss the available data supporting the use of molnupiravir to treat mild-to-moderate COVID-19 in adults who have tested positive for COVID-19 and who are at high risk of progression to severe COVID-19, including hospitalization or death. In October 2021, the EMA initiated a rolling review for molnupiravir. Merck plans to work with ~~reduced ejection fraction,~~the CHMP of the EMA to complete the rolling review process to facilitate initiating the formal review of the Marketing Authorization Application. Merck is developing molnupiravir in ~~combination~~collaboration with Ridgeback Bio. The companies are actively working with other ~~heart failure therapies.~~regulatory agencies worldwide to submit applications for emergency use or marketing authorization in the coming months. Molnupiravir is also being evaluated for post-exposure prophylaxis in the Phase 3 MOVe-AHEAD trial, which is evaluating the efficacy and safety of molnupiravir in preventing the spread of COVID-19 within households. As previously announced, data from the MOVe-IN clinical trial indicated that molnupiravir is unlikely to demonstrate a clinical benefit in hospitalized patients, who generally had a longer duration of symptoms prior to study entry; therefore, the decision was made not to proceed to Phase 3.

MK-7264, gefapixant, is an investigational, orally administered, selective P2X3 receptor antagonist, for the treatment of refractory chronic cough or unexplained chronic cough in adults under review by the FDA. The New Drug Application (NDA) for gefapixant is based on results from the COUGH-1 and COUGH-2 clinical trials. In July 2021, the FDA ~~set~~informed Merck of its decision to extend the goal date for the NDA to provide time for a full review of the submission. The extended Prescription Drug User Fee Act (PDUFA), date, or target action date, ~~of January 20, 2021. Vericiguat~~ is being jointly developed with Bayer (see Note 3 to the condensed consolidated financial statements). The application is based on results from the Phase 3 VICTORIA trial, which is the first contemporary outcomes study focused exclusively on a population with worsening chronic heart failure who are at high risk for cardiovascular mortality and repeated heart failure hospitalizations. Data from VICTORIA were presented at the virtual American College of Cardiology’s 69th Annual Scientific Session together with World Congress of Cardiology and published in ~~The New England Journal of Medicine. Vericiguat~~March 21, 2022. Gefapixant is also under review in the EU and in Japan. ~~Merck and Bayer plan to share VICTORIA data with regulatory authorities worldwide.~~

~~Koselugo~~V114, Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine), is an investigational 15-valent pneumococcal conjugate vaccine under review inby the EUEMA for the ~~treatment~~prevention of ~~pediatric patients two~~invasive disease and pneumonia in adults. In October 2021, the EMA’s CHMP recommended the approval of Vaxneuvance for active immunization for the prevention of invasive disease and pneumonia caused by Streptococcus pneumoniae in individuals 18 years of age and ~~older with NF1 who have symptomatic, inoperable PN~~older. The CHMP recommendation will now be reviewed by the EC for marketing authorization in the EU, and a final decision is expected by the end of 2021. The CHMP opinion was based on data from seven randomized, double-blind clinical studies evaluating Vaxneuvance in a variety of adult populations and clinical circumstances. The Company has several ongoing Phase 3 trials evaluating V114 in pediatric patients. In August 2021, Merck announced positive topline results from the ~~NCI CTEP-sponsored~~pivotal Phase ~~2 SPRINT Stratum 1 trial. Koselugo was approved by~~3 PNEU-PED study evaluating the immunogenicity, safety, and tolerability of Vaxneuvance in infants and has submitted a supplemental licensure application to the FDA for pediatric use. V114 previously received Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease in ~~April 2020. Koselugo is being jointly developed and commercialized with AstraZeneca globally (see Note 3~~pediatric patients 6 weeks to ~~the condensed consolidated financial statements).~~18 years of age.

Keytruda is an anti-PD-1 therapy approved for the treatment of many cancers that is in clinical development for expanded indications. These approvals were the result of a broad clinical development program that currently consists of more than ~~1,300~~1,600 clinical trials, including ~~more than 900~~nearly 1,200 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: biliary tract, estrogen receptor positive breast cancer, cervical, colorectal, cutaneous squamous cell, endometrial, esophageal, gastric, glioblastoma, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, non-small-cell lung, small-cell lung, melanoma, mesothelioma, ~~nasopharyngeal, non-small-cell lung,~~ ovarian, prostate, renal, ~~small-cell lung, triple-negative~~triple-

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negative breast, and urothelial, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.

~~In July 2020,~~Keytruda is under priority review by the FDA ~~accepted and granted Priority Review for a supplemental Biologics License Application (BLA) seeking accelerated approval for~~ ~~Keytruda~~ ~~in combination with chemotherapy~~ for the adjuvant treatment of adult and pediatric (12 years and older) patients with ~~locally recurrent unresectable~~Stage IIB or ~~metastatic~~ ~~triple-negative breast cancer (TNBC) whose tumors express PD-L1 (CPS ≥10). The application was~~IIC melanoma following complete resection. This submission is based on data from the ~~KEYNOTE-355~~Phase 3 KEYNOTE-716 trial. In August 2021, Merck announced that the KEYNOTE-716 trial ~~in which~~ ~~Keytruda~~ ~~plus chemotherapy demonstrated a statistically significant~~met its primary endpoint of recurrence-free survival for the adjuvant treatment of patients with surgically resected high-risk stage IIB and ~~clinically meaningful improvement in progression-free survival (PFS) compared with chemotherapy alone in patients whose tumors expressed PD-L1 at CPS ≥10.~~ ~~In patients whose tumors expressed PD-L1 with~~

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~~CPS ≥1,~~ ~~Keytruda~~ ~~plus chemotherapy improved PFS versus chemotherapy alone, however these~~IIC melanoma. These results ~~did not meet statistical significance.~~ ~~These data~~ were presented at the ~~virtual scientific program of the 2020 American~~European Society of ~~Clinical~~Medical Oncology ~~(ASCO) Annual Meeting. As previously announced, the trial will continue without changes to evaluate the other dual primary endpoint of overall survival (OS).~~(ESMO) Congress in September 2021. The FDA set a PDUFA date of ~~November 28, 2020. In October 2020, Merck announced the submission of KEYNOTE-355 to the Japan PMDA.~~

~~Also in July 2020, the FDA accepted for standard review a supplemental BLA for~~December 4, 2021. Keytruda is also under review in the EU for this indication.

