2,926,375,532 Sales Costs, Expenses and Other Materials and production Marketing and administrative Research and development Restructuring costs Equity income from affiliates Other (income) expense, net Income Before Taxes Taxes on Income Net Income Less: Net Income Attributable to Noncontrolling Interests Net Income Attributable to Merck & Co., Inc. Basic Earnings per Common Share Attributable to Earnings per Common Share Assuming Dilution Attributable Dividends Declared per Common Share Net Income Attributable to Merck & Co., Inc. Other Comprehensive Income (Loss) Net of Taxes: Net unrealized gain (loss) on derivatives, net of reclassifications Net unrealized gain on investments, net of reclassifications Benefit plan net gain and prior service cost, net of amortization Cumulative translation adjustment Comprehensive Income Attributable to Merck & Co., Inc. Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable (net of allowance for doubtful accounts of $144 in 2013 Inventories (excludes inventories of $1,445 in 2013 and $1,606 Deferred income taxes and other current assets Total current assets Investments Property, Plant and Equipment, at cost, net of accumulated depreciation of $17,622 Goodwill Other Intangibles, Net Other Assets Liabilities and Equity Current Liabilities Loans payable and current portion of long-term debt Trade accounts payable Accrued and other current liabilities Income taxes payable Dividends payable Total current liabilities Long-Term Debt Deferred Income Taxes and Noncurrent Liabilities Merck & Co., Inc. Stockholders’ Equity Common stock, $0.50 par value Other paid-in capital Retained earnings Accumulated other comprehensive loss Less treasury stock, at cost: Total Merck & Co., Inc. stockholders’ equity Noncontrolling Interests Total equity Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Intangible asset impairment charges Equity income from affiliates Dividends and distributions from equity affiliates Deferred income taxes Share-based compensation Other Net changes in assets and liabilities Net Cash Provided by Operating Activities Cash Flows from Investing Activities Capital expenditures Purchases of securities and other investments Proceeds from sales of securities and other investments Other Net Cash Used in Investing Activities Cash Flows from Financing Activities Net change in short-term borrowings Payments on debt Purchases of treasury stock Dividends paid to stockholders Proceeds from exercise of stock options Other Net Cash Used in Financing Activities Effect of Exchange Rate Changes on Cash and Cash Equivalents Net (Decrease) Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Period the total cumulative pretax costs estimated to be up to Merger Restructuring Program Materials and production Marketing and administrative Research and development Restructuring costs 2008 Restructuring Program Materials and production Marketing and administrative Restructuring costs Merger Restructuring Program Materials and production Marketing and administrative Research and development Restructuring costs 2008 Restructuring Program Materials and production Restructuring costs Merger Restructuring Program Restructuring reserves January 1, 2013 Expense (Payments) receipts, net Non-cash activity Restructuring reserves March 31, 2013(1) 2008 Restructuring Program Restructuring reserves January 1, 2013 Expense (Payments) receipts, net Non-cash activity Restructuring reserves March 31, 2013(1) The cash outlays associated with the Merger Restructuring Program are expected to be substantially completed by the end of 2013 with the exception of certain actions, principally manufacturing-related, which are expected to be substantially completed by 2016. The cash outlays associated with the remaining restructuring reserves for the 2008 Restructuring Program are primarily manufacturing-related and are expected to be completed by the end of 2015. U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value of the collar strategy reduces to zero and the Company benefits from the increase in the U.S. dollar equivalent value of its anticipated foreign currency cash flows, however this benefit would be capped at the strike level of the written call. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, the written . U.S. Dollar Notional U.S. Dollar Notional Derivatives Designated as Hedging Instruments Foreign exchange contracts (current) Deferred income taxes and other current assets Foreign exchange contracts (non-current) Other assets Foreign exchange contracts (current) Accrued and other current liabilities Derivatives Not Designated as Hedging Instruments Foreign exchange contracts (current) Deferred income taxes and other current assets Foreign exchange contracts (non-current) Other assets Foreign exchange contracts (current) Accrued and other current liabilities Gross amounts recognized in the consolidated balance sheet Gross amount subject to offset in master netting arrangements Gross amount not subject to master netting arrangements Cash collateral (received) posted Net amounts The table below provides information on the location and pretax gain or loss amounts for derivatives that are: (i) designated in a fair value hedging relationship, (ii) designated in a cash flow hedging relationship, (iii) designated in a foreign currency net investment hedging relationship and (iv) not designated in a hedging relationship: Derivatives designated in foreign currency cash flow hedging relationships Foreign exchange contracts Amount of loss reclassified fromAOCI to Sales Amount of (gain) loss recognized inOCI on derivatives Derivatives designated in foreign currency net investment hedging relationships Foreign exchange contracts Amount of gain recognized inOther (income) expense, net on derivatives (1) Amount of gain recognized inOCI on derivatives Derivatives not designated in a hedging relationship Foreign exchange contracts Amount of loss recognized inOther (income) expense, net on derivatives (2) Amount of gain recognized inSales on hedged item Fair Value Amortized Cost Fair Value Amortized Cost Corporate notes and bonds Commercial paper U.S. government and agency securities Asset-backed securities Mortgage-backed securities Foreign government bonds Equity securities Quoted Prices In Active Markets for Identical Assets Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Quoted Prices Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Investments Corporate notes and bonds Commercial paper U.S. government and agency securities Asset-backed securities (1) Mortgage-backed securities (1) Foreign government bonds Equity securities Other assets Securities held for employee compensation Derivative assets(2) Purchased currency options Forward exchange contracts Total assets Liabilities Derivative liabilities(2) Forward exchange contracts Written currency options Total liabilities Primarily all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by credit card, auto loan, and home equity receivables, with weighted-average lives of primarily 5 years or less. Mortgage-backed securities represent AAA-rated securities issued or unconditionally guaranteed as to payment of principal and interest by U.S. government agencies. 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. care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business, taking into consideration the global economic downturn and the sovereign debt issues in certain European countries. The Company continues to monitor the credit and economic conditions within Greece, Italy, Spain, and Portugal, among other members of the EU. These economic conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect accounts receivable outstanding. As such, time value of money discounts have been recorded for those customers for which collection of accounts receivable is expected to be in excess of one year. At Finished goods Raw materials and work in process Supplies Total (approximates current cost) Increase to LIFO costs Recognized as: Inventories Other assets AstraZeneca LP Other(1) Includes results from Sanofi Pasteur MSD. Sales Materials and production costs Other expense, net Income before taxes(1) plaintiff petitioned the Kentucky Supreme Court to review the Court of Appeals’ order and, in November 2012, the Kentucky Supreme Court granted review. Briefing before the Kentucky Supreme Court is now complete and the court vigorously defend against them. In view of the inherent difficulty of predicting the outcome of litigation, particularly where there are many claimants and the claimants seek indeterminate damages, the Company is unable to predict the outcome of these matters and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the remainingVioxxLawsuits. The Company has established a reserve with respect to the Canadian settlement and with respect to certain otherVioxx Product Liability Lawsuits, including the Missouri matter discussed above. The Company also has an immaterial remaining reserve relating to the previously disclosedVioxx investigation for the non-participating states with which litigation is continuing. The Company has established no other liability reserves with respect to theVioxx Litigation. Unfavorable outcomes in theVioxx Litigation could have a material adverse effect on the Company’s financial position, liquidity and results of operations. . Januvia and/or Janumet. As of Victoza, the latter two of which are products manufactured by other pharmaceutical companies. In its MDL request, the law firm asked the JPML to appoint Judge Anthony Battaglia of the United States District Court for the Southern District of California as the MDL Judge. On April 29, 2013, Merck and the other defendant manufacturers individually filed responses, all of which agreed that Judge Battaglia should preside if the JPML determines that an MDL is warranted. A hearing before the JPML concerning the motion was held on July 25, 2013. The Company intends to defend against these lawsuits. (continued) $195 million. In the second quarter of 2013, the Company paid $480 million into a settlement fund. The Company’s insurers subsequently paid the remaining $208 million, which reflects an additional $13 million of insurance recoveries not previously recognized. complaint is due on September 9, 2013. In June 2013, a of Nexium. The finalize their agreement. Common Stock Other Capital Retained Earnings Accumulated Loss Treasury Stock Non- Interests Total Balance January 1, 2012 Net income attributable to Merck & Co., Inc. Cash dividends declared on common stock Treasury stock shares purchased Share-based compensation plans and other Other comprehensive loss Net income attributable to noncontrolling interests Distributions attributable to noncontrolling interests Balance March 31, 2012 Balance January 1, 2013 Net income attributable to Merck & Co., Inc. Cash dividends declared on common stock Treasury stock shares purchased Share-based compensation plans and other Other comprehensive income Supera joint venture Net income attributable to noncontrolling interests Distributions attributable to noncontrolling interests Balance March 31, 2013 $5 billion of Merck’s common stock, in total, with an initial delivery of approximately 99.5 million shares of Merck’s common stock, based on current market price, made by Goldman Sachs to Merck, and payment of $5 billion made by Merck to Goldman Sachs, on May 21, 2013. The payment to Goldman Sachs was recorded as a reduction to shareholders’ equity, consisting of a $4.5 billion increase in treasury stock, which reflects the value of the initial 99.5 million shares received upon execution, and a $500 million decrease in other-paid-in capital, which reflects the value of the stock held back by Goldman Sachs pending final settlement. The final number of shares of Merck’s common stock that Merck may receive, or may be required to remit, upon settlement under the ASR will be based upon the average daily volume weighted-average price of Merck’s common stock during the term of the ASR program. Final settlement of the transaction under the ASR agreement is expected to occur in the fourth quarter of 2013, and may occur earlier at the option of Goldman Sachs, or later under certain circumstances. The terms of the transaction under the ASR agreement are subject to adjustment if Merck were to enter into or announce certain types of transactions. If Merck is obligated to make an adjustment payment to Goldman Sachs under the ASR, Merck may elect to satisfy such obligation in cash or in shares of Merck’s common stock. This ASR was entered into pursuant to a share repurchase program announced on May 1, 2013. Pretax share-based compensation expense Income tax benefit Total share-based compensation expense, net of taxes During the first Service cost Interest cost Expected return on plan assets Net amortization Termination benefits Service cost Interest cost Expected return on plan assets Net amortization Termination benefits Curtailments Interest income Interest expense Exchange losses Other, net Basic Earnings per Common Share Net income attributable to Merck & Co., Inc. Less: Income allocated to participating securities Net income allocated to common shareholders Average common shares outstanding Earnings per Common Share Assuming Dilution Net income attributable to Merck & Co., Inc. Less: Income allocated to participating securities Net income allocated to common shareholders Average common shares outstanding Common shares issuable(1) Average common shares outstanding assuming dilution Issuable primarily under share-based compensation plans. Balance January 1, 2012, net of taxes Other comprehensive income (loss), net of taxes Balance March 31, 2012, net of taxes Balance January 1, 2013, net of taxes Other comprehensive income (loss) before reclassifications adjustments, pretax Tax Other comprehensive income (loss) before reclassification adjustments, net of taxes Reclassification adjustments, pretax Tax Reclassification adjustments, net of taxes Other comprehensive income (loss), net of taxes Balance March 31, 2013, net of taxes Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see note Primary Care and Women’s Health Cardiovascular Zetia Vytorin Diabetes and Obesity Januvia Janumet Respiratory Nasonex Singulair Dulera Asmanex Women’s Health and Endocrine NuvaRing Fosamax Follistim AQ Implanon Cerazette Other Arcoxia Avelox Hospital and Specialty Immunology Remicade Simponi Infectious Disease Isentress Cancidas PegIntron Victrelis Invanz Noxafil Oncology Temodar Emend Other Cosopt/Trusopt Bridion Integrilin Diversified Brands Cozaar/Hyzaar Primaxin Zocor Claritin Rx Propecia Clarinex Remeron Maxalt Proscar Vaccines(1) Gardasil ProQuad/M-M-R II/Varivax Zostavax RotaTeq Pneumovax 23 Other pharmaceutical(2) Total Pharmaceutical segment sales Other segment sales(3) Total segment sales Other(4) Segment profits: Pharmaceutical segment Other segments Total segment profits Other profits (losses) Unallocated: Interest income Interest expense Equity income from affiliates Depreciation and amortization Research and development Amortization of purchase accounting adjustments Restructuring costs Other unallocated, net to Goldman Sachs, on May 21, 2013 (see “Liquidity and Capital Resources” below). Zostavax [Zoster Vaccine Live] also partially offset the revenue decline in the year-to-date