Keytruda is also under priority review by the FDA for the adjuvant treatment of patients with RCC at intermediate-high or high risk of recurrence following nephrectomy (surgical removal of a kidney) or following nephrectomy and resection of metastatic lesions based on data from the Phase 3 KEYNOTE-564 trial. The FDA set a PDUFA date of December 10, 2021. Keytruda is also under review in the EU and Japan for this indication.

Additionally, Keytruda is under review by the FDA for the treatment of patients with advanced endometrial cancer that is MSI-H or dMMR, who have disease progression following prior systemic therapy in any setting and are not candidates for curative surgery or radiation. This submission is based on data from the KEYNOTE-158 trial. The FDA set a PDUFA date of March 28, 2022.

Keytruda in combination with chemotherapy is under review in the EU and Japan for the treatment of patients with high-risk, early-stage TNBC ~~in combination with chemotherapy~~ as neoadjuvant treatment, and then as a single agent as ~~adjuvant~~adjuvent treatment after ~~surgery. The application was based on data from the KEYNOTE-522 trial in which neoadjuvant~~ ~~Keytruda~~ ~~plus chemotherapy resulted in a statistically significant increase in pathologic complete response in patients with early-stage TNBC, regardless of PD-L1 expression. The~~ ~~Keytruda~~ ~~regimen also demonstrated a favorable trend for the other dual primary endpoint of event-free survival.~~ ~~An interim analysis for this study was conducted by the Independent Data Monitoring Committee (DMC). Based on the recommendation of the DMC, the study continues to evaluate event-free survival.~~ ~~Data from the KEYNOTE-522 trial were presented at the European Society for Medical Oncology 2019 Congress. As previously announced,~~ ~~Keytruda~~ plus chemotherapy was granted Breakthrough Therapy designation by the FDA in September 2019 for the neoadjuvant treatment of patients with high-risk, early-stage TNBC. The PDUFA date for this application is March 29, 2021.

The Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) announced the start of a procedure to extend the currently approved therapeutic indication for the treatment of relapsed or refractory cHL in adults to an earlier line of therapysurgery based on the ~~pivotal Phase 3 KEYNOTE-204 trial, in which~~ ~~Keytruda~~ demonstrated a significant improvement in PFS compared to brentuximab vedotin (BV), a current standard of care in this patient population. Data from KEYNOTE-204 were presented during the virtual scientific program of the 2020 ASCO Annual Meeting. ~~Keytruda~~ ~~was approved for this indication by the FDA in October 2020. The procedure also seeks to extend the indication to include pediatric patients.~~KEYNOTE-522 trial.

Keytruda is ~~also~~ under review in ~~the EU and in~~ Japan ~~for the first-line treatment of patients with MSI-H or mismatch repair deficient unresectable or metastatic colorectal cancer based on the results from the Phase 3 KEYNOTE-177 trial.~~ ~~Keytruda~~ ~~was approved for this indication by the FDA in June 2020.~~

~~In addition to the Breakthrough Therapy designation from the FDA for the combination of~~ ~~Keytruda~~ ~~with neoadjuvant chemotherapy for the treatment of high-risk, early-stage TNBC noted above,~~ ~~Keytruda~~ ~~also received Breakthrough Therapy designation from the FDA in February 2020 for the combination of~~ ~~Keytruda~~ with PADCEV (enfortumab vedotin-ejfv), in the first-line setting for the treatment of patients with unresectable locally advanced or metastatic urothelial cancer who are not eligible for cisplatin-containing chemotherapy. The FDA’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.

~~In August 2020, Merck announced first-time data from the pivotal Phase 3 KEYNOTE-590 trial evaluating~~ ~~Keytruda~~ ~~in combination with platinum-based chemotherapy for the first-line treatment of patients with locally advanced or metastatic esophageal and gastroesophageal junction cancer. In the study,~~ ~~Keytruda~~ in combination with chemotherapy significantly improved OS and PFS versus chemotherapy in all randomized patients; it was demonstrated that the risk of death was reduced by 27% versus chemotherapy as first-line treatment for locally advanced or metastatic esophageal cancer. With these results, ~~Keytruda~~ is the first anti-PD-1 therapy in combination with chemotherapy to show superior OS, PFS and objective response rate (ORR) versus chemotherapy, the current standard of care, for these patients regardless of histology or PD-L1 expression status. These data were presented at the European Society for Medical Oncology (ESMO) Virtual Congress 2020. Merck will be sharing these data with regulatory authorities worldwide.

~~In June 2020, Merck announced that the Phase 3 KEYNOTE-361 trial evaluating~~ ~~Keytruda~~ in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic carcinoma of the esophagus or HER2-negative gastroesophageal junction adenocarcinoma in adults whose tumors express PD-L1 based on the results from the KEYNOTE-590 trial.

Additionally, Keytruda is under review in Japan for treatment of adult patients with advanced or ~~metastatic urothelial carcinoma (bladder cancer) did not meet its pre-specified dual primary endpoints of OS or PFS, compared~~recurrent TMB-H solid tumors that have progressed after chemotherapy (limited to use when difficult to treat with standard of ~~care chemotherapy. In~~care) based on the ~~final analysis of the study, there was an improvement in OS and PFS for patients treated with~~ KEYNOTE-158 trial.

Keytruda in combination with platinum-based chemotherapy ~~compared to chemotherapy alone; however, these results did not meet statistical significance per~~with or without bevacizumab is also under review in Japan for the ~~pre-specified statistical plan. The monotherapy arm~~first-line treatment of patients with persistent, recurrent or metastatic cervical cancer based on the ~~study was not formally tested, since superiority was not reached for OS or PFS in the~~ ~~Keytruda~~ ~~combination arm.~~ ~~Keytruda~~ has three FDA-approved bladder cancer indications across multiple stages of bladder cancer. Additionally, Merck has an extensive clinical development program in bladder cancer and is continuing to evaluate ~~Keytruda~~ ~~as monotherapy and in combination with other anti-cancer therapies across several disease settings (i.e., metastatic, muscle invasive bladder cancer, and non-muscle invasive bladder cancer).~~KEYNOTE-826 trial.

In ~~May 2020, Merck announced~~October 2021, the CHMP of the EMA adopted a positive ~~results from two studies from~~opinion recommending approval of the ~~Company’s lung cancer research program. Initial results from the Phase 2 KEYNOTE-799 trial evaluating~~combination of Keytruda ~~plus concurrent chemoradiation therapy~~

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demonstrated an ORR of 67.0% in Cohort A (squamous and nonsquamous NSCLC patients who received paclitaxel plus carboplatin) and 56.6% in Cohort B (nonsquamous NSCLC patients who received cisplatin plus pemetrexed) in untreated patients with unresectable, locally advanced stage III NSCLC.

~~Additionally in May 2020, Merck and Eisai presented data from analyses of two trials evaluating~~ ~~Keytruda~~ ~~plus Lenvima at the 2020 ASCO Annual Meeting, in which the~~ ~~Keytruda~~ plus Lenvima combination demonstrated clinically meaningful ORR: the KEYNOTE-524/Study 116 trial in patients with unresectable HCC with no prior systemic therapy and the KEYNOTE-146/Study 111 trial in patients with metastatic clear cell renal cell carcinoma (ccRCC) who progressed following immune checkpoint inhibitor therapy.

~~In July 2020, Merck and Eisai announced that the FDA issued a Complete Response Letter (CRL) regarding Merck’s and Eisai’s applications seeking accelerated approval of Keytruda~~ plus Lenvima for the first-line treatment of adult patients with ~~unresectable HCC~~advanced RCC based on data from the Phase ~~1b KEYNOTE-524/~~3 KEYNOTE-581 trial/Study ~~116 trial, which showed clinically meaningful efficacy in the single-arm setting. These data supported~~307. The CHMP also adopted a ~~Breakthrough Therapy designation granted by the FDA in July 2019. Ahead~~positive opinion recommending approval of the PDUFA action dates of Merck’s and Eisai’s applications, another combination therapy was approved based on a randomized, controlled trial that demonstrated improvement in OS versus standard-of-care treatment. Consequently, the CRL stated that Merck’s and Eisai’s applications do not provide evidence that Keytruda in combination with Lenvima ~~represents a meaningful advantage over available therapies~~ for the treatment of unresectable or metastatic HCC with no prior systemic therapy for advanced disease. Since the applications for KEYNOTE-524/Study 116 no longer meet the criteria for accelerated approval, both companies plan to work with the FDA to take appropriate next steps, which include conducting a well-controlled clinical trial that demonstrates substantial evidence of effectiveness and the clinical benefit of the combination. As such, LEAP-002, the Phase 3 trial evaluating the ~~Keytruda~~ ~~plus Lenvima combination as a first-line treatment for advanced HCC, is currently underway and fully enrolled. The CRL does not impact the current approved indications for~~ ~~Keytruda~~ ~~or for Lenvima.~~

~~In July 2020, the FDA granted Breakthrough Therapy designation to the hypoxia-inducible factor-2 alpha (HIF-2α) inhibitor MK-6482, a novel investigational~~ ~~candidate for the treatment of~~adult patients with ~~von Hippel-Lindau (VHL) disease-associated RCC~~advanced or recurrent endometrial carcinoma who have disease progression following prior treatment with ~~nonmetastatic RCC tumors less than three centimeters~~a platinum-containing therapy in ~~size, unless immediate~~any setting and who are not candidates for curative surgery ~~is required. The FDA also granted orphan drug designation to MK-6482 for VHL disease. These designations are~~or radiation, based on data from athe Phase ~~2 trial evaluating MK-6482~~3 KEYNOTE-775 trial/Study 309. The CHMP’s recommendations will now be reviewed by the EC for marketing authorization in ~~patients with VHL-associated ccRCC, which were presented at~~ the ~~2020 ASCO Annual Meeting. Additionally, Phase 2 data showing anti-tumor responses~~EU and decisions are expected in ~~VHL disease patients with ccRCC and other tumors were presented at~~ the fourth quarter of 2021. ~~ESMO Virtual Congress 2020~~Keytruda. is also under review for both of these indications in Japan.

~~In September 2020,~~ Merck and ~~Seagen announced a collaboration to globally develop and commercialize Seagen’s ladiratuzumab vedotin (MK-6440), an investigational antibody-drug conjugate targeting LIV-1, which is currently in~~Eisai have stopped LEAP-007, the Phase ~~2 clinical trials for breast cancer and other solid tumors. The collaboration will pursue a broad joint development program~~3 study evaluating ~~ladiratuzumab vedotin as monotherapy and~~the first-line treatment of Lenvima in combination with Keytruda in ~~triple-negative breast cancer, hormone receptor-positive breast cancer~~participants with metastatic squamous or non-squamous NSCLC, whose tumors are PD-L1 positive with no EGFR or ALK genomic tumor aberrations. The trial has been discontinued following the recommendation of the external Data Monitoring Committee (eDMC) which met, as scheduled, to assess safety and ~~other LIV-1-expressing solid tumors. Seagen also granted~~ futility. The eDMC determined that the study had met the criteria for declaring futility and the benefit/risk profile of the combination did not support continuing the trial.