period. Primary Care and Women’s Health Cardiovascular Zetia Vytorin Diabetes and Obesity Januvia Janumet Respiratory Nasonex Singulair Dulera Asmanex Women’s Health and Endocrine NuvaRing Fosamax Follistim AQ Implanon Cerazette Other Arcoxia Avelox Hospital and Specialty Immunology Remicade Simponi Infectious Disease Isentress Cancidas PegIntron Victrelis Invanz Noxafil Oncology Temodar Emend Other Cosopt/Trusopt Bridion Integrilin Diversified Brands Cozaar/Hyzaar Primaxin Zocor Claritin Rx Propecia Clarinex Remeron Maxalt Proscar Vaccines(1) Gardasil ProQuad/M-M-R II/Varivax Zostavax RotaTeq Pneumovax 23 Other pharmaceutical(2) Total Pharmaceutical segment sales Other segment sales(3) Total segment sales Other(4) These amounts do not reflect sales of vaccines sold in most major European markets through the Company’s joint venture, Sanofi Pasteur MSD, the results of which are reflected inEquity income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed Represents the non-reportable segments of Animal Health, Consumer Care and Alliances. The Alliances segment includes revenue from the Company’s relationship with AZLP. Other revenues are primarily comprised of miscellaneous corporate revenues, third-party manufacturing sales, sales related to divested products or businesses and supply sales not included in segment world. therapy or who are intolerant to or have medical contraindications for such therapies. The EC is expected to render a final decision in the coming months. Materials and production costs. Gardasil in Japan will decline for the remainder of 2013. Sales of Gardasil in Japan were approximately $140 million for the full year of 2012. became available again in the United States for ordering in October 2012. Merck’s sales ofProQuad were Excluding the unfavorable impact of foreign exchange, sales performance in the quarter and year-to-date period reflects growth in companion animal and poultry products, partially offset by a decline in swine products. development sites and the consolidation of office facilities. In July 2011, the Company initiated further actions under the Merger Restructuring Program through which the Company expects to reduce its workforce measured at the time of the Merger by an additional 12% to 13% across the Company worldwide. A majority of the workforce reductions associated with these additional actions relate to manufacturing (including Animal Health), administrative and headquarters organizations. The Company will continue to hire employees in strategic growth areas of the business as necessary. $120 million in 2012 related to an agreement with Endocyte, Inc. Pharmaceutical segment profits Other non-reportable segment profits Other Income before income taxes Pretax income as reported under GAAP Increase (decrease) for excluded items: Acquisition-related costs Restructuring costs Taxes on income as reported under GAAP Estimated tax benefit on excluded items Net tax benefit from resolution of legacy Schering-Plough federal income tax issue Non-GAAP net income Less: Net income attributable to noncontrolling interests Non-GAAP net income attributable to Merck & Co., Inc. EPS assuming dilution as reported under GAAP EPS difference (1) Non-GAAP EPS assuming dilution Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the applicable period. A new nonproprietary generic name for MK-3475 is under review by the United States Adopted Names Council. second quarter of 2013 related to the discontinuation of the clinical development program for preladenant. Allergy MK-8237, Immunotherapy(1) MK-0859 (anacetrapib) (May 2008) (November 2011) (6) (July 2006) North American rights only. Cash and investments Working capital Total debt to total liabilities and equity The global economic downturn and the sovereign debt issues, among other factors, have adversely affected foreign receivables in certain European countries (see Note 4 to the interim consolidated financial statements). Additionally, the Company continues to expand in the emerging markets where payment terms tend to be longer. While the Company continues to receive payment on these receivables, these conditions have resulted in an increase in the average length of time it takes to collect accounts receivable outstanding thereby adversely affecting cash provided by operating activities. debt. In July 2013, the Board of Directors declared a quarterly dividend for the fourth quarter of $0.43 per share on the Company’s common stock that is payable in October 2013. Period January 1 - January 31 February 1 - February 28 March 1 - March 31 Total All shares purchased during the period were made as part of Number Description /s/ Bruce N. Kuhlik /s/ John Canan Number Descriptionx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period endedMarch 31, 2013¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ For the transition period fromtoIncorporated in New Jersey I.R.S. Employer Identification No. 22-1918501 April 30,July 31, 2013: 3,019,611,844þx (Do not check if a smaller reporting company) Three Months Ended
March 31, 2013 2012 $ 10,671 $ 11,731 3,959 4,037 2,987 3,074 1,907 1,862 119 219 (133 ) (110 ) 282 142 9,121 9,224 1,550 2,507 (66 ) 740 $ 1,616 $ 1,767 23 29 $ 1,593 $ 1,738
Merck & Co., Inc. Common Shareholders $ 0.53 $ 0.57
to Merck & Co., Inc. Common Shareholders $ 0.52 $ 0.56 $ 0.43 $ 0.42 Three Months Ended
June 30, Six Months Ended
June 30, 2013 2012 2013 2012 Sales $ 11,010 $ 12,311 $ 21,681 $ 24,041 Costs, Expenses and Other Materials and production 4,284 4,112 8,243 8,150 Marketing and administrative 3,140 3,249 6,126 6,322 Research and development 2,101 2,165 4,008 4,026 Restructuring costs 155 144 274 363 Equity income from affiliates (116 ) (142 ) (249 ) (253 ) Other (income) expense, net 201 103 484 247 9,765 9,631 18,886 18,855 Income Before Taxes 1,245 2,680 2,795 5,186 Taxes on Income 310 860 244 1,599 Net Income $ 935 $ 1,820 $ 2,551 $ 3,587 Less: Net Income Attributable to Noncontrolling Interests 29 27 52 56 Net Income Attributable to Merck & Co., Inc. $ 906 $ 1,793 $ 2,499 $ 3,531 Basic Earnings per Common Share Attributable to Merck & Co., Inc. Common Shareholders $ 0.30 $ 0.59 $ 0.83 $ 1.16 Earnings per Common Share Assuming Dilution Attributable to Merck & Co., Inc. Common Shareholders $ 0.30 $ 0.58 $ 0.82 $ 1.15 Dividends Declared per Common Share $ 0.43 $ 0.42 $ 0.86 $ 0.84 Three Months Ended
March 31, 2013 2012 $ 1,593 $ 1,738 236 (58 ) 1 29 161 — (345 ) (56 ) 53 (85 ) $ 1,646 $ 1,653 Three Months Ended
June 30, Six Months Ended
June 30, 2013 2012 2013 2012 Net Income Attributable to Merck & Co., Inc. $ 906 $ 1,793 $ 2,499 $ 3,531 Other Comprehensive Income (Loss) Net of Taxes: Net unrealized gain on derivatives, net of reclassifications 35 102 271 44 Net unrealized (loss) gain on investments, net of reclassifications (81 ) 1 (80 ) 30 Benefit plan net gain and prior service cost, net of amortization 51 18 212 18 Cumulative translation adjustment (136 ) (30 ) (481 ) (86 ) (131 ) 91 (78 ) 6 Comprehensive Income Attributable to Merck & Co., Inc. $ 775 $ 1,884 $ 2,421 $ 3,537 March 31,
2013 December 31,
2012 $ 13,024 $ 13,451 2,998 2,690
and $163 in 2012) (excludes accounts receivable of $482 in 2013 and $473
in 2012 classified in Other assets - see Note 4) 7,965 7,672
in 2012 classified in Other assets - see Note 5) 6,773 6,535 4,484 4,509 35,244 34,857 7,948 7,305
in 2013 and $17,385 in 2012 15,802 16,030 12,207 12,134 28,108 29,083 6,891 6,723 $ 106,200 $ 106,132 $ 4,736 $ 4,315 2,084 1,753 9,569 9,737 1,075 1,200 1,338 1,343 18,802 18,348 16,089 16,254 15,703 16,067
Authorized - 6,500,000,000 shares
Issued - 3,577,103,522 shares in 2013 and 2012 1,788 1,788 40,727 40,646 40,272 39,985 (4,629 ) (4,682 ) 78,158 77,737
559,727,953 shares in 2013 and 550,468,221 shares in 2012 25,129 24,717 53,029 53,020 2,577 2,443 55,606 55,463 $ 106,200 $ 106,132 June 30, 2013 December 31, 2012 Assets Current Assets Cash and cash equivalents $ 15,090 $ 13,451 Short-term investments 3,008 2,690 7,779 7,672 6,766 6,535 Deferred income taxes and other current assets 4,352 4,509 Total current assets 36,995 34,857 Investments 8,555 7,305 15,683 16,030 Goodwill 12,198 12,134 Other Intangibles, Net 26,333 29,083 Other Assets 7,112 6,723 $ 106,876 $ 106,132 Liabilities and Equity Current Liabilities Loans payable and current portion of long-term debt $ 5,582 $ 4,315 Trade accounts payable 2,253 1,753 Accrued and other current liabilities 8,872 9,737 Income taxes payable 409 1,200 Dividends payable 1,286 1,343 Total current liabilities 18,402 18,348 Long-Term Debt 22,526 16,254 Deferred Income Taxes and Noncurrent Liabilities 15,843 16,067 Merck & Co., Inc. Stockholders’ Equity 1,788 1,788 Other paid-in capital 39,891 40,646 Retained earnings 39,915 39,985 Accumulated other comprehensive loss (4,760 ) (4,682 ) 76,834 77,737 29,334 24,717 Total Merck & Co., Inc. stockholders’ equity 47,500 53,020 Noncontrolling Interests 2,605 2,443 Total equity 50,105 55,463 $ 106,876 $ 106,132 Three Months Ended
March 31, 2013 2012 $ 1,616 $ 1,767 1,674 1,790 30 9 (133 ) (110 ) 5 66 (71 ) (41 ) 67 76 326 71 (1,173 ) (1,474 ) 2,341 2,154 (351 ) (331 ) (4,010 ) (2,725 ) 3,161 2,797 47 (11 ) (1,153 ) (270 ) 880 634 (506 ) (2 ) (580 ) (456 ) (1,306 ) (1,279 ) 92 379 (1 ) (1 ) (1,421 ) (725 ) (194 ) (34 ) (427 ) 1,125 13,451 13,531 $ 13,024 $ 14,656 Six Months Ended
June 30, 2013 2012 Cash Flows from Operating Activities Net income $ 2,551 $ 3,587 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,329 3,594 Intangible asset impairment charges 594 136 Equity income from affiliates (249 ) (253 ) Dividends and distributions from equity affiliates 68 122 Deferred income taxes (319 ) (365 ) Share-based compensation 142 169 Other 372 143 Net changes in assets and liabilities (1,809 ) (2,059 ) Net Cash Provided by Operating Activities 4,679 5,074 Cash Flows from Investing Activities Capital expenditures (764 ) (762 ) Purchases of securities and other investments (8,818 ) (4,001 ) Proceeds from sales of securities and other investments 7,195 4,174 Other 99 21 Net Cash Used in Investing Activities (2,288 ) (568 ) Cash Flows from Financing Activities Net change in short-term borrowings 1,702 1,637 Proceeds from issuance of debt 6,467 — Payments on debt (515 ) (2 ) Purchases of treasury stock (6,105 ) (985 ) Dividends paid to stockholders (2,638 ) (2,559 ) Proceeds from exercise of stock options 641 601 Other (3 ) (3 ) Net Cash Used in Financing Activities (451 ) (1,311 ) Effect of Exchange Rate Changes on Cash and Cash Equivalents (301 ) 26 Net Increase in Cash and Cash Equivalents 1,639 3,221 Cash and Cash Equivalents at Beginning of Year 13,451 13,531 Cash and Cash Equivalents at End of Period $ 15,090 $ 16,752 1.1. Basis of Presentation Merck��sMerck’s Form 10-K filed on February 28, 2013.2.2. Restructuring $153$265 million and $279$293 million in the second quarter of 2013 and 2012, respectively, and $418 million and $572 million in the first quartersix months of 2013 and 2012, respectively, related to this program. Since inception of the Merger Restructuring Program through March 31,June 30, 2013, Merck has recorded total pretax accumulated costs of approximately $6.2$6.5 billion and eliminated approximately 23,14023,810 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The restructuring actions under the Merger Restructuring Program are expected to be substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related. Subsequent to the Merger, the Company has rationalized a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2016. The Company expects the estimated total cumulative pretax costs for this program to be approximately $7.2$7.2 billion to $7.5 billion.$7.5 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.$41$13 million and $14$(4) million were recorded in the second quarter of 2013 and 2012, respectively, and $54 million and $10 million were recorded in the first quartersix months of 2013 and 2012, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through March 31,June 30, 2013, Merck has recorded total pretax accumulated costs of $1.7approximately $1.7 billion and eliminated approximately 6,4506,460 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program was substantially completed in 2011, with the exception of certain manufacturing-related actions, which are expected to be completed by the end of 2015, with-5-Notes to Interim Consolidated Financial Statements (unaudited) (continued)$2.0 billion. Three Months Ended March 31, 2013 ($ in millions) Separation
Costs Accelerated
Depreciation Other Total $ — $ 31 $ 9 $ 40 — 15 — 15 — 15 — 15 65 — 18 83 65 61 27 153 — — 3 3 — 2 — 2 32 — 4 36 32 2 7 41 $ 97 $ 63 $ 34 $ 194 Three Months Ended March 31, 2012 ($ in millions) Separation
Costs Accelerated
Depreciation Other Total $ — $ (21 ) $ 17 $ (4 ) — 23 1 24 — 41 4 45 180 — 34 214 180 43 56 279 — 2 7 9 2 — 3 5 2 2 10 14 $ 182 $ 45 $ 66 $ 293 Three Months Ended June 30, 2013 Six Months Ended June 30, 2013 ($ in millions) Other Total Other Total Merger Restructuring Program Materials and production $ — $ 30 $ 62 $ 92 $ — $ 61 $ 71 $ 132 Marketing and administrative — 9 5 14 — 24 5 29 Research and development — 14 — 14 — 29 — 29 Restructuring costs 129 — 16 145 194 — 34 228 129 53 83 265 194 114 110 418 2008 Restructuring Program Materials and production — (2 ) 3 1 — (2 ) 6 4 Marketing and administrative — 2 — 2 — 4 — 4 Restructuring costs 2 — 8 10 34 — 12 46 2 — 11 13 34 2 18 54 $ 131 $ 53 $ 94 $ 278 $ 228 $ 116 $ 128 $ 472 Three Months Ended June 30, 2012 Six Months Ended June 30, 2012 ($ in millions) Other Total Other Total Merger Restructuring Program Materials and production $ — $ 58 $ 20 $ 78 $ — $ 37 $ 37 $ 74 Marketing and administrative — 20 1 21 — 43 2 45 Research and development — 41 — 41 — 82 4 86 Restructuring costs 124 — 29 153 304 — 63 367 124 119 50 293 304 162 106 572 2008 Restructuring Program Materials and production — 1 4 5 — 3 11 14 Restructuring costs (13 ) — 4 (9 ) (11 ) — 7 (4 ) (13 ) 1 8 (4 ) (11 ) 3 18 10 $ 111 $ 120 $ 58 $ 289 $ 293 $ 165 $ 124 $ 582 firstsecond quarter of 2013 and 2012, approximately 740670 positions and 1,020780 positions, respectively, were eliminated under the Merger Restructuring Program. In addition, approximately 10 positions were eliminated in the second quarter of 2013 under the 2008 Restructuring Program. In the first six months of 2013 and 2012, approximately 1,405 positions and 1,800 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 5055 positions and 140 positions, respectively, were eliminated under the 2008 Restructuring Program. TheseProgram.These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.- 6 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)11)12) and share-based compensation costs.threesix months ended March 31,June 30, 2013:($ in millions) Separation
Costs Accelerated