Merck ~~an exclusive license~~ and ~~entered into~~Eisai have closed LEAP-011 for further enrollment. LEAP-011 is a ~~co-development agreement~~Phase 3 study evaluating Lenvima in combination with ~~Merck to accelerate the global reach of Tukysa (MK-7119), a small molecule tyrosine kinase inhibitor,~~ Keytruda for the ~~treatment~~first-line treatments of ~~HER2-positive cancers, in Asia,~~patients with platinum-ineligible urotherial carcinoma. Enrollment was closed following the ~~Middle East and Latin America and other regions outside~~recommendation of the ~~United States, Canada~~eDMC, which met, as scheduled, to assess safety and ~~Europe. See Note 2 to the condensed consolidated financial statements.~~

Lynparza is an oral PARP inhibitor currently approved for certain types of advanced ovarian, breast, pancreatic and prostate cancers being co-developed for multiple cancer types as part of a collaboration with AstraZeneca (see Note 3 to the condensed consolidated financial statements).

~~In May 2020, the results~~futility. Data from the ~~Phase 3 GY004 trial, led by NRG Oncology and sponsored by the U.S. NCI, were~~study will be presented at the 2020 ASCO Annual Meeting. This follows the March 2020, Merck and AstraZeneca announcement of the high-level results from the Phase 3 GY004 trial that examined primarily the efficacy and safety of investigational medicine cediranib in combination with Lynparza versus platinum-based chemotherapy in patients with platinum-sensitive relapsed ovarian cancer. The trial did not meet the primary endpoint in the intent-to-treat population of a statistically significant improvement in PFS with cediranib in combination with Lynparza vs. platinum-based chemotherapy.an upcoming medical meeting.

In September 2020, Merck announced the results from two ongoing pivotal Phase 3 trials (COUGH-1 and COUGH-2) evaluating the efficacy and safety of gefapixant (MK-7264), an investigational, orally administered, selective P2X3 receptor antagonist, for the treatment of refractory or unexplained chronic cough. In these studies, adult patients treated with gefapixant 45 mg twice daily demonstrated a statistically significant reduction in 24-hour cough frequency versus placebo at 12 weeks (COUGH-1) and 24 weeks (COUGH-2). The gefapixant 15 mg twice daily treatment arms did not meet the primary efficacy endpoint in either Phase 3 study. These results were presented at the Virtual European Respiratory Society International Congress 2020. Merck plans to share data from COUGH-1 and COUGH-2 with regulatory authorities worldwide.

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In ~~October 2020,~~April 2021, Merck announced ~~Week 96 data~~the discontinuation of development of MK-7110 (formerly known as CD24Fc) which was being evaluated for the treatment of hospitalized patients with COVID-19. Merck acquired MK-7110 in December 2020 through its acquisition of OncoImmune, a privately held clinical-stage biopharmaceutical company. In 2021, Merck received feedback from the ~~Phase 2b trial (NCT03272347) evaluating~~FDA that additional data would be needed to support a potential EUA application and therefore the Company did not expect MK-7110 would become available until the first half of 2022. Given this timeline and the technical, clinical and regulatory uncertainties, the availability of a number of medicines for patients hospitalized with COVID-19, and the need to concentrate Merck’s resources on accelerating the development and manufacture of the most viable therapeutics and vaccines, Merck decided to discontinue development of MK-7110 for the treatment of COVID-19. Due to the discontinuation, the Company recorded charges of $207 million in the first nine months of 2021, which are reflected in Cost of sales and relate to fixed-asset and materials write-offs, as well as the recognition of liabilities for purchase commitments.

In September 2021, the FDA approved updated labeling for Steglatro, Steglujan and Segluromet, medicines for adults with type 2 diabetes, to include the primary efficacy and safety ~~of islatravir, the company’s investigational oral nucleoside reverse transcriptase translocation inhibitor (NRTTI), in combination with doravirine (Pifeltro~~), in treatment-naïve adults with HIV-1 infection. Week 96 findings demonstrated that the combination of islatravir and doravirine maintained virologic suppression (as measured by the number of study participants achieving HIV-1 RNA levels <50 copies/mL, similar to ~~Delstrigo~~ (doravirine/lamivudine/tenofovir disoproxil fumarate)), and the findings were consistent with Week 48 results. Additional Week 96 data from the study show low rates of participants meeting the definition of protocol-defined virologic failure in both the islatravir plus doravirine and the ~~Delstrigo~~ treatment arms, and no participants in either arm met the criteria for resistance testing. These data were presented at the virtual 2020 International Congress on Drug Therapy in HIV Infection (HIV Glasglow).

In October 2020, Merck announced findings from two Phase 3 studies evaluating the safety, tolerability and immunogenicity of V114, the Company’s investigational 15-valent pneumococcal conjugate vaccine. In the PNEU-PATH (V114-016) study, healthy adults 50 years of age and older received V114 or PCV13 followed by ~~Pneumovax~~ ~~23 one year later. Immune responses following vaccination with~~ ~~Pneumovax~~ 23 were comparable in both vaccination groups for the 15 serotypes in V114. Results also showed that at 30 days post vaccination with either V114 or PCV13, immune responses were comparable for both groups across the 13 serotypes shared by the conjugate vaccines and higher in the V114 group for serotypes 22F and 33F, the two serotypes not included in PCV13. In PNEU-DAY (V114-017), a Phase 3 study in immunocompetent adults 18 to 49 years of age with underlying medical conditions associated with increased risk for pneumococcal disease, V114 generated immune responses generally comparable to PCV13 for the 13 shared serotypes and higher immune responses for serotypes 22F and 33F at 30 days post-vaccination.

In September 2020, Merck announced that two Phase 3 studies evaluating the safety, tolerability and immunogenicity of V114 met their primary immunogenicity objectives. The pivotal PNEU-AGE (V114-019) study in healthy adults 50 years of age or older demonstrated that V114 is non-inferior to the currently available 13-valent pneumococcal conjugate vaccine (PCV13) for the 13 serotypes targeted by both vaccines and superior for serotypes 22F and 33F, the two serotypes targeted by V114 but not PCV13. The PNEU-AGE study also met the key secondary immunogenicity objective, demonstrating superiority of V114 compared to PCV13 for serotype 3, a leading cause of invasive pneumococcal disease globally. In another Phase 3 study, PNEU-TRUE (V114-020), in healthy adults 50 years of age or older, V114 met its primary immunogenicity objective demonstrating equivalent immune response across all 15 serotypes for three different lots of V114.