Depreciation Other Total $ 699 $ — $ 19 $ 718 65 61 27 153 (108 ) — (27 ) (135 ) — (61 ) (4 ) (65 ) $ 656 $ — $ 15 $ 671 $ 77 $ — $ — $ 77 32 2 7 41 (46 ) — (4 ) (50 ) — (2 ) (3 ) (5 ) $ 63 $ — $ — $ 63 ($ in millions) Other Total Merger Restructuring Program Restructuring reserves January 1, 2013 $ 699 $ — $ 19 $ 718 Expense 194 114 110 418 (Payments) receipts, net (227 ) — (56 ) (283 ) Non-cash activity — (114 ) (67 ) (181 ) $ 666 $ — $ 6 $ 672 2008 Restructuring Program Restructuring reserves January 1, 2013 $ 77 $ — $ — $ 77 Expense 34 2 18 54 (Payments) receipts, net (49 ) — (11 ) (60 ) Non-cash activity — (2 ) (7 ) (9 ) $ 62 $ — $ — $ 62 3.3. Acquisitions, Research Collaborations and License Agreements $60$60 million of upfront and milestone payments made to Pfizer. Pfizer will be eligible for additional payments associated with the achievement of pre-specified future clinical, regulatory and commercial milestones. The companies will share potential revenues and certain costs 60% to Merck and 40% to Pfizer. Each party will have certain manufacturing and supply obligations. The Company has the right to terminate the agreement at any time up to the commencement of the first Phase III clinical trial. The Company and Pfizer each have the right to terminate the agreement due to a material, uncured breach by, or insolvency of, the other party, or in the event of a safety issue. Pfizer has the right to terminate the agreement upon 12 months notice at any time following the first anniversary of the first commercial sale of a collaboration product, but must assign all rights to ertugliflozin to Merck. Upon termination of the agreement, depending upon the circumstances, the parties have varying rights and obligations with respect to the continued development and commercialization of ertugliflozin and certain payment obligations.will market, distributemarkets, distributes and sellsells a portfolio of innovative pharmaceutical and branded generic products from Merck, Cristália and Eurofarma in Brazil. Merck owns 51% of the joint venture, and Cristália and Eurofarma collectively own 49%. The transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values. This resulted in Merck recognizing intangible assets for currently marketed products of $89$89 million, in-process research and development (“IPR&D”) of $100$100 million, goodwill of $103$103 million, and deferred tax liabilities of $64 million.$64 million. The Company also recorded increases toNoncontrolling interests and Other paid-in capital in the amounts of $112 million and $116 million, respectively. This transactionNoncontrolling interests andOther paid-in capital, in the amounts of $112 million and $116 million, respectively. This transaction 4.4. Financial Instruments three3 years into the future. The Company will layer in hedges over time, increasing the portion of third-party and intercompany distributor entity sales hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales. The portion of sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The hedged anticipated sales are a specified component of a portfolio of similarly denominated foreign currency-based sales transactions, each of which responds to the hedged currency risk in the same manner. The Company manages its anticipated transaction exposure principally with purchased local currency put options, which provide the Company with a right, but not an obligation, to sell foreign currencies in the future at a predetermined price. If the U.S. dollar strengthens relative to the currency of the hedged anticipated sales, total changes in the options’ cash flows offset the decline in the expected future U.S. dollar equivalent cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options’ value reduces to zero, but the Company benefits from the increase in the U.S. dollar equivalent value of the anticipated foreign currency cash flows.- 8 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)year.year(losses) of $78$40 million and $(44)$92 million for the first threesix months of 2013 and 2012, respectively, from the euro-denominated notes.- 9 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)March 31, 2013 or December 31, 2012. March 31, 2013 December 31, 2012 Fair Value of Derivative Fair Value of Derivative ($ in millions) Balance Sheet Caption Asset Liability Asset Liability $ 580 $ — $ 6,370 $ 281 $ — $ 6,646 596 — 6,101 387 — 5,989 — 3 748 — 13 938 $ 1,176 $ 3 $ 13,219 $ 668 $ 13 $ 13,573 $ 132 $ — $ 6,237 $ 55 $ — $ 4,548 6 — 113 8 — 232 — 142 3,893 — 216 8,203 $ 138 $ 142 $ 10,243 $ 63 $ 216 $ 12,983 $ 1,314 $ 145 $ 23,462 $ 731 $ 229 $ 26,556 As noted above, the Company records its derivatives on a gross basis in the Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (seeConcentrations 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: March 31, 2013 December 31, 2012 ($ in millions) Asset Liability Asset Liability $ 1,314 $ 145 $ 731 $ 229
not offset in the consolidated balance sheet (115 ) (115 ) (195 ) (195 ) (3 ) (1 ) (3 ) (3 ) (841 ) — (305 ) — $ 355 $ 29 $ 228 $ 31 Three Months Ended
March 31, ($ in millions) 2013 2012 $ 32 $ 27 (349 ) 120 (2 ) (9 ) (180 ) (142 ) 24 253 (10 ) — June 30, 2013 December 31, 2012 Fair Value of Derivative Fair Value of Derivative ($ in millions) Balance Sheet Caption Asset Liability Asset Liability Derivatives Designated as Hedging Instruments Interest rate swap contracts (non-current) Other assets $ 1 $ — $ 200 $ — $ — $ — Interest rate swap contracts (non-current) Deferred income taxes and noncurrent liabilities — 33 2,000 — — — Foreign exchange contracts (current) Deferred income taxes and other current assets 544 — 5,721 281 — 6,646 Foreign exchange contracts (non-current) Other assets 603 — 6,103 387 — 5,989 Foreign exchange contracts (current) Accrued and other current liabilities — 3 659 — 13 938 Foreign exchange contracts (non-current) Deferred income taxes and noncurrent liabilities — 4 440 — — — $ 1,148 $ 40 $ 15,123 $ 668 $ 13 $ 13,573 Derivatives Not Designated as Hedging Instruments Foreign exchange contracts (current) Deferred income taxes and other current assets $ 144 $ — $ 5,504 $ 55 $ — $ 4,548 Foreign exchange contracts (non-current) Other assets — — — 8 — 232 Foreign exchange contracts (current) Accrued and other current liabilities — 58 3,288 — 216 8,203 $ 144 $ 58 $ 8,792 $ 63 $ 216 $ 12,983 $ 1,292 $ 98 $ 23,915 $ 731 $ 229 $ 26,556 June 30, 2013 December 31, 2012 ($ in millions) Asset Liability Asset Liability Gross amounts recognized in the consolidated balance sheet $ 1,292 $ 98 $ 731 $ 229 (94 ) (92 ) (195 ) (195 ) Cash collateral (received) posted (855 ) — (305 ) — Net amounts $ 343 $ 6 $ 231 $ 34 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Derivatives designated in a fair value hedging relationship Interest rate swap contracts $ 33 $ — $ 33 $ — (33 ) — (33 ) — Derivatives designated in foreign currency cash flow hedging relationships Foreign exchange contracts 2 26 34 53 (36 ) (154 ) (385 ) (34 ) Derivatives designated in foreign currency net investment hedging relationships Foreign exchange contracts (1 ) (2 ) (3 ) (11 ) (65 ) 86 (244 ) (56 ) Derivatives not designated in a hedging relationship Foreign exchange contracts (32 ) (279 ) (8 ) (26 ) 7 — (3 ) — There was no ineffectiveness on the hedge. Represents the amount excluded from hedge effectiveness testing. These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates. - 10 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)March 31,June 30, 2013, the Company estimates $42$59 million of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified fromAOCI toSales. The amount ultimately reclassified toSalesmay differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity. March 31, 2013 December 31, 2012 Gross Unrealized Gross Unrealized ($ in millions) Gains Losses Gains Losses $ 5,807 $ 5,769 $ 41 $ (3 ) $ 5,063 $ 5,013 $ 52 $ (2 ) 2,229 2,229 — — 2,150 2,150 — — 1,205 1,203 2 — 1,206 1,204 2 — 878 876 3 (1 ) 837 835 3 (1 ) 491 491 2 (2 ) 435 436 2 (3 ) 121 120 1 — 108 107 1 — 429 376 53 — 403 370 33 — $ 11,160 $ 11,064 $ 102 $ (6 ) $ 10,202 $ 10,115 $ 93 $ (6 ) June 30, 2013 December 31, 2012 Gross Unrealized Gross Unrealized ($ in millions) Gains Losses Gains Losses Corporate notes and bonds $ 6,222 $ 6,243 $ 20 $ (41 ) $ 5,063 $ 5,013 $ 52 $ (2 ) Commercial paper 2,240 2,240 — — 2,150 2,150 — — U.S. government and agency securities 1,339 1,351 — (12 ) 1,206 1,204 2 — Asset-backed securities 931 935 1 (5 ) 837 835 3 (1 ) Mortgage-backed securities 538 543 1 (6 ) 435 436 2 (3 ) Foreign government bonds 81 82 — (1 ) 108 107 1 — Equity securities 444 393 51 — 403 370 33 — $ 11,795 $ 11,787 $ 73 $ (65 ) $ 10,202 $ 10,115 $ 93 $ (6 ) $3.0$3.0 billion at March 31,June 30, 2013. Of the remaining debt securities, $6.9$7.5 billion mature within five years. At March 31,June 30, 2013 and December 31, 2012, there were no debt securities pledged as collateral.- 11 -Notes to Interim Consolidated Financial Statements (unaudited) (continued) Fair Value Measurements Using Fair Value Measurements Using
(Level 1) Total
In Active Total ($ in millions) March 31, 2013 December 31, 2012 $ — $ 5,807 $ — $ 5,807 $ — $ 5,063 $ — $ 5,063 — 2,229 — 2,229 — 2,150 — 2,150 — 1,205 — 1,205 — 1,206 — 1,206 — 878 — 878 — 837 — 837 — 491 — 491 — 435 — 435 — 121 — 121 — 108 — 108 215 — — 215 196 — — 196 215 10,731 — 10,946 196 9,799 — 9,995 183 31 — 214 169 38 — 207 — 934 — 934 — 546 — 546 — 380 — 380 — 185 — 185 — 1,314 — 1,314 — 731 — 731 $ 398 $ 12,076 $ — $ 12,474 $ 365 $ 10,568 $ — $ 10,933 $ — $ 142 $ — $ 142 $ — $ 216 $ — $ 216 — 3 — 3 — 13 — 13 $ — $ 145 $ — $ 145 $ — $ 229 $ — $ 229 Fair Value Measurements Using Fair Value Measurements Using Total Total ($ in millions) June 30, 2013 December 31, 2012 Assets Investments Corporate notes and bonds $ — $ 6,222 $ — $ 6,222 $ — $ 5,063 $ — $ 5,063 Commercial paper — 2,240 — 2,240 — 2,150 — 2,150 U.S. government and agency securities — 1,339 — 1,339 — 1,206 — 1,206 — 931 — 931 — 837 — 837 — 538 — 538 — 435 — 435 Foreign government bonds — 81 — 81 — 108 — 108 Equity securities 212 — — 212 196 — — 196 212 11,351 — 11,563 196 9,799 — 9,995 Other assets Securities held for employee compensation 193 39 — 232 169 38 — 207 Purchased currency options — 953 — 953 — 546 — 546 Forward exchange contracts — 338 — 338 — 185 — 185 Interest rate swaps — 1 — 1 — — — — — 1,292 — 1,292 — 731 — 731 Total assets $ 405 $ 12,682 $ — $ 13,087 $ 365 $ 10,568 $ — $ 10,933 Liabilities Forward exchange contracts $ — $ 63 $ — $ 63 $ — $ 216 $ — $ 216 Written currency options — 2 — 2 — 13 — 13 Interest rate swaps — 33 — 33 — — — — Total liabilities $ — $ 98 $ — $ 98 $ — $ 229 $ — $ 229 (1)(1) threesix months of 2013. As of March 31,June 30, 2013,Cash and cash equivalents of $13.0$15.1 billion included $12.0$14.3 billion of cash equivalents (which would be considered Level 2 in the fair value hierarchy).March 31,June 30, 2013 was $22.8$29.0 billion compared with a carrying value of $20.8$28.1 billion and at December 31, 2012 was $22.8$22.8 billion compared with a carrying value of $20.6 billion.$20.6 billion. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.- 12 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)March 31,June 30, 2013 and December 31, 2012,Other assets included $482$490 million and $473$473 million, respectively, of accounts receivable not expected to be collected within one year. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.March 31,June 30, 2013, the Company’s accounts receivable in Greece, Italy, Spain and Portugal totaled approximately $1.2 billion.$1.2 billion. Of this amount, hospital and public sector receivables were approximately $800$825 million in the aggregate, of which approximately 18%11%, 38%, 36%40% and 9%11% related to Greece, Italy, Spain and Portugal, respectively. At March 31,June 30, 2013, the Company’s total accounts receivable outstanding for more than one year were approximately $245$350 million, of which approximately 50%60% related to accounts receivable in Greece, Italy, Spain and Portugal, mostly comprised of hospital and public sector receivables.March 31,June 30, 2013 and December 31, 2012, the Company had received cash collateral of $841$855 million and $305$305 million, respectively, from various counterparties and the obligation to return such collateral is recorded inAccrued and other current liabilities. The Company had not advanced any cash collateral to counterparties as of March 31,June 30, 2013 or December 31, 2012.5.5. Inventories ($ in millions) March 31,
2013 December 31,
2012 $ 2,055 $ 1,924 5,876 5,921 240 244 8,171 8,089 47 52 $ 8,218 $ 8,141 $ 6,773 $ 6,535 1,445 1,606 ($ in millions) June 30, 2013 December 31, 2012 Finished goods $ 2,214 $ 1,924 Raw materials and work in process 5,783 5,921 Supplies 235 244 Total (approximates current cost) 8,232 8,089 Increase to LIFO costs 49 52 $ 8,281 $ 8,141 Recognized as: Inventories $ 6,766 $ 6,535 Other assets 1,515 1,606 March 31,both June 30, 2013 and December 31, 2012, these amounts included $1.3$1.4 billion and $1.4 billion, respectively, of inventories not expected to be sold within one year. In addition, these amounts included $173$162 million and $196$196 million at March 31,June 30, 2013 and December 31, 2012, respectively, of inventories produced in preparation for product launches.- 13 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)6.6. Other Intangibles $30$234 million and $9$127 million, respectively, and during the first six months of 2013 and 2012, recorded $264 million and $136 million, respectively, of IPR&D impairment charges withinResearch and development expenses expenses. Of the IPR&D impairment charges recorded in the second quarter and first six months of 2013, approximately $181 million related to the write-off of the intangible asset associated with preladenant as a result of the discontinuation of the clinical development program for this compound. In addition, the Company recorded impairment charges resulting from changes in cash flow assumptions for certain compounds. The remaining impairment charges for the first six months of 2013 and the charges in the second quarter and first six months of 2012 reflect impairments primarily forrelated to pipeline programs that had previously been deprioritized and were subsequently deemed to have no alternative use in the period. The Company may recognize additional non-cash impairment charges in the future related to other pipeline programs or marketed products and such charges could be material.7.7. Joint Ventures and Other Equity Method Affiliates Three Months Ended
March 31, ($ in millions) 2013 2012 $ 125 $ 113 8 (3 ) $ 133 $ 110 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 AstraZeneca LP $ 105 $ 140 $ 230 $ 253 11 2 19 — $ 116 $ 142 $ 249 $ 253 $327$327 million, reflecting an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018. The exercise price will also include an additional amount equal to a multiple of ten times Merck’s average 1% annual profit allocation in the partnership for the three years prior to exercise. The Company believes that it is likely that AstraZeneca will exercise its option in 2014. Three Months Ended
March 31 ($ in millions) 2013 2012 $ 1,158 $ 1,042 552 478 381 381 $ 225 $ 183 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Sales $ 1,142 $ 1,150 $ 2,300 $ 2,192 Materials and production costs 575 520 1,126 959 Other expense, net 419 350 801 732 $ 148 $ 280 $ 373 $ 501 - 14 -8. Loans Payable, Long-Term Debt and Other Commitments NotesIn May 2013, the Company completed an underwritten public offering of $6.5 billion senior unsecured notes consisting of $1.0 billion aggregate principal amount of 0.70% notes due 2016, $500 million aggregate principal amount of floating rate notes due 2016, $1.0 billion aggregate principal amount of 1.30% notes due 2018, $1.0 billion aggregate principal amount of floating rate notes due 2018, $1.75 billion aggregate principal amount of 2.80% notes due 2023 and $1.25 billion aggregate principal amount of 4.15% notes due 2043. Interest on the notes is payable semi-annually. The notes of each series are redeemable in whole or in part at any time at the Company’s option at varying redemption prices. A substantial portion of the net proceeds from the notes were used to Interim Consolidated Financial Statements (unaudited) (continued)repurchase the Company’s common stock pursuant to an accelerated share repurchase agreement in May 2013 (see Note 10).8.9. Contingencies and Environmental Liabilities $39$39 million in the third quarter of 2012 in connection with that settlement agreement, which is the minimum amount that the Company is required to pay under the agreement. The court-approved program to notify class members about the settlement has been completed. The settlement was approved, and final judgment in the action has been entered. The court-approved process for class members to submit claims under the settlement is ongoing and will continue until October 7, 2013.- 15 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)has setheard oral argument foron May 15, 2013.$8.25$8.25 million in exchange for the dismissal of its lawsuit.which motion has been fully briefed. Discoverybut granted plaintiffs’ leave to amend their complaint to add certain allegations within the existing class period. On June 30, 2013, plaintiffs filed their Sixth Amended Class Action Complaint. On July 1, 2013, defendants answered the Sixth Amended Class Action Complaint. Fact discovery is now closed; expert discovery is currently proceeding in accordance with the court’s scheduling order.DiscoveryFact discovery is now closed; expert discovery is currently proceeding in the individual securities lawsuits together with expert discovery in the class action.$170$170 million, which is currently being used to partially fund the Company’s legal fees. As a result of the previously disclosed insurance arbitration, additional insurance coverage for these claims should also be available, if needed, under upper-level excess policies that provide coverage for a variety of risks. There are disputes with the insurers about the availability of some or all of the Company’s insurance coverage for these claims and there are likely to be additional disputes. The amounts actually recovered under the policies discussed in this paragraph may be less than the stated upper limits.$21$21 million but not more than an aggregate maximum of approximately $36 million.$36 million. The agreement has been approved by courts in Canada’s provinces.- 16 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)(the (the “FosamaxLitigation”). As of March 31,June 30, 2013, approximately 4,9905,075 cases, which include approximately 5,5855,440 plaintiff groups, had been filed and were pending against Merck in either federal or state court, including one case which seeks class action certification, as well as damages and/or medical monitoring. In approximately 1,2101,135 of these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw (“ONJ”), generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use ofFosamax. In addition, plaintiffs in approximately 3,780 3,940940855 of the cases are before Judge Keenan. In the firstFosamaxONJ MDL trial,Boles v. Merck, theFosamaxONJ MDL court declared a mistrial because the eight person jury could not reach a unanimous verdict. TheBolescase was retried in June 2010 and resulted in a verdict in favor of the plaintiff in the amount of $8 million.$8 million. Merck filed post-trial motions seeking judgment as a matter of law or, in the alternative, a new trial. In October 2010, the court denied Merck’s post-trial motions butsua sponteordered a remittitur reducing the verdict to $1.5 million.$1.5 million. Plaintiff rejected the remittitur ordered by the court and requested a new trial on damages. Plaintiff and Merck subsequently entered into a confidential stipulation as to the amount of plaintiff’s damages that enabled Merck to appeal the underlying judgment, and Merck filed its appeal in theBoles case in October 2012. Prior to 2013, three other cases were tried to verdict in theFosamax ONJ MDL. Defense verdicts in favor of Merck were returned in each of those three cases. Plaintiffs have filed an appeal in two of the cases –Graves v. MerckandSecrest v. Merck.On January 30, 2013, the U.S. Court of Appeals for the Second Circuit affirmed the judgment in Merck’s favor inSecrest.On April 30, 2013, plaintiff Plaintiff in theSecrestcase subsequently filed a petition for a writ of certiorari with the U.S. Supreme Court.Court, but that petition was denied on June 3, 2013.$285$285 thousand in compensatory damages. On March 5, 2013, Merck filed aMerck’s post-trial motion for judgment as a matter of law in theScheinberg case was denied on July 1, 2013, and that motion is still pending.the Company has filed an appeal with the U.S. Court of Appeals for the Second Circuit.2011,2012, Judge Keenan issued an order requiring plaintiffs who do not allege certain types of specific injuries to provide expert reports in support of their claims. The deadlines for submission of these reports arewere staggered throughout the first half of 2013, and failure to comply with the order may result in dismissal of a plaintiff’s claim. The first deadline passed on February 20, 2013, and Merck submitted to the court on February 27, 2013 a list of several hundred plaintiffs who failed to comply with that first deadline. On March 13, 2013, Judge Keenan ordered that those plaintiffs who failed to provide reports by the February 20, 2013 deadline had 30 days to provide the required reports or, upon motion, the case may be dismissed with prejudice and/or the court may impose sanctions for failure to comply. To date, the claims of more than 225335 plaintiffs subject to the order have been dismissed their claims with prejudice.- 17 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)March 31,June 30, 2013, approximately 265275 ONJ cases were pending against Merck in Atlantic County, New Jersey. In July 2009, Judge Higbee entered a Case Management Order (and various amendments thereto) setting forth a schedule that contemplates completing fact and expert discovery in an initial group of cases to be reviewed for trial. In February 2011, the jury inRosenberg v. Merck, the first trial in the New Jersey coordinated proceeding, returned a verdict in Merck’s favor. In April 2012, the jury inSessner v. Merck, the second case tried in New Jersey, also returned a verdict in Merck’s favor. Plaintiffs have filed an appeal in both cases. On March 25, 2013, the New Jersey Appellate Division affirmed the judgment in Merck’s favor in theRosenberg case.2013.2013 or 2014.1,0151,075 cases were pending in theFosamax Femur Fracture MDL as of March 31,June 30, 2013. A Case Management Order has been entered that has selected four cases from that group to be tried as the initial bellwether cases in theFosamax Femur Fracture MDL. The first bellwether case,Glynn v. Merck, began on April 8, 2013, and the jury returned a verdict in Merck’s favor on April 29, 2013.2013; in addition, on June 27, 2013, Judge Pisano 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. Plaintiff Glynn did not appeal that ruling and the Glynn judgment entered in Merck’s favor is now final. The second bellwether case, Zessin v. Merck, case which was set to be tried in September 2013, but has been rescheduledis currently being held in abeyance, as are the trial dates for January 2014; the remaining bellwether cases, Young v. Merck andJohnson v. Merck cases are expected to be tried later in 2014.March 31,June 30, 2013, approximately 2,3052,660 cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge Higbee in Atlantic County Superior Court. The parties have selected an initial group of 30 cases to be reviewed through fact discovery. The first trial of the New Jersey state Femur Fracture cases,Su v. Merck, began on March 11, 2013, but a mistrial was declared on March 28, 2013 after the plaintiff suffered a serious medical issue unrelated to her use ofFosamaxthat prevented her from proceeding with the trial. The next trial,Unanski v. Merck, is currentlywas set to be tried beginning November 4, 2013.2013, but has been continued and is expected to be tried in 2014.March 31,June 30, 2013, approximately 440470 cases alleging Femur Fractures have been filed in California state court. A petition was filed seeking to coordinate all Femur Fracture cases filed in California state court before a single judge in Orange County, California. The petition was granted and Judge Steven Perk is now presiding over the coordinated proceedings. No scheduling order has yet been entered.nineseven Femur Fracture cases pending in other state courts. A trial date has been set for August 12, 2013 for theBarnes v. Merckcase pending in Alabama state court.March 31,June 30, 2013, there were 43approximately 60 cases, which include approximately 65 plaintiff groups, filed complaintsand pending against Merck alleging that plaintiffs’ use ofJanuviaand/orJanumetcaused them to developthe development of pancreatic cancer. These complaints were filed in several different state and federal courts, with the majority filed in the United States District Court for the Southern District of California. On April 5, 2013, a law firm representing certain plaintiffs filed a request with the JPML to create a federal MDL for lawsuits alleging pancreatic cancer due to use of the following medicines:Januvia, Janumet, and Byetta and- 18 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)March 31,June 30, 2013, there were approximately 1,4101,500NuvaRingcases. Of these cases, approximately 1,1901,285 are or will be pending in theNuvaRingMDL in the U.S. District Court for the Eastern District of Missouri before Judge Rodney Sippel, and approximately 210200 are pending in coordinated proceedings in the Bergen County Superior Court of New Jersey before Judge Brian R. Martinotti. In addition, thereNine additional cases are several cases pending in various other state courts. The Company has certain insurance coverage available to it, which is currently being used to partially fundcourts, including two cases in a coordinated state proceeding in the Company’s legal fees. The Company intends to defend against these lawsuits.San Francisco Superior Court in California before Judge John E. Munter.eightseven cases from which the first trials in theNuvaRing MDL will be selected. TheJudge Sippel recently denied the Company’s motion for summary judgment in the firstNuvaRing MDL trial which is expected to take place in October of 2013. The Company has filed motions relatedJanuary 2014.the admissibility of expert testimony and motions for summary judgment. Judge Sippel recently denied the majority of the Company’s expert challenges. In one of the eight trial pool cases in which the Company moved for summary judgment, the plaintiff dismissed her case with prejudice. No date is set yet for any hearings on the Company’s remaining summary judgment motions in theNuvaRing MDL.Interim Consolidated Financial Statements (unaudited)March 31,June 30, 2013, approximately 5401,040 lawsuits involving a total of approximately 7601,370 plaintiffs (in some instances spouses are joined as plaintiffs in the suits) who allege that they have experienced persistent sexual side effects following cessation of treatment withPropeciaand/orProscar have been filed against Merck. Approximately 25 of the plaintiffs also allege that Propecia or Proscar has caused or can cause prostate cancer or male breast cancer. The lawsuits have been filed in various federal courts and in state court in New Jersey. The federal lawsuits have been consolidated for pretrial purposes in a federal MDL before Judge John Gleeson of the Eastern District of New York. The matters pending in state court in New Jersey have been consolidated before Judge Jessica Mayer in Middlesex County. The Company intends to defend against these lawsuits.allegesalleged that Merck delayed releasing unfavorable results of the ENHANCE clinical trial regarding the efficacy ofVytorin and that Merck made false and misleading statements about expected earnings, knowing that once the results of the ENHANCE study were released, sales ofVytorin would decline and Merck’s earnings would suffer. In December 2008, Merck and the- 19 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)other defendants moved to dismiss this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be granted. In September 2009, the court denied defendants’ motion to dismiss. In March 2012, defendants filed a motion for summary judgment. In September 2012, the court denied defendants’ motion for summary judgment and granted lead plaintiffs’ amended motion for class certification. On February 13,14, 2013, Merck announced that it had reached an agreement in principle with plaintiffs to settle this matter for $215 million.$215 million. On March 11, 2013, the court stayed all proceedings pending submission of the agreement for court approval. On June 4, 2013, plaintiffs moved for preliminary approval of the settlement, which the court granted on June 7, 2013. On July 2, 2013, plaintiffs moved for final approval of the settlement and the proposed plan of allocation. A final fairness hearing has been scheduled for October 1, 2013. The proposed settlement was reflected in the Company’s 2012 financial results as discussed below.namesnamed as defendants Schering-Plough; Merck/Schering-Plough Pharmaceuticals; certain of the Company’s current and former officers and directors; and underwriters who participated in an August 2007 public offering of Schering-Plough’s common and preferred stock. In December 2008, Schering-Plough and the other defendants filed motions to dismiss this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be granted. In September 2009, the court denied defendants’ motions to dismiss. In March 2012, the Schering-Plough defendants filed a motion for partial summary judgment and the underwriter defendants filed a motion for summary judgment. In September 2012, the court denied defendants’ motions for summary judgment and granted lead plaintiffs’ amended motion for class certification. On February 13,14, 2013, Merck announced that it had reached an agreement in principle with plaintiffs to settle this matter for $473 million.