In June 2020, Merck announced results from two initial Phase 3 studies evaluating the safety, tolerability and immunogenicity of V114. Results from the PNEU-WAY (V114-018) study in adults 18 years of age or older living with HIV showed that V114 elicited an immune response to all 15 serotypes included in the vaccine, including serotypes 22F and 33F. Results from the PNEU-FLU (V114-021) study in healthy adults 50 years of age or older showed that V114 can be given concomitantly with the quadrivalent influenza vaccine. These data were announced and published in the International Symposium on Pneumococci and Pneumococcal Diseases digital library in lieu of an in-person meeting.

The V114 Phase 3 clinical development program is comprised of 16 trials investigating the safety, tolerability and immunogenicity of V114 in a variety of populations who are at increased risk for pneumococcal disease including both healthy older adult and healthy pediatric populations, as well as people who are immunocompromised or have certain chronic conditions. Findings from the V114 Phase 3 clinical program, including the studies above, will be presented at a future scientific congress and will form the basis for global regulatory licensure applications, beginning with the FDA before the end of the year.

~~In June 2020, Merck and Pfizer Inc. announced the presentation of~~ results from the ~~Phase 3~~ VERTIS CV trial, which assessed the effect of Steglatro compared with placebo on cardiovascular ~~(CV)~~ outcomes ~~trial that evaluated Steglatro (ertugliflozin), an oral sodium-glucose cotransporter 2 (SGLT2) inhibitor, versus placebo, added to background standard of care treatment,~~ in adult patients with type 2 diabetes and established atherosclerotic CVcardiovascular disease. The ~~study met~~FDA issued a Complete Response Letter (CRL) concerning the ~~primary endpoint~~Company’s application for a new indication, based on additional results from the VERTIS CV trial, to reduce the risk of non-inferiority on major adverse CV events (MACE), which is a composite of CV death, nonfatal myocardial infarction or nonfatal stroke, compared to placebo. The key secondary endpoints of superiority for Steglatro versus placebo for time to the first occurrence of the composite of CV death or hospitalization for heart ~~failure, time~~failure. The Company is reviewing the CRL to CV death alone and time to the first occurrence of the composite of renal death, dialysis/transplant or doubling of serum creatinine from baseline were not met. While not a pre-specified hypothesis for statistical testing, a reduction in hospitalization for heart failure was observed with Steglatro.

~~In July 2020, the FDA granted V181, the Company’s investigational dengue vaccine in Phase 1 development, Fast Track designation.~~assess next steps.

The chart below reflects the Company’s research pipeline as of ~~November 2, 2020.~~October 27, 2021. 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,

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additional indications in the same therapeutic area (other than with respect to cancer) and additional claims, line extensions or formulations for in-line products are not shown.