$473 million. On March 11, 2013, the court stayed all proceedings pending submission of the settlement agreement for court approval. On June 4, 2013, plaintiffs moved for preliminary approval of the settlement, which the court granted on June 7, 2013. On July 2, 2013, plaintiffs moved for final approval of the settlement and the proposed plan of allocation. A final fairness hearing has been scheduled for October 1, 2013. If approved, this settlement will exhaust the remaining Directors and Officers insurance coverage applicable to theVytorin lawsuits brought by the legacy Schering-Plough shareholders. The proposed settlement was reflected in the Company’s 2012 financial results and, together with the settlement described in the preceding paragraph, resulted in an aggregate charge of $493$493 million after taking into account anticipated insurance recoveries of $195 million.remainhave been named as defendants in cases brought by various states alleging manipulation by pharmaceutical manufacturers of Average Wholesale Prices (“AWP”), which are sometimes used by public and private payors in calculating provider reimbursement levels. The outcome of these lawsuits could include substantial damages, the imposition of substantial fines and penalties and injunctive or administrative remedies. certain AWP cases brought by the states of Alabama, Alaska, Kansas, Illinois, Kentucky, Louisiana, Oklahoma, and Mississippi. The Company and/or certain of its subsidiaries continue to be defendants in cases brought by five states.two states, Utah and Wisconsin.groundgrounds that plaintiffs had failed to demonstrate their standing to sue. Plaintiffs were given until June 3, 2013 to filePlaintiffs’ consolidated amended complaints.- 20 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)Abbreviated New Drug Applications (“ANDAs”)ANDAs with the U.S. Food and Drug Administration (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. Certain products of the Company (or products marketed via agreements with other companies) currently involved in such patent infringement litigation in the United States include: AzaSite,Emend for Injection, Integrilin,Nasonex, Nexium,VytorinandZetia. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by generic companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through mergers and acquisitions, potentially significant intangible asset impairment charges.scheduled for Julyexpected to be completed in August 2013.automatically stays FDA approvalpending the outcome of Intas’ ANDA until July 2015 or until an adverse court decision, if any, whichever may occur earlier.the lawsuit with Sandoz.AnThe Court of Appeals for the Federal Circuit issued a decision in June 2013 affirming the district court’s decision and the Company has exhausted all of its appeal hearing is scheduled for June 2013.options.Hanmi USA, Inc. (“Hanmi”) and Mylan Laboratories Limited (“Mylan Labs”) and Actavis, Inc./Watson Pharma Company (collectively, “Actavis/Watson”) related to their applications to the FDA seeking pre-patent expiry approval to sell generic versions- 21 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)HanmiMylan Labs and Mylan LabsActavis/Watson applications to the FDA remain stayed until May 2013August 2014 and August 2014,October 2015, respectively, or until earlier adverse court decisions, if any, whichever may occur earlier. A trial in the Hanmi case is scheduled for May 2013. In March 2013, a patent infringement lawsuit was filed (jointly with AstraZeneca) in the United States against Actavis, Inc./Watson Pharma Company (collectively, “Actavis/Watson”) in respect of Actavis/Watson’s application to the FDA seeking pre-patent expiry approval to market a generic version of Nexium. The lawsuit automatically stays FDA approval of Actavis/Watson’s ANDA until October 2015 or until an adverse court decision, if any, whichever may occur earlier.- 22 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)SubjectThe parties are currently working on an agreement in principle intended to resolve the court’s anticipated rulings on defendants’ potentially dispositive summary judgment and other pre-trial motions, trialremainder of nine selected trial plaintiffs’ claims currentlythis litigation. At the parties’ request, it is anticipated that trial in this matter will be taken off calendar while the parties work to begin near the end of June 2013.March 31,June 30, 2013 and December 31, 2012 of approximately $230$210 million and $260- 23 -10. Equity Total ($ and shares in millions) Shares Par Value Shares Cost Balance January 1, 2012 3,577 $ 1,788 $ 40,663 $ 38,990 $ (3,132 ) 536 $ (23,792 ) $ 2,426 $ 56,943 Net income attributable to Merck & Co., Inc. — — — 3,531 — — — — 3,531 Cash dividends declared on common stock — — — (2,571 ) — — — — (2,571 ) Treasury stock shares purchased — — — — — 26 (985 ) — (985 ) Share-based compensation plans and other — — (113 ) — — (24 ) 809 — 696 Other comprehensive income — — — — 6 — — — 6 Net income attributable to noncontrolling interests — — — — — — — 56 56 Distributions attributable to noncontrolling interests — — — — — — — (3 ) (3 ) Balance at June 30, 2012 3,577 $ 1,788 $ 40,550 $ 39,950 $ (3,126 ) 538 $ (23,968 ) $ 2,479 $ 57,673 Balance January 1, 2013 3,577 $ 1,788 $ 40,646 $ 39,985 $ (4,682 ) 550 $ (24,717 ) $ 2,443 $ 55,463 Net income attributable to Merck & Co., Inc. — — — 2,499 — — — — 2,499 Cash dividends declared on common stock — — — (2,569 ) — — — — (2,569 ) Treasury stock shares purchased — — (500 ) — — 124 (5,605 ) — (6,105 ) Share-based compensation plans and other — — (371 ) — — (23 ) 988 1 618 Other comprehensive income — — — — (78 ) — — — (78 ) Supera joint venture — — 116 — — — — 112 228 Net income attributable to noncontrolling interests — — — — — — — 52 52 Distributions attributable to noncontrolling interests — — — — — — — (3 ) (3 ) Balance at June 30, 2013 3,577 $ 1,788 $ 39,891 $ 39,915 $ (4,760 ) 651 $ (29,334 ) $ 2,605 $ 50,105 NotesOn May 20, 2013, Merck entered into an accelerated share repurchase (“ASR”) agreement with Goldman, Sachs & Co. (“Goldman Sachs”). Under the ASR, Merck agreed to Interim Consolidated Financial Statements (unaudited) (continued)purchase approximately 9.Equity
Paid-In
Other
Comprehensive
Controlling ($ and shares in millions) Shares Par Value Shares Cost 3,577 $ 1,788 $ 40,663 $ 38,990 $ (3,132 ) 536 $ (23,792 ) $ 2,426 $ 56,943 — — — 1,738 — — — — 1,738 — — — (1,287 ) — — — — (1,287 ) — — — — — 12 (456 ) — (456 ) — — (11 ) — — (13 ) 444 — 433 — — — — (85 ) — — — (85 ) — — — — — — — 29 29 — — — — — — — (1 ) (1 ) 3,577 $ 1,788 $ 40,652 $ 39,441 $ (3,217 ) 535 $ (23,804 ) $ 2,454 $ 57,314 3,577 $ 1,788 $ 40,646 $ 39,985 $ (4,682 ) 550 $ (24,717 ) $ 2,443 $ 55,463 — — — 1,593 — — — — 1,593 — — — (1,306 ) — — — — (1,306 ) — — — — — 14 (580 ) — (580 ) — — (35 ) — — (4 ) 168 — 133 — — — — 53 — — — 53 — — 116 — — — — 112 228 — — — — — — — 23 23 — — — — — — — (1 ) (1 ) 3,577 $ 1,788 $ 40,727 $ 40,272 $ (4,629 ) 560 $ (25,129 ) $ 2,577 $ 55,606 $2.4$2.4 billion par value preferred stock with a dividend rate of 5% per annum, which is carried by KBI and included inNoncontrolling interests on the Consolidated Balance Sheet. If AstraZeneca exercises its option to acquire Merck’s interest in AZLP (see Note 7), this preferred stock obligation will be retired.10.11. Share-Based Compensation Plans Three Months Ended
March 31 ($ in millions) 2013 2012 $ 67 $ 76 (20 ) (24 ) $ 47 $ 52 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Pretax share-based compensation expense $ 75 $ 93 $ 142 $ 169 Income tax benefit (23 ) (29 ) (43 ) (53 ) Total share-based compensation expense, net of taxes $ 52 $ 64 $ 99 $ 116 threesix months of 2013 and 2012, the Company granted 32 thousand6 million RSUs with a weighted-average grant date fair value of $41.09$44.96 per RSU and 33 thousand7 million RSUs with a weighted-average grant date fair value of $38.63$39.29 per RSU, respectively.- 24 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)threesix months of 2013 the Company did not grant any stock options. During the first three months ofand 2012, the Company granted 19 thousand6 million options with a weighted-average exercise price of $38.63$44.98 per option.option and 7 million options with a weighted-average exercise price of $39.26 per option, respectively. The weighted-average fair value of options granted for the first threesix months of 2013 and 2012 was $5.17$6.21 and $5.46 per option, respectively, and was determined using the following assumptions:Three Months EndedMarch 31, 2012Expected dividend yield4.4% Risk-free interest rate1.4% Expected volatility24.6% Expected life (years)7.0 Six Months Ended
June 30, 2013 2012 Expected dividend yield 4.2 % 4.4 % Risk-free interest rate 1.2 % 1.3 % Expected volatility 25.0 % 25.3 % Expected life (years) 7.0 7.0 March 31,June 30, 2013, there was $636$559 million of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted-average period of 2.3 years.The Company typically communicates the value of annual share-based compensation awards to employees during the first quarter, but the related share amounts are not established and communicated until early May. Therefore, while the number of RSU and stock option grants disclosed above do not reflect any amounts relating to the annual grants, share-based compensation costs for the first quarter of 2013 and 2012 and unrecognized compensation expense at March 31, 2013 reflect an impact relating to the awards communicated to employees.11.12. Pension and Other Postretirement Benefit Plans Three Months Ended
March 31, ($ in millions) 2013 2012 $ 175 $ 142 166 166 (275 ) (244 ) 84 48 2 5 $ 152 $ 117 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Service cost $ 170 $ 141 $ 345 $ 283 Interest cost 165 166 331 332 Expected return on plan assets (272 ) (244 ) (547 ) (488 ) Net amortization 82 48 166 96 Termination benefits 3 4 5 9 Curtailments (2 ) (1 ) (2 ) (1 ) $ 146 $ 114 $ 298 $ 231 Three Months Ended
March 31, ($ in millions) 2013 2012 $ 24 $ 21 27 31 (31 ) (34 ) (12 ) (8 ) — 2 — (2 ) $ 8 $ 10 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Service cost $ 24 $ 21 $ 48 $ 42 Interest cost 27 31 54 62 Expected return on plan assets (32 ) (34 ) (63 ) (68 ) Net amortization (12 ) (8 ) (24 ) (16 ) Termination benefits 2 3 2 5 Curtailments (2 ) (2 ) (2 ) (4 ) $ 7 $ 11 $ 15 $ 21 - 25 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)12.13. Other (Income) Expense, Net Three Months Ended
March 31, ($ in millions) 2013 2012 $ (57 ) $ (55 ) 184 175 212 67 (57 ) (45 ) $ 282 $ 142 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Interest income $ (65 ) $ (76 ) $ (122 ) $ (129 ) Interest expense 201 172 385 346 Exchange losses 55 13 267 80 Other, net 10 (6 ) (46 ) (50 ) $ 201 $ 103 $ 484 $ 247 quartersix months of 2013 as compared with the first quarter ofsame period in 2012 are due primarily to a Venezuelan currency devaluation. In February 2013, the Venezuelan government devalued its currency (Bolívar Fuertes) from 4.30 VEF per U.S. dollar to 6.30 VEF per U.S. dollar. The Company recognized losses due to exchange of approximately $140$140 million in the first quartersix months of 2013 resulting from the remeasurement of the local monetary assets and liabilities at the new rate. Since January 2010, Venezuela has been designated hyperinflationary and, as a result, local foreign operations are remeasured in U.S. dollars with the impact recorded in results of operations.threesix months ended March 31,June 30, 2013 and 2012 was $211$352 million and $187$324 million, respectively, which excludes commitment fees.13.14. Taxes on Income (4.3)%24.9% and 29.5%8.7% for the second quarter and first quartersix months of 2013, respectively, and32.1% and 30.8% for the second quarter and first six months of 2012, respectively, reflect the impacts of acquisition-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective income tax rates for the second quarter and first six months of 2013 reflect net benefits from reductions in tax reserves upon expiration of applicable statue of limitations. Additionally, the effective tax rate infor the first quartersix months of 2013 reflects the favorable impact of various discrete items, including the impact of tax legislation enacted in the first quarter of 2013 that extended the R&D tax credit for both 2012 and 2013, a reduction in tax reserves upon expiration of applicable statute of limitations, as well as a benefit of approximately $160$160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue as discussed below.$160$160 million related to this issue, which was settled in the fourth quarter of 2012, with final resolution relating to interest owed being reached in the first quarter of 2013. The Company’s unrecognized tax benefits related to this issue exceeded the settlement amount. Management has concluded that the exclusion of this benefit is not material to prior period financial statements or projected current year financial results. The IRS began its examination of the 2007-2009 tax years in 2010.- 26 -Notes to Interim Consolidated Financial Statements (unaudited) (continued)14.15. Earnings Per Share Three Months Ended
March 31, ($ and shares in millions except per share amounts) 2013 2012 $ 1,593 $ 1,738 — 2 $ 1,593 $ 1,736 3,022 3,043 $ 0.53 $ 0.57 $ 1,593 $ 1,738 — 2 $ 1,593 $ 1,736 3,022 3,043 31 31 3,053 3,074 $ 0.52 $ 0.56 Three Months Ended
June 30, Six Months Ended
June 30,($ and shares in millions except per share amounts) 2013 2012 2013 2012 Basic Earnings per Common Share Net income attributable to Merck & Co., Inc. $ 906 $ 1,793 $ 2,499 $ 3,531 Less: Income allocated to participating securities — 1 — 3 Net income allocated to common shareholders $ 906 $ 1,792 $ 2,499 $ 3,528 Average common shares outstanding 2,977 3,041 3,000 3,042 $ 0.30 $ 0.59 $ 0.83 $ 1.16 Earnings per Common Share Assuming Dilution Net income attributable to Merck & Co., Inc. $ 906 $ 1,793 $ 2,499 $ 3,531 Less: Income allocated to participating securities — 1 — 3 Net income allocated to common shareholders $ 906 $ 1,792 $ 2,499 $ 3,528 Average common shares outstanding 2,977 3,041 3,000 3,042 33 31 30 32 Average common shares outstanding assuming dilution 3,010 3,072 3,030 3,074 $ 0.30 $ 0.58 $ 0.82 $ 1.15 March 31,June 30, 2013 and 2012, 8623 million and 117107 million, respectively, and for the first six months of 2013 and 2012, 32 million and 112 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.15.16. Other Comprehensive Income (Loss) ($ in millions) Derivatives Investments Employee
Benefit
Plans Cumulative
Translation
Adjustment Other
Comprehensive
Income (Loss) $ 4 $ 21 $ (2,346 ) $ (811 ) $ (3,132 ) (58 ) 29 — (56 ) (85 ) $ (54 ) $ 50 $ (2,346 ) $ (867 ) $ (3,217 ) $ (97 ) $ 73 $ (3,667 ) $ (991 ) $ (4,682 ) 349 36 133 (253 ) 265 (133 ) (12 ) (23 ) (92 ) (260 ) 216 24 110 (345 ) 5 32 (28 ) 72 — 76 (12 ) 5 (21 ) — (28 ) 20 (1) (23 ) (2) 51 (3) — 48 236 1 161 (345 ) 53 $ 139 $ 74 $ (3,506 ) $ (1,336 ) $ (4,629 ) ($ in millions) Derivatives Investments Balance January 1, 2012, net of taxes $ 4 $ 21 $ (2,346 ) $ (811 ) $ (3,132 ) Other comprehensive income (loss), net of taxes 44 30 18 (86 ) 6 Balance June 30, 2012, net of taxes $ 48 $ 51 $ (2,328 ) $ (897 ) $ (3,126 ) Balance January 1, 2013, net of taxes $ (97 ) $ 73 $ (3,667 ) $ (991 ) $ (4,682 ) Other comprehensive income (loss) before reclassification adjustments, pretax 413 (44 ) 144 (378 ) 135 Tax (163 ) (8 ) (30 ) (103 ) (304 ) Other comprehensive income (loss) before reclassification adjustments, net of taxes 250 (52 ) 114 (481 ) (169 ) Reclassification adjustments, pretax 33 (34 ) 142 — 141 Tax (12 ) 6 (44 ) — (50 ) Reclassification adjustments, net of taxes 21 (28 ) 98 — 91 Other comprehensive income (loss), net of taxes 271 (80 ) 212 (481 ) (78 ) Balance June 30, 2013, net of taxes $ 174 $ (7 ) $ (3,455 ) $ (1,472 ) $ (4,760 ) Sales.Sales.11)12).16.17. Segment Reporting Three Months
Ended March 31, ($ in millions) 2013 2012 $ 629 $ 614 394 444 884 919 409 392 385 375 337 1,340 68 39 40 48 151 146 137 184 122 116 84 76 61 67 121 112 36 73 549 519 108 74 362 337 162 145 126 162 110 111 110 101 65 59 216 237 116 102 105 124 63 58 47 53 267 336 84 88 82 103 76 87 68 108 61 134 52 57 40 156 39 51 390 284 272 255 168 76 162 142 111 112 1,022 1,066 8,891 10,082 1,712 1,593 10,603 11,675 68 56 $ 10,671 $ 11,731 Three Months Ended