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Phase 2	Phase 3 (Phase 3 entry date)	Under Review
~~Antiviral COVID-19~~Cancer ~~MK-4482 (molnupiravir)(1)~~MK-0482 ~~Cancer~~ Non-Small Cell Lung MK-1026 Hematological Malignancies MK-1308 (quavonlimab)(2) Non-Small-Cell Lung MK-1308A (quavonlimab+pembrolizumab) Advanced Solid Tumors Colorectal Hepatocellular Melanoma Small-Cell Lung MK-2140 Breast Non-Small-Cell Lung ~~MK-1454(2)~~ ~~Head and Neck~~ MK-3475 Keytruda Advanced Solid Tumors MK-4280 (favezelimab)(2) Hematological Malignancies Non-Small-Cell Lung MK-4280A (favezelimab+pembrolizumab) Renal Cell Small-Cell Lung MK-4830 Non-Small-Cell Lung Small-Cell Lung MK-5890(2) Non-Small-Cell Lung Small-Cell Lung MK-6440 (ladiratuzumab vedotin)(1)(3) ~~Advanced Solid~~Breast Esophageal Gastric Head and Neck Melanoma Non-Small-Cell Lung Prostate Small-Cell Lung MK-6482 Welireg(3) Biliary Colorectal Pancreatic Rare cancers Von Hippel-Lindau Disease-Associated Tumors ~~Breast~~ (EU) MK-7119 Tukysa(1) Advanced Solid Tumors Biliary Tract Bladder Cervical Colorectal Endometrial Gastric Non-Small-Cell Lung MK-7339 Lynparza(1)(3) Advanced Solid Tumors MK-7684 (vibostolimab)(2) Melanoma ~~Non-Small-Cell Lung~~MK-7684A (vibostolimab+pembrolizumab) Biliary Breast Cervical Endometrial Esophageal Hematological Malignancies Prostate MK-7902 Lenvima(1)(2) ~~Advanced Solid Tumors~~ Biliary Tract ~~Colorectal~~ Glioblastoma ~~Gastric~~ Pancreatic ~~Glioblastoma~~ Prostate Small-Cell Lung V937 Breast Cutaneous Squamous Cell ~~Melanoma~~ Head and Neck Melanoma Solid Tumors Cardiovascular MK-2060 Chikungunya ~~virus~~Virus Vaccine V184 ~~Cytomegalovirus~~HIV-1 Infection ~~V160~~MK-8591B (islatravir+MK-8507) ~~HIV-1 Prevention~~MK-8591D (islatravir+lenacapavir)(1) ~~MK-8591 (islatravir)~~Nonalcoholic Steatohepatitis (NASH) MK-3655 MK-6024 Overgrowth Syndrome MK-7075 (miransertib) Pneumococcal Vaccine Adult V116 Pulmonary Arterial Hypertension MK-5475 Respiratory Syncytial Virus MK-1654 Schizophrenia MK-8189 Treatment Resistant Depression MK-1942	Cancer MK-1308A (quavonlimab+pembrolizumab) Renal Cell (April 2021) MK-3475 Keytruda Biliary Tract (September 2019) ~~Breast (October 2015) (EU)~~ Cervical (October 2018) (EU) Cutaneous Squamous Cell (August 2019) ~~(EU)~~ ~~Endometrial (August 2019) (EU)~~ ~~Esophageal (December 2015)~~ (EU) Gastric (May 2015) (EU) Hepatocellular (May 2016) (EU) Mesothelioma (May 2018) ~~Nasopharyngeal (April 2016)~~ Ovarian (December 2018) Prostate (May 2019) Small-Cell Lung (May 2017) ~~(EU)~~ MK-3475 (pembrolizumab subcutaneous) Non-Small-Cell Lung (August 2021) MK-6482Welireg(3) Renal Cell (February 2020) MK-7119 Tukysa(1) Breast (October 2019) MK-7339 Lynparza(1)~~(2)~~(3) Colorectal (August 2020) Non-Small-Cell Lung (June 2019) Small-Cell Lung (December 2020) MK-7684A (vibostolimab+pembrolizumab) Non-Small-Cell Lung (April 2021) MK-7902 Lenvima(1)(2) ~~Bladder (May 2019)~~Colorectal (April 2021) ~~Endometrial (June 2018) (EU)~~Esophageal (July 2021) Gastric (December 2020) Head and Neck (February 2020) Melanoma (March 2019) Non-Small-Cell Lung (March 2019) ~~Cough~~ ~~MK-7264 (gefapixant) (March 2018)~~ HIV-1 Infection MK-8591A ~~(doravirine/~~(doravirine+islatravir) (February 2020) ~~Pneumoconjugate Vaccine~~HIV-1 Prevention ~~V114 (June 2018)~~MK-8591 (islatravir) (February 2021)	New Molecular Entities/Vaccines ~~Heart Failure~~Antiviral COVID-19 ~~MK-1242 (vericiguat)~~MK-4482 (molnupiravir) (U.S.)~~(1)~~(4) (EU) Cough MK-7264 (gefapixant) (U.S.) (EU) (JPN) ~~Pediatric Neurofibromatosis Type 1~~Pneumococcal Vaccine Adult ~~MK-5618 (selumetinib)(1)~~V114 (EU) (JPN) Certain Supplemental Filings Cancer MK-3475 Keytruda • ~~Metastatic Triple-Negative Breast~~Resected Stage IIB and IIC Melanoma (KEYNOTE-716) (U.S.) (EU) • Adjuvent Renal Cell Cancer ~~(KEYNOTE-355)~~(KEYNOTE-564) (U.S.) (EU) (JPN) • MSI-H or dMMR Endometrial Cancer (KEYNOTE-158) (U.S.) • High-Risk Early-Stage Triple-Negative Breast Cancer (KEYNOTE-522) ~~(U.S.)~~(EU) (JPN) • ~~Refractory Classical Hodgkin Lymphoma~~Advanced Unresectable Metastatic Esophageal Cancer ~~(KEYNOTE-204) (EU)~~(KEYNOTE-590) (JPN) • ~~Unresectable or Metastatic MSI-H or dMMR Colorectal~~Tumor Mutational Burden-High (KEYNOTE-158) (JPN) • Cervical Cancer ~~(KEYNOTE-177) (EU)~~(KEYNOTE-826) (JPN) MK-7902 Lenvima(1)(2) • First-Line Metastatic Hepatocellular Carcinoma (KEYNOTE-524) (U.S.)~~(2)(4)~~(5) • ~~Thymic~~Advanced Unresectable Renal Cell Carcinoma ~~(NCCH1508/REMORA)~~ (KEYNOTE-581) (EU) (JPN) • Advanced Endometrial Cancer (KEYNOTE-775) (EU) (JPN)
		Footnotes: (1) Being developed in a ~~collaboration~~collaboration. (2) Being developed in combination with Keytruda. (3) Being developed as monotherapy ~~and~~and/or in combination with Keytruda. (4) Under review for Emergency Use Authorization. (5)In July 2020, the FDA issued a ~~CRL~~Complete Response Letter for Merck’s and Eisai’s applications. Merck and Eisai ~~are reviewing the letter and will~~intend to submit additional data when available to the FDA.

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Liquidity and Capital Resources


($ in millions)	($ in millions)	September 30, 2020			December 31, 2019			($ in millions)	September 30, 2021			December 31, 2020
Cash and investments	Cash and investments	$	8,728		$	11,919		Cash and investments	$	10,451		$	8,835
Working capital	Working capital	6,172			5,263			Working capital	7,330			437
Total debt to total liabilities and equity	Total debt to total liabilities and equity	32.0		%	31.2		%	Total debt to total liabilities and equity	28.3		%	34.7		%

Cash provided by operating activities from continuing operations was ~~$6.2~~$8.0 billion in the first nine months of 2021 compared with $4.2 billion in the first nine months of 2020 reflecting stronger operating performance. Cash provided by operating activities from continuing operations in the first nine months of 2021 includes $400 million of payments related to collaborations compared with ~~$8.6~~$2.1 billion in the first nine months of ~~2019.~~2020. Cash provided by operating activities ~~in the first nine months of 2020 includes $2.1 billion of payments related to collaborations compared with $505 million in the first nine months of 2019. Cash provided by operating activities~~from continuing operations continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders.

Cash used in investing activities of continuing operations was ~~$4.7~~$4.4 billion in the first nine months of ~~2020~~2021 compared with ~~$1.9~~$4.5 billion in the first nine months of ~~2019.~~2020. The ~~increase~~lower use of cash in investing activities was driven primarily by lower cash used for acquisitions, largely offset by lower proceeds from sales of securities and other investments and higher capital ~~expenditures, partially offset by lower purchases of securities and other investments and lower use of cash for acquisitions.~~

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expenditures.

Cash used in financing activities of continuing operations was $2.1 billion in the first nine months of 2021 compared with $4.2 billion in the first nine months of ~~2020 compared with $6.9 billion in the first nine months of 2019.~~2020. The lower use of cash in financing activities was primarily driven ~~primarily~~ by ~~a net increase~~the cash distribution received from Organon in ~~short-term borrowings in 2020 compared~~connection with ~~a net decrease in short-term borrowing in 2019, as well as~~the spin-off (see Note 2 to the condensed consolidated financial statements), lower payments on debt (see below) and lower purchases of treasury stock, partially offset by ~~higher payments on debt (see below),~~ lower proceeds from the issuance of debt (see below), a higher net decrease in short-term borrowings and higher dividends paid to ~~shareholders, and lower proceeds from the exercise of stock options.~~shareholders.

Capital expenditures totaled $3.2 billion and ~~$2.3~~$3.0 billion for the first nine months of 2021 and 2020, ~~and 2019,~~ respectively. The increased capital expenditures reflect investment in new capital projects focused primarily on increasing manufacturing capacity for Merck’s key products, as well as the purchase of a manufacturing facility in Dunboyne, Ireland to support upcoming product launches (see Note 2 to the condensed consolidated financial statements).

The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored ~~$2.1~~$2.4 billion and ~~$2.7~~$2.1 billion of accounts receivable ~~in the third quarter of~~at September 30, 2021 and December 31, 2020, ~~and the fourth quarter of 2019,~~ respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Condensed Consolidated Statement of Cash Flows. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. The net cash flows relating to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows.

Dividends paid to stockholders were ~~$4.7~~$5.0 billion and ~~$4.3~~$4.7 billion for the first nine months of ~~2020~~2021 and ~~2019,~~2020, respectively. In May ~~2020,~~2021, the Board of Directors declared a quarterly dividend of ~~$0.61~~$0.65 per share on the Company’s ~~common~~ stock for the third quarter that was paid in July ~~2020.~~2021. In July ~~2020,~~2021, the Board of Directors declared a quarterly dividend of ~~$0.61~~$0.65 per share on the Company’s ~~common~~ stock for the fourth quarter that was paid in October ~~2020.~~2021.

In January 2021, the Company’s $1.15 billion, 3.875% notes matured in accordance with their terms and were repaid. In October 2021, the Company’s €1.0 billion, 1.125% notes matured in accordance with their terms and were repaid.

In February 2020, the Company’s $1.25 billion, 1.85% notes and $700 million floating-rate notes matured in accordance with their terms and were repaid.

In March 2019, the Company issued $5.0 billion principal amount of senior unsecured notes consisting of $750 million of 2.90% notes due 2024, $1.75 billion of 3.40% notes due 2029, $1.0 billion of 3.90% notes due 2039, and $1.5 billion of 4.00% notes due 2049. The Company used the net proceeds from the offering of $5.0 billion for general corporate purposes, including the repayment of outstanding commercial paper borrowings.

In 2018, Merck’s Board of Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. ~~During the first nine months of 2020,~~In May 2021, Merck restarted its share repurchase program, which the Company had temporarily suspended in March 2020. The Company purchased ~~$1.3 billion (16~~$822 million (11 million shares) of its common stock ~~for its treasury under this share repurchase program.~~during the first nine months of 2021. As of September 30, ~~2020,~~2021, the Company’s remaining share repurchase authorization was ~~$5.9~~$5.1 billion. ~~In March 2020, the Company temporarily suspended its share repurchase program.~~

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The Company has a $6.0 billion credit facility that matures in June ~~2024.~~2026. 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.

Critical Accounting ~~Policies~~Estimates

The Company’s significant accounting policies, which include management’s best estimates and judgments, are included in Note 2 to the consolidated financial statements for the year ended December 31, ~~2019~~2020 included in Merck’s Form 10‑K filed on February ~~26, 2020. Certain~~25, 2021. See Note 1 to the condensed consolidated financial statements for information on the adoption of ~~these~~new accounting ~~policies are~~standards during 2021. A discussion of accounting estimates considered critical ~~as disclosed in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Merck’s Form 10-K~~ because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such ~~estimates.~~estimates are disclosed in the Critical Accounting Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Merck’s Form 10-K. There have been no significant changes in the Company’s critical accounting ~~policies~~estimates since December 31, ~~2019. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during~~ 2020.

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Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 1 to the condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk exposures that affect the disclosures presented in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2020 Form 10-K filed on February 25, 2021.

Item 4. Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures over financial reporting. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, ~~2020,~~2021, the Company’s disclosure controls and procedures are effective. For the third quarter of ~~2020,~~2021, there were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, or negative variations of any of the foregoing. 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, development programs and ~~development programs.~~include statements related to the expected impact of the COVID-19 pandemic. 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 ~~the impact of the global outbreak of COVID-19 and other risks and uncertainties~~ 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 Forms 10-K, 10-Q and 8-K. In Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10‑K for the year ended December 31, ~~2019, as~~2020, filed on February ~~26, 2020,~~25, 2021, in the Company’s Form 10-Q for the quarterly period ended March 31, ~~2020, as~~2021, filed on May ~~6, 2020,~~5, 2021, in the Company’s Form 10-Q for the quarterly period ended June 30, ~~2020,~~2021, as filed on August ~~5, 2020,~~9, 2021, and in this Form 10-Q, 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.

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PART II - Other Information

Item 1. Legal Proceedings

The information called for by this Item is incorporated herein by reference to Note 9 included in Part I, Item 1, Financial Statements (unaudited) — Notes to Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

For a discussion of risks that affect the Company’s business, please refer to Part I, Item IA, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. There have been no material changes to the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K, except as follows:

The global COVID-19 pandemic is having an adverse impact on the Company’s business, operations and financial performance. The Company is unable to predict the full extent to which the pandemic and related impacts will continue to adversely impact its business, operations, financial performance, results of operations, and financial condition.