June 30, Six Months Ended
June 30, ($ in millions) 2013 2012 2013 2012 Primary Care and Women’s Health Cardiovascular Zetia $ 650 $ 632 $ 1,279 $ 1,246 Vytorin 417 445 810 889 Diabetes and Obesity Januvia 1,072 1,058 1,956 1,977 Janumet 474 411 883 802 Respiratory Nasonex 325 293 711 668 Singulair 281 1,431 618 2,771 Dulera 79 50 147 89 Asmanex 49 51 89 99 Women’s Health and Endocrine NuvaRing 171 157 322 303 Fosamax 144 186 281 370 Follistim AQ 134 125 257 241 Implanon 102 85 187 161 Cerazette 48 72 108 139 Other Arcoxia 121 117 242 229 Avelox 29 44 65 117 Hospital and Specialty Immunology Remicade 527 518 1,076 1,037 Simponi 120 76 228 150 Infectious Disease Isentress 412 398 775 735 Cancidas 163 166 326 311 PegIntron 142 183 268 345 Invanz 120 110 230 211 Victrelis 116 126 226 238 Noxafil 71 66 136 125 Oncology Temodar 219 225 434 461 Emend 135 145 250 247 Other Cosopt/Trusopt 103 105 209 229 Bridion 69 60 131 118 Integrilin 48 60 95 113 Diversified Brands Cozaar/Hyzaar 255 337 522 674 Primaxin 85 104 168 192 Zocor 74 96 156 199 Propecia 67 100 135 208 Clarinex 64 140 125 273 Claritin Rx 40 48 115 134 Remeron 53 66 106 123 Proscar 58 55 98 106 Maxalt 43 154 83 310 Gardasil 383 324 773 608 ProQuad/M-M-R II/Varivax 339 316 611 571 Zostavax 141 148 309 224 RotaTeq 144 142 306 284 Pneumovax 23 108 101 219 213 1,115 1,034 2,136 2,102 Total Pharmaceutical segment sales 9,310 10,560 18,201 20,642 1,631 1,680 3,343 3,273 Total segment sales 10,941 12,240 21,544 23,915 69 71 137 126 $ 11,010 $ 12,311 $ 21,681 $ 24,041 (3)Represents the non-reportable segments of Animal Health, Consumer Care and Alliances. The Alliances segment includes revenue from the Company’s relationship with AZLP. (4) Three Months Ended
March 31, ($ in millions) 2013 2012 $ 5,345 $ 6,596 899 804 6,244 7,400 (14 ) (73 ) 57 55 (184 ) (175 ) (2 ) (20 ) (479 ) (551 ) (1,692 ) (1,643 ) (1,184 ) (1,229 ) (119 ) (219 ) (1,077 ) (1,038 ) $ 1,550 $ 2,507 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Segment profits: Pharmaceutical segment $ 5,693 $ 6,906 $ 11,039 $ 13,502 Other segments 793 774 1,693 1,578 Total segment profits 6,486 7,680 12,732 15,080 Other profits (losses) 4 45 (19 ) (28 ) Unallocated: Interest income 65 76 122 129 Interest expense (201 ) (172 ) (385 ) (346 ) Equity income from affiliates (12 ) 11 (15 ) (9 ) Depreciation and amortization (458 ) (567 ) (937 ) (1,118 ) Research and development (1,875 ) (1,930 ) (3,567 ) (3,573 ) Amortization of purchase accounting adjustments (1,185 ) (1,226 ) (2,369 ) (2,455 ) Restructuring costs (155 ) (144 ) (274 ) (363 ) Other unallocated, net (1,424 ) (1,093 ) (2,493 ) (2,131 ) $ 1,245 $ 2,680 $ 2,795 $ 5,186 hashad authorized additional purchases of up to $15 billion of Merck’s common stock for its treasury. The Company expects to repurchase approximately $7.5 billion of common stock overwithin 12 months following the next 12 months,date of the announcement, financed through a combination of debt issuance and operating cash flows, with the remainder to be repurchased over time with no time limit. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions.ManagementIn March On May 20, 2013, Merck entered into an accelerated share repurchase (“ASR”) agreement with Goldman, Sachs & Co. (“Goldman Sachs”). Under the Company announced the appointmentASR, Merck agreed to purchase approximately $5 billion of Roger M. Perlmutter, M.D., Ph.D., as executive vice presidentMerck’s common stock, in total, with an initial delivery of approximately 99.5 million shares of Merck’s common stock, based on current market price, made by Goldman Sachs to Merck, and presidentpayment of $5 billion made by Merck Research Laboratories, effective April 15, 2013. Dr. Perlmutter succeeded Peter S. Kim, Ph.D., who served in the role since 2003.$10.7$11.0 billion for the firstsecond quarter of 2013, a decline of 9%11% compared with the firstsecond quarter of 2012,2012. Global sales for the first six months of 2013 were $21.7 billion, a decrease of 10% compared with the same period in 2012. The second quarter and year-to-date sales declines were driven primarily by lower sales ofSingulair. As noted above, the patents that provided U.S. market exclusivity and market exclusivity in a number of major European markets forSingulair expired in August 2012 and February 2013, respectively, and the Company experienced a significant and rapid decline inSingulair sales in those markets thereafter. Foreign exchange unfavorably affected global sales performance by 3% and 2%, respectively, for the second quarter and first quartersix months of 2013. The revenue declinedeclines in the second quarter and first quartersix months of 2013 also reflectsreflect lower sales ofMaxalt,Clarinex(desloratadine),Cozaar(losartan (losartan potassium),Hyzaar (losartan potassium and hydrochlorothiazide),Clarinex (desloratadine), Fosamax (alendronate sodium), Vytorin(ezetimibe/ (ezetimibe/simvastatin),Fosamax(alendronate sodium),PegIntron (peginterferon alpha-2b) and Propecia,Avelox(moxifloxacin hydrochloride) andPegIntron(peginterferon alpha-2b). These declines were partially offset by growth inGardasil [human papillomavirus quadrivalent (types 6, 11, 16 and 18) vaccine, recombinant],Zostavax [Zoster Vaccine Live]Janumet (sitagliptin/metformin HCI), and Simponi(golimumab),Remicade(infliximab),Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate) andIsentress (raltegravir), as well as higher revenue from the Company’s relationship with AstraZeneca LP (“AZLP”). In addition, increased sales of quartersix months of 2013 and the Company anticipates these measures will continue to negatively affect revenue performance for the remainder of 2013. Three Months
Ended March 31, ($ in millions) 2013 2012 $ 629 $ 614 394 444 884 919 409 392 385 375 337 1,340 68 39 40 48 151 146 137 184 122 116 84 76 61 67 121 112 36 73 549 519 108 74 362 337 162 145 126 162 110 111 110 101 65 59 216 237 116 102 105 124 63 58 47 53 267 336 84 88 82 103 76 87 68 108 61 134 52 57 40 156 39 51 390 284 272 255 168 76 162 142 111 112 1,022 1,066 8,891 10,082 1,712 1,593 10,603 11,675 68 56 $ 10,671 $ 11,731 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Primary Care and Women’s Health Cardiovascular Zetia $ 650 $ 632 $ 1,279 $ 1,246 Vytorin 417 445 810 889 Diabetes and Obesity Januvia 1,072 1,058 1,956 1,977 Janumet 474 411 883 802 Respiratory Nasonex 325 293 711 668 Singulair 281 1,431 618 2,771 Dulera 79 50 147 89 Asmanex 49 51 89 99 Women’s Health and Endocrine NuvaRing 171 157 322 303 Fosamax 144 186 281 370 Follistim AQ 134 125 257 241 Implanon 102 85 187 161 Cerazette 48 72 108 139 Other Arcoxia 121 117 242 229 Avelox 29 44 65 117 Hospital and Specialty Immunology Remicade 527 518 1,076 1,037 Simponi 120 76 228 150 Infectious Disease Isentress 412 398 775 735 Cancidas 163 166 326 311 PegIntron 142 183 268 345 Invanz 120 110 230 211 Victrelis 116 126 226 238 Noxafil 71 66 136 125 Oncology Temodar 219 225 434 461 Emend 135 145 250 247 Other Cosopt/Trusopt 103 105 209 229 Bridion 69 60 131 118 Integrilin 48 60 95 113 Diversified Brands Cozaar/Hyzaar 255 337 522 674 Primaxin 85 104 168 192 Zocor 74 96 156 199 Propecia 67 100 135 208 Clarinex 64 140 125 273 Claritin Rx 40 48 115 134 Remeron 53 66 106 123 Proscar 58 55 98 106 Maxalt 43 154 83 310 Gardasil 383 324 773 608 ProQuad/M-M-R II/Varivax 339 316 611 571 Zostavax 141 148 309 224 RotaTeq 144 142 306 284 Pneumovax 23 108 101 219 213 1,115 1,034 2,136 2,102 Total Pharmaceutical segment sales 9,310 10,560 18,201 20,642 1,631 1,680 3,343 3,273 Total segment sales 10,941 12,240 21,544 23,915 69 71 137 126 $ 11,010 $ 12,311 $ 21,681 $ 24,041 MSD.separately.results.revenuessales by $1.3 billion and $1.5 billion for the three months ended March 31,June 30, 2013 and 2012, respectively, and $2.5 billion and $3.0 billion for the six months ended June 30, 2013 and 2012, respectively. Inventory levels at key U.S. wholesalers for each of the Company’s major pharmaceutical products are generally less than one month.$629$650 million in the firstsecond quarter of 2013 an increaseand $1.3 billion for the first six months of 2%2013, representing increases of 3% compared with the first quartersame periods of 2012. Foreign exchange unfavorably affected global sales performance by 3% and 2% in the second quarter and first quartersix months of 2013.2013, respectively. The sales increase reflects positive performanceincreases primarily reflect favorable pricing in the United States.(marketed (marketed outside the United States asInegy), a combination product containing the active ingredients of bothZetiaandZocor (simvastatin), were $394$417 million and $810 million in the second quarter and first quartersix months of 2013, respectively, representing a declinedeclines of 11%6% and 9%, respectively, compared with the first quarter ofsame periods in 2012. The sales decline reflectsdeclines primarily reflect lower volumes in the United States, as well as unfavorable pricing and internationally.lower volumes in Europe.MarchMay 2013, Merck announced that the Data Safety Monitoring BoardU.S. Food and Drug Administration (the “FDA”) approved Liptruzet (ezetimibe and atorvastatin) tablets for the treatment of the IMPROVE-IT trial, a large cardiovascular outcomes study evaluating ezetimibe/simvastatin against simvastatin aloneelevated low-density lipoprotein (“LDL”) cholesterol in patients presenting with acute coronary syndrome, completed itsprimary or mixed hyperlipidemia as adjunctive therapy to diet when diet alone is not enough. Liptruzet, a once-daily tablet, inhibits the absorption of cholesterol in the digestive tract (through ezetimibe) and the production of cholesterol in the liver (through atorvastatin). Merck is continuing to move forward with planned review of study data and recommended that the study continue. The study design callsfilings for the collection of 5,250 clinical endpoints. Merck remains blinded toezetimibe and atorvastatin combination tablet in additional countries around the actual results of this analysis and to other IMPROVE-IT safety and efficacy data. IMPROVE-IT is an 18,141 patient event-driven trial and, based on the targeted number of clinical endpoints and the rate at which events are being reported, the trial is projected to conclude in September 2014. The IMPROVE-IT executive committee and Merck will continue to monitor the progress of the study, and Merck will update the study timeline if appropriate. No additional interim analyses are planned.$884 million$1.1 billion in the second quarter of 2013, an increase of 1% compared with the second quarter of 2012 including a 6% unfavorable effect from foreign exchange. Sales performance in the second quarter of 2013 as compared with the second quarter of 2012 reflects higher sales in the United States driven primarily by favorable pricing, as well as volume growth in Japan, partially offset by the unfavorable effect of foreign exchange particularly in Japan. Worldwide sales of Januvia were $2.0 billion in the first quartersix months of 2013, a decline of 1% compared with the same period of 2012 including a 4% unfavorable effect from foreign exchange. Excluding the negative effect from foreign exchange, sales in the first six months of 2013 as compared with the first quartersix months of 2012 reflecting lower salesreflect positive performance in Japan, the emerging markets, and the United States due primarily to lower customer inventory levels. Foreign exchange unfavorably affected global sales performance by 3% in the first quarter of 2013.States. (sitagliptin/metformin HCI), Merck’s oral antihyperglycemic agent that combines sitagliptin (Januvia) with metformin in a single tablet to target all three key defects of type 2 diabetes, were $409$474 million for the second quarter of 2013 and $883 million for the first quartersix months of 2013, representing an increaseincreases of 4%16% and 10%, respectively, compared with the same periodperiods of 2012,2013, reflecting favorable pricing and volume growth in Europe, Canada and the emerging markets.United States, as well as volume growth internationally.(mometasone (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, increased 3%11% in the firstsecond quarter of 2013 to $385$325 million reflecting volume growthand 6% in Japan, partially offsetthe first six months of 2013 to $711 million driven primarily by declinesincreases in the United States, and Latin America.reflecting a net favorable adjustment to indirect customer discounts that was partially offset by lower volumes. The sales increase for the first six months of 2013 also reflects growth in Japan. Foreign exchange unfavorably affected global sales performance by 4%2% and 3% in the second quarter and first quartersix months of 2013.2013, respectively. In 2009, Apotex Inc. and Apotex Corp. (collectively, “Apotex”) filed an Abbreviated New Drug Application with the U.S. Food and Drug Administration (the “FDA”)FDA seeking approval to sell its generic version ofNasonex. In June 2012, the U.S. District Court for the District of New Jersey ruled against the Company in a patent infringement suit against Apotex holding that Apotex’s generic version ofNasonex does not infringe on the Company’s formulation patent (see Note 89 to the interim consolidated financial statements). The Company has appealedIn June 2013, the Court of Appeals for the Federal Circuit issued a decision affirming the U.S. District Court decision.decision and the Company has exhausted all of its appeal options. If generic versions become available, significant losses ofNasonex sales could occur and the Company may take a non-cash impairment charge with respect to the value of theNasonex intangible asset, which had a carrying value of approximately $1.7$1.6 billion at March 31,June 30, 2013. If theNasonexintangible asset is determined to be impaired, the impairment charge could be material. U.S. sales ofNasonex were $597 million for the full year of 2012.75%80% in the firstsecond quarter of 2013 to $337$281 million and declined 78% in the first six months of 2013 to $618 million compared with the first- 33 -quartersame periods of 2012, driven primarily by lower sales in United States, andas well as in Europe. Revenue declines in Japan and Latin America also contributed to theSingulair sales decline in the quarter. The patent that provided U.S. market exclusivity forSingulairexpired in August 2012 and the Company has lost substantially all sales ofSingulair in the United States. In addition, the patents that provided market exclusivity forSingulairexpired in a number of major European markets in February 2013 and the Company is experiencing a significant and rapid decline inSingulair sales in thesethose markets following the patent expiries and expects the decline to continue. Sales ofSingulair in Europe declined 34%70% to $111$49 million in the second quarter of 2013 and 52% to $160 million in the first quartersix months of 2013 compared with the first quartersame periods of 2012.$68$79 million in the firstsecond quarter of 2013 compared with $39$50 million in the second quarter of 2012 and were $147 million in the first quartersix months of 2012 reflecting volume growth2013 compared with $89 million for the first six months of 2012. The sales increases reflect higher demand in the United States. In January 2012, Merck received a Complete Response Letter from the FDA on the Company’s supplemental New Drug Application forDulera Inhalation Aerosol for the treatment of chronic obstructive pulmonary disease. The Company is planning to conduct an additional clinical study and update the application in the future.(etonogestrel/ (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product, increased 4%9% in the firstsecond quarter of 2013 to $151$171 million and grew 6% in the first six months of 2013 to $322 million compared with the same periods in 2012 primarily reflecting positive performancefavorable pricing in the United States.26%22% in the firstsecond quarter of 2013 to $137$144 million and decreased 24% in the first six months of 2013 to $281 million compared with the first quartersame periods of 2012 driven primarily by declines in Europe and Japan. These medicines have lost market exclusivity in the United States and in most major Europeaninternational markets. The Company expects the sales declines within theFosamax product franchise to continue.(follitropin (follitropin beta injection) (marketed in most countries outside the United States asPuregon), a biological fertility treatment, grew 5%8% in the firstsecond quarter of 2013 to $122$134 million and increased 6% in the first six months of 2013 to $257 million compared with the same periods in 2012 driven largely by demand growthpositive performance in China and the United States, partially offset by declines in Europe.States. Puregonlost market exclusivity in the EU in August 2009.SalesOther products included in Primary Care and Women’s Health include among others, Asmanex Twisthaler (mometasone furoate inhalation powder), an inhaled corticosteroid for asthma; Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant; Cerazette (desogestrol), a progestin only oral contraceptive; Arcoxia (etoricoxib) for the treatment of arthritis and pain; and Avelox(moxifloxacin hydrochloride), a broad-spectrum fluoroquinolone antibiotic for the treatment of certain respiratory and skin infections marketed by the Company in the United States, declined 51% in the first quarter of 2013 to $36 million due primarily to a competitor’s product that became available in generic form.States. The patent that provides U.S. market exclusivity forAvelox expires in March 2014; however, by agreement, a generic manufacturer may launch a generic version ofAvelox in February 2014.Other products included in Primary Care and Women’s Health include among others,Asmanex Twisthaler(mometasone furoate inhalation powder), an inhaled corticosteroid for asthma;Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant;Cerazette (desogestrol), a progestin only oral contraceptive; andArcoxia(etoricoxib) for the treatment of arthritis and pain.6%2% to $549$527 million for the firstsecond quarter of 2013 compared with the firstsecond quarter of 2012 reflectingand increased 4% to $1.1 billion for the first six months of 2013 compared with the same period in 2012. Sales growth in both periods reflects volume growth in Europe. Foreign exchange favorably affected global sales performanceEurope that was partially offset by 1% in the first quarter of 2013.unfavorable pricing.$108$120 million in the firstsecond quarter of 2013 compared with $74$76 million in the second quarter of 2012 and were $228 million in the first quartersix months of 20122013 compared with $150 million in the first six months of 2012. Sales growth was driven by continued uptake since launch.Simponi was approved by the European Commission (the “EC”) in October 2009. In July 2012, a submission was made to2013, the Committee for Medicinal Products for Human Use of the European Medicines Agency requestingadopted a positive opinion recommending approval ofSimponi for the treatment of adult patients with moderately to severely active ulcerative colitistherapy.- 34 -8%4% in the firstsecond quarter of 2013 to $362$412 million and increased 5% in the first six months of 2013 to $775 million compared with the same periods in 2012 primarily reflecting favorable pricing and volume growth in the United States and volume growth in Europe. In the second quarter of 2013, these increases were partially offset by a decline in emerging markets and Europe.market sales as compared with the second quarter of 2012.(caspofungin (caspofungin acetate), an anti-fungal product, increased 12%decreased 1% in the firstsecond quarter of 2013 to $162$163 million. Sales of Cancidas grew 5% in the first six months of 2013 to $326 million compared with the same period in 2012 largely reflecting volume growth inoutside the emerging markets and Europe.United States.declined 23% to $126were $142 million and $268 million in the second quarter and first quartersix months of 2013, driven largely by lower salesrespectively, representing declines of 22% compared with the same periods in the United States and Japan.2012. The Company believes that the sales decline in the United States wasdeclines are attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available. Foreign exchange unfavorably affected global sales performance by 3% and 2% in the second quarter and first quartersix months of 2013.2013, respectively.the Company’s innovativean oral medicine for the treatment of chronic hepatitis C, declined 1%were $116 million and $226 million in the second quarter and first quartersix months of 2013, to $110 million.respectively, representing declines of 8% and 5%, respectively, compared with the same periods of 2012. Foreign exchange unfavorably affected global sales performance by 1% and 2%. Excluding in the impactsecond quarter and first six months of foreign exchange, sales performance reflects volume2013, respectively. Sales declines in the United States were partially offset by growth in the emerging markets which was offset by declines in the United States.markets. The Company believes that the sales declinedeclines in the United States wasare attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available.Victrelis was approved by the FDA in May 2011 and by the EC in July 2011.$216$219 million for the firstsecond quarter of 2013, a decline of 9%3% compared with the firstsecond quarter of 2012, and were $434 million for the first six months of 2013, a decline of 6% compared with the same period in 2012. Foreign exchange unfavorably affected global sales performance by 2%3% in both the second quarter and first quartersix months of 2013. Sales performance primarily reflects generic competition in Europe and declines in certain emerging markets.Europe. Temodarlost patent exclusivity in the EU in 2009. As previously disclosed, by agreement, a generic manufacturer may launch a generic version ofTemodar in the United States in August 2013. Accordingly, the Company anticipates that U.S. sales ofTemodar, which were $423 million for the full year of 2012, will decline significantly in 2013. The U.S. patent and exclusivity periods will otherwise expire in February 2014.$116$135 million in the second quarter of 2013, a decline of 7% compared with the second quarter of 2012, largely reflecting a decline in Japan. Sales of Emend were $250 million for the first quartersix months of 2013, an increase of 14%1% compared with the first quarter of 2012. Sales performance primarily reflectssame period in 2012 reflecting volume growth in the emerging markets, Europe and the United States.OtherWorldwide sales of ophthalmic products Cosopt (dorzolamide hydrochloride-timolol maleate ophthalmic solution) andTrusopt (dorzolamide hydrochloride ophthalmic solution) declined 15%States, partially offset by a decline in the first quarter of 2013 to $105 million reflecting lower sales in Japan and Europe.Japan. Foreign exchange unfavorably affected global sales performance by 5%4% and 3% in the second quarter and first six months of 2013, respectively.2013.2013, respectively. The patent forCosopt expired in a number of major European markets in March 2013 and the Company is experiencing sales declines in those markets and expects the declines to continue. The patents that provided market exclusivity forCosopt andTrusopt in the United States and forTrusopt in a number of major European markets had previously expired.8%14% to $63$69 million in the firstsecond quarter of 2013.2013 and increased 11% to $131 million for the first six months of 2013 compared with the same periods of 2012. The sales increases were driven by volume growth in Europe and in the emerging markets. Foreign exchange unfavorably affected global sales performance by 9%12% and 11% in the second quarter and first quartersix months of 2013.2013, respectively. Sugammadex sodium injection is currently under review by the FDA.FDA (see “Research and Development Update” below).$30$42 million and $41$43 million in the firstsecond quarter of 2013 and 2012, respectively, and were $73 million and $83 million in the first six months of 2013 and 2012, respectively. Merck continues to focus on buildingDuring the second quarter, the Company reduced cash flow projections for Saphris/Sycrest as a result of reduced expectations in international markets and maintaining the brand awareness ofSaphris in the United States. If these effortsThese revisions to cash flows indicated that the Saphris/Sycrest intangible asset value was not recoverable on an undiscounted cash flows basis. Utilizing market participant assumptions, and considering several different scenarios, the Company concluded that its best estimate of the current fair value of the intangible asset related to Saphris/Sycrest was approximately $170 million, which resulted in the United States or Lundbeck’s on-going launchrecognition of the product in the EU are not successful, the Company may take a non-cashan impairment charge with respect toof $330 million during the valuesecond quarter and first six months of theSaphris/Sycrest intangible asset,2013, which had a carrying value of approximately $525 million at March 31, 2013. If theSaphris/Sycrest intangible asset is determined to be impaired, the impairment charge could be material.reflected within - 35 -(ertapenem (ertapenem sodium) for the treatment of certain infections;Noxafil (posaconazole) for the prevention of certain invasive fungal infections; andIntegrilin (eptifibatide), a treatment for patients with acute coronary syndrome, which is sold by the Company in the United States and Canada.declined 21%were $255 million in the firstsecond quarter of 2013 to $267and $522 million for the first six months of 2013, representing declines of 24% and 23%, respectively, compared with the same periods of 2012. Foreign exchange unfavorably affected global sales performance by 8% and 7% for the second quarter and first quartersix months of 2012 including a 5% negative effect from foreign exchange.2013, respectively. The patents that provided market exclusivity forCozaarandHyzaarin the United States and in a number of major international markets have expired. Accordingly, the Company is experiencing significant declines inCozaar andHyzaar sales in those markets and the Company expects the declines to continue. TheIn the first six months of 2013, the declines were partially offset by higher sales in the emerging markets. (finasteride), a product for the treatment of male pattern hair loss, declined 37%were $67 million and $135 million in the second quarter and first quartersix months of 2013, to $68 million, including a 4% negative effect from foreignrespectively, representing declines of 33% and 35%, respectively, compared with the same periods in 2012. Foreign exchange unfavorably affected global sales performance by 7% and 5% in the second quarter and first six months of 2013, respectively. The sales declines in both periods were driven primarily by volume declines in the United States and Japan.States. The formulation/use patent that provides U.S. market exclusivity forPropecia expires in October 2013; however, as previously disclosed, by agreement, one generic manufacturer entered the U.S. market in January 2013 and another has beenwas given the right to enter in July 2013. Accordingly, the Company is experiencing a significant decline in U.S. sales ofPropecia and expects the decline to continue. U.S. sales ofPropecia were $124 million for the full year of 2012.(marketed (marketed asAeriusin many countries outside the United States), a non-sedating antihistamine, were $61$64 million for the firstsecond quarter of 2013, a decline of 55%,54% compared with the second quarter of 2012, and were $125 million for the first six months of 2013, a decline of 54% compared with the same period of 2012, reflecting lower volumes in the United States and Europe as a result of generic competition. As previously disclosed, by virtue of litigation settlements, certain generic manufacturers were given the right to enter the U.S. market in 2012 and several generic versions have been launched. The Company anticipates that sales ofClarinex will continue to decline.declined 74% to $40were $43 million forand $83 million in the second quarter and first quartersix months of 2013, respectively, representing declines of 72% and 73%, respectively, compared with the same periods in 2012, driven by lower sales in the United States. The patent that provided U.S. market exclusivity forMaxalt expired in December 2012 and the Company experienced a significant and rapid decline in U.S.Maxalt sales thereafter. In addition, the patent that provides market exclusivity forMaxalt will expire in a number of major European markets in August 2013 and the Company anticipates that sales in those markets will decline significantly thereafter. Sales ofMaxalt were $491 million in the United States and $92 million in Europe for the full year of 2012. cancers and other diseases caused by human papillomavirus (“HPV”) types 6, 11, 16 and 18, grew 37%18% in the firstsecond quarter of 2013 to $390$383 million and increased 27% in the first six months of 2013 to $773 million as compared with the same periods in 2012. The sales increases were driven primarily by volume growth in the United States, reflecting continued uptake in males and, for the year-to-date period, higher public sector purchases, as well as volume growth in certain emerging markets, particularly in Latin America andAmerica. On June 14, 2013, the Asia Pacific region.Japanese Health Ministry issued an advisory to suspend active promotion of HPV vaccines. Accordingly, the Company anticipates that sales of [Measles, [Measles, Mumps, Rubella and Varicella Virus Vaccine Live], a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, which experienced supply constraints in recent years,- 36 -$62$82 million in the second quarter of 2013 and $144 million in the first quartersix months of 2013.$143$184 million for the firstsecond quarter of 2013 compared with $176$216 million for the second quarter of 2012 and were $327 million for the first quartersix months of 2013 compared with $392 million for the first six months of 2012. Merck’s sales ofM-M-R II [Measles, Mumps and Rubella Virus Vaccine Live], a vaccine to help protect against measles, mumps and rubella, were $67$73 million for the firstsecond quarter of 2013 compared with $80$101 million for the second quarter of 2012 and were $140 million for the first quartersix months of 2013 compared with $180 million for the first six months of 2012. TheVarivax andM-M-R II sales declines are largely attributable to the availability ofProQuad discussed above.