The Company’s business and financial results have been negatively impacted by the outbreak of Coronavirus Disease 2019 (COVID-19). The duration, spread and severity of the COVID-19 pandemic is uncertain, rapidly changing and difficult to predict. The degree to which COVID-19 impacts the Company’s results will depend on future developments, beyond the Company’s knowledge or control, including, but not limited to, the duration and spread of the outbreak, its

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severity, the actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Merck ~~assumes~~continues to believe that global health systems and patients have largely adapted to the ~~majority~~impacts of ~~the negative impact from~~ the COVID-19 pandemic, ~~occurred in the second quarter of 2020. However, the Company expects some residual~~and that while negative impacts inwill persist, the ~~fourth quarter, largely in Europe and certain emerging markets. In addition,~~trend will continue to improve. For the ~~phasing~~full year of ~~the recovery~~2021, Merck assumes a net unfavorable impact to sales of ~~Gardasil~~ ~~9 demand is slower~~less than ~~originally anticipated, in particular in the United States~~3% due to ~~lower back-to-school demand.~~the COVID-19 pandemic, all of which relates to the Pharmaceutical segment. To the extent these assumptions prove to be incorrect, the Company’s results may differ materially from the estimates set forth herein.

Thus far in 2020, the COVID-19 pandemic has impacted the Company’s business and the Company continues to expect that it will impact the business in numerous ways, including but not limited to those outlined below:

InFor the third quarter and first nine months of ~~2020,~~2021, the estimated negative impact of the COVID-19 pandemic to Merck’s ~~Pharmaceutical~~ sales was ~~estimated~~approximately $350 million and $1.3 billion, respectively, all of which related to ~~be approximately $475 million. The negative impact to Animal Health sales was immaterial. The negative impact to sales in the first nine months of 2020 was approximately $2.0 billion for~~ the Pharmaceutical ~~segment and $50 million for the Animal Health~~ segment. For the full-year 2020, including the impact for the first nine months, Merck expects an unfavorable impact to sales of approximately $2.35 billion (excluding the impact of foreign exchange) due to the COVID-19 pandemic, comprised of approximately $2.3 billion for Pharmaceutical revenue and approximately $50 million for Animal Health revenue.

Roughly ~~two-thirds~~75% of Merck’s Pharmaceutical segment revenue is comprised of physician-administered products, which, despite strong underlying demand, ~~were~~have been affected by social distancing measures and fewer well visits and delays in elective surgeries due to the COVID-19 pandemic. These impacts, as well as the prioritization of COVID-19 patients at health care providers, have resulted in reduced administration of many of the Company’s human health products, in particular for its vaccines, including ~~Gardasil~~ ~~9 (Human Papillomavirus 9-valent Vaccine, Recombinant), as well as for~~ ~~Keytruda~~ ~~(pembrolizumab) and~~ ~~Implanon/Nexplanon~~ (etonogestrel implant). Access to healthcare providers remains reduced, although improved from the second quarter. Merck anticipates reduced demand for its physician-administered products while pandemic-related access measures remain in place. In addition, declines in elective surgeries negatively affected the demand for ~~Bridion~~ ~~(sugammadex) Injection in the year-to-date period. Sales of~~ ~~Pneumovax~~ ~~23 (pneumococcal vaccine polyvalent) increased due to heightened awareness of pneumococcal vaccination during the COVID-19 pandemic and ahead of flu season.~~visits.

Operating expenses ~~were positively affected~~reflect a minor positive effect in the third quarter and first nine months of ~~2020 by approximately $115 million and $540 million, respectively, primarily driven by lower promotional and selling costs,~~2021 as ~~well as lower research and development expenses, net of~~ investments in COVID-19-related ~~antiviral and vaccine~~ research ~~programs. For~~programs largely offset the ~~full-year 2020, Merck expects a net~~ favorable impact ~~to operating expenses~~ of ~~approximately $625 million reflecting continued~~ lower spending in other areas due to the COVID-19 ~~pandemic, partially offset by spending on COVID-19-related antiviral and vaccine research programs.~~pandemic.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer purchases of equity securities for the three months ended September 30, ~~2020~~2021 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES


				($ in millions)				($ in millions)
Period	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)	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)
July 1 - July 31	July 1 - July 31	—	$0.00	$5,888	July 1 - July 31	1,636,842	$77.33	$5,522
August 1 - August 31	August 1 - August 31	—	$0.00	$5,888	August 1 - August 31	2,029,851	$76.37	$5,367
September 1 - September 30	September 1 - September 30	—	$0.00	$5,888	September 1 - September 30	4,104,249	$73.35	$5,066
Total	Total	—	$0.00	$5,888	Total	7,770,942	$74.97	$5,066

(1) ~~The Company did not purchase any shares~~Shares purchased during the ~~three months ended September 30, 2020 under the~~period were made as part of a plan approved by the Board of Directors in October 2018 to purchase up to $10 billion of Merck’s common stock for its treasury.

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Item 6. Exhibits


Number		Description

3.1	—	Restated Certificate of Incorporation of Merck & Co., Inc. (November 3, 2009) – Incorporated by reference to Current Report on Form 8-K filed on November 4, 2009 (No. 1-6571)

3.2	—	By-Laws of Merck & Co., Inc. (effective July 22, 2015) – Incorporated by reference to Current Report on Form 8-K filed on July 28, 2015 (No. 1-6571)

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.INS	—	XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.SCH	—	XBRL Taxonomy Extension Schema Document.

101.CAL	—	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	—	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	—	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	—	XBRL Taxonomy Extension Presentation Linkbase Document.

104	—	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						MERCK & CO., INC.

Date: November 5, ~~2020~~2021						/s/ Jennifer Zachary
						JENNIFER ZACHARY
						Executive Vice President, General Counsel and Corporate Secretary

Date: November 5, ~~2020~~2021						/s/ Rita A. Karachun
						RITA A. KARACHUN
						Senior Vice President Finance - Global Controller

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