[Rotavirus [Rotavirus Vaccine, Live, Oral, Pentavalent], a vaccine to help protect against rotavirus gastroenteritis in infants and children, recorded by Merck were $162$144 million in the firstsecond quarter of 2013, an increase of 14%1% compared with the firstsecond quarter of 2012. Sales of RotaTeq were $306 million in the first six months of 2013, an increase of 8% compared with the same period in 2012, due primarily toreflecting higher public sector purchases in the United States.States and higher sales in Japan, partially offset by declines in certain emerging markets.$168$141 million in the firstsecond quarter of 2013 compared with $76$148 million in the second quarter of 2012 and were $309 million in the first quartersix months of 2012 due to strong2013 compared with $224 million in the first six months of 2012. The sales increase in the first six months of 2013 reflects higher demand in the United States and Canada.States. The Company anticipates limited launches ofZostavax outside of the United States later in 2013.Merck’s sales ofPneumovax23 [pneumococcal vaccine polyvalent], a vaccine to help prevent pneumococcal disease, declined 1% to $111 million in the first quarter of 2013 driven primarily by lower sales in Japan, partially offset by positive performance in the United States due to higher volumes and favorable pricing.$840$851 million for the firstsecond quarter of 2013, an increasea decline of 2% compared with the firstsecond quarter of 2012, driven primarily by higher salesand were $1.7 billion for the first six months of companion animal and poultry products.2013, essentially flat when compared with the same period in 2012. Foreign exchange unfavorably affected global sales performance by 2%3% in the firstsecond quarter of 2013 and by 2% for the first six months of 2013.$571$490 million for the firstsecond quarter of 2013, an increasea decrease of 3%11% compared with the second quarter of 2012, and were $1.1 billion for the first six months of 2013, a decline of 4% compared with the first quartersix months of 2012, driven by growth inCoppertoneandClaritin.2012. Foreign exchange unfavorably affected global sales performance by 1% in both the second quarter and first quartersix months of 2013. The sales declines in both periods resulted from the ongoing termination in China of certain Consumer Care distribution arrangements and a reversal of sales previously made to those distributors, together with associated termination costs. Excluding those actions, Consumer Care global sales would have increased by 2% and 3% for the second quarter and first six months of 2013, respectively, compared with the same periods in 2012 including a 1% unfavorable impact due to foreign exchange in both periods. Consumer Care product sales are affectedfallthird quarter of 2013.$262$245 million and $186$223 million in the second quarter of 2013 and 2012, respectively, and was $507 million and $409 million in the first quartersix months of 2013 and 2012, respectively. AstraZeneca has an option to buy Merck’s interest in a subsidiary and, through it, Merck’s interest in Nexium and Prilosec, exercisable in 2014, and the Company believes that it is likely that AstraZeneca will exercise that option (see “Selected Joint Venture and Affiliate Information” below). If AstraZeneca exercises its option, the Company will no longer record equity income from AZLP and supply sales to AZLP are expected to terminate.- 37 -$153$265 million and $279$293 million in the second quarter of 2013 and 2012, respectively, and $418 million and $572 million in the first quartersix months of 2013 and 2012, respectively, related to this program. The restructuring actions under the Merger Restructuring Program are expected to be substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related. Subsequent to the Merger, the Company has rationalized a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2015.2016. The Company expects the estimated total cumulative pretax costs for this program to be approximately $7.2 billion to $7.5 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects the Merger Restructuring Program to yield annual savings by the end of 2013 of approximately $3.5 billion to $4.0 billion and annual savings upon completion of the program of approximately $4.0 billion to $4.6 billion.$41$13 million and $14$(4) million were recorded in the second quarter of 2013 and 2012, respectively, and $54 million and $10 million were recorded in the first quartersix months of 2013 and 2012, respectively, related to the 2008 Restructuring Program. The 2008 Restructuring Program was substantially completed in 2011, with the exception of certain manufacturing-related actions, which are expected to be completed by the end of 2015, with the total cumulative pretax costs estimated to be up to $2.0 billion. The Company estimates that two-thirds of the cumulative pretax costs relate to cash outlays, primarily from employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. Merck expects the 2008 Restructuring Program to yield cumulative pretax savings of $3.8 billion to $4.2 billion from 2008 to 2013.$4.0$4.3 billion for the second quarter of 2013, an increase of 4% compared with the second quarter of 2012, and were $8.2 billion for the first quartersix months of 2013, a declinean increase of 2%1% compared with the first quartersix months of 2012. Costs in both the second quarter and first quartersix months of 2013 include $1.2 billion and $2.4 billion, respectively, and for the second quarter and first quartersix months of 2012 include $1.2 billion and $2.5 billion, respectively, of expenses for the amortization of intangible assets recognized in connection with mergers and acquisitions. In addition, expenses in the second quarter and first six months of 2013 include an intangible asset impairment charge of $330 million. Also included in materials and production costs were costs associated with restructuring activities which amounted to $43$93 million and $5$83 million in the second quarter of 2013 and 2012, respectively, and $136 million and $88 million in the first quartersix months of 2013 and 2012, 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 inRestructuring costsas discussed below.62.9%61.1% in the firstsecond quarter of 2013 compared with 65.6%66.6% in the second quarter of 2012 and was 62.0% in the first quartersix months of 2013 compared with 66.1% for the first six months of 2012. The amortization of intangible assets, as well as the restructuring and restructuringimpairment charges noted above reduced gross margin by 11.514.6 and 10.510.6 percentage points for the second quarter of 2013 and 2012, respectively, and 13.1 and 10.6 percentage points for the first quartersix months of 2013 and 2012, respectively. The gross margin declinedeclines were driven primarily reflectsby the loss ofSingulairsales as a result of patent expiries in the United Sates in August 2012 and in major European markets in February 2013. In addition, generic competition in the United States forMaxalt andPropecia also negatively affected gross margin in the second quarter and first quartersix months of 2013. These declines were partially offset by improvements resulting from other changes in product mix and lower costs due to manufacturing efficiencies. The Company anticipates that gross margin will continue to be negatively affected by the loss of market exclusivity forSingulair,Maxalt andPropecia for the remainder of 2013.- 38 -$3.0$3.1 billion in the firstsecond quarter of 2013 a declineand were $6.1 billion for the first six months of 2013, representing declines of 3% compared with the first quartersame periods of 2012. The decline wasdeclines were largely due to the favorable impact of foreign exchange and lower promotional spending and selling costs. Expenses for the firstsecond quarter of 2013 and 2012 include restructuring costs of $17$16 million and $24$21 million, respectively, and for the first six months of 2013 and 2012 include $33 million and $45 million, respectively, of restructuring costs, related primarily to accelerated depreciation for facilities to be closed or divested. Separation costs associated with sales force reductions have been incurred and are reflected inRestructuring costsas discussed below. Marketing and administrative expenses also include $23$19 million and $51$64 million of acquisition-related costs in the second quarter of 2013 and 2012, respectively, and $42 million and $115 million for the first quartersix months of 2013 and 2012, respectively, consisting of incremental, third-party integration costs related to the Merger, including costs related to legal entity and systemsystems integration.$1.9$2.1 billion for the second quarter of 2013, a decline of 3% compared with the second quarter of 2012, and were $4.0 billion for the first quartersix months of 2013, an increase of 2%essentially flat when compared with the first quartersix months of 2012. Research and development expenses are comprised of the costs directly incurred by Merck Research Laboratories (“MRL”), the Company’s research and development division that focuses on human health-related activities, which were approximately $1.1 billion in both the firstsecond quarter of 2013 and the second quarter of 2012 and were $2.2 billion in both the first quartersix months of 2013 and the first six months of 2012. Also included in research and development expenses are costs incurred by other divisions in support of research and development activities, including depreciation, production and general and administrative, as well as licensing activity, certain costs from operating segments, including the Pharmaceutical, Animal Health and Consumer Care segments, which in the aggregate were $769$713 million and $723$888 million for the second quarter of 2013 and 2012, respectively, and $1.5 billion and $1.6 billion for the first quartersix months of 2013 and 2012, respectively. Research and development expenses in the second quarter and first quartersix months of 2013 reflect higherlower costs for upfront and milestone payments for in-licensed programs as compared with the first quartersame periods in the prior year, largely due to payment of 2012.firstsecond quarter of 2013 and 2012, the Company recorded $30$234 million and $9$127 million, respectively, and for the first six months of 2013 and 2012 recognized $264 million and $136 million, respectively, of IPR&D impairment charges. Of the IPR&D impairment charges recorded in the second quarter and first six months of 2013, approximately $181 million related to the write-off of the intangible asset associated with preladenant as a result of the discontinuation of the clinical development program for this compound (see “Research and Development Update” below). In addition, the Company recorded impairment charges resulting from changes in cash flow assumptions for certain compounds. The remaining impairment charges for the first six months of 2013 and the charges in the second quarter and first six months of 2012 reflect impairments primarily forrelated to pipeline programs that had previously been deprioritized and were$15$14 million and $45$41 million in the firstsecond quarter of 2013 and 2012, respectively, and $29 million and $86 million in the first six months of 2013 and 2012, respectively.$119$155 million and $219$144 million for the second quarter of 2013 and 2012, respectively, and $274 million and $363 million for the first quartersix months of 2013 and 2012, respectively, nearly all of which related to the Merger Restructuring Program. Separation costs were incurred associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. Merck eliminated approximately 790680 positions in the firstsecond quarter of 2013, of which 740670 related to the Merger Restructuring Program and 5010 related to the 2008 Restructuring Program. ForDuring the first quartersix months of 2012,2013, Merck eliminated 1,160approximately 1,460 positions of which 1,0201,405 related to the Merger Restructuring Program and 55 related to the 2008 Restructuring Program. Merck eliminated approximately 780 positions in the second quarter of 2012, all of which related to the Merger Restructuring Program. During the first six months of 2012, Merck eliminated approximately 1,940 positions of which 1,800 related to the Merger Restructuring Program and 140 related to the 2008 Restructuring Program. These position eliminations are comprised of actual headcount reductions, and the elimination of contractors and vacant positions. Also included in restructuring costs are curtailment, settlement and termination charges associated with pension and other postretirement benefit plans, share-based compensation and shutdown costs. For segment reporting, restructuring costs are unallocated expenses. Additional costs associated with the Company’s restructuring activities are included inMaterials and production,Marketing and administrative andResearch and developmentas discussed above.$133$116 million in the firstsecond quarter of 2013 compared with $110$142 million in the second quarter of 2012 largely reflecting lower equity income from AZLP. Equity income from affiliates was $249 million in the first quartersix months of 2012 reflecting higher equity income from AZLP.2013 compared with $253 million in the first six months of 2012. (See “Selected Joint Venture and Affiliate Information” below.)$282$201 million of expense in the second quarter of 2013 compared with $103 million of expense in the second quarter of 2012 and was $484 million of expense in the first quartersix months of 2013 compared with $142$247 million of expense in the first quartersix months of 2012. The higher net expenses in both periods reflect increased exchange losses, which for the first six months of 2013 include losses from a Venezuelan currency devaluation, as well as increased interest expense resulting in part from issuances of debt in September 2012 due primarily to higher exchange losses.and May 2013. In February 2013, the Venezuelan government devalued its currency (Bolívar Fuertes) from 4.30 VEF per U.S. dollar to 6.30 VEF per U.S. dollar. The Company recognized losses due to exchange of approximately $140 million in the first quarter of 2013 resulting from the remeasurement of the local monetary assets and liabilities at the new rate. Since January 2010, Venezuela has been designated hyperinflationary and, as a result, local foreign operations are remeasured in U.S. dollars with the impact recorded in results of operations.- 39 - Three Months Ended
March 31, ($ in millions) 2013 2012 $ 5,345 $ 6,596 899 804 (4,694 ) (4,893 ) $ 1,550 $ 2,507 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions) 2013 2012 2013 2012 Pharmaceutical segment profits $ 5,693 $ 6,906 $ 11,039 $ 13,502 Other non-reportable segment profits 793 774 1,693 1,578 Other (5,241 ) (5,000 ) (9,937 ) (9,894 ) Income before income taxes $ 1,245 $ 2,680 $ 2,795 $ 5,186 19%18% in both the second quarter and first quartersix months of 2013 as compared with the same periods in 2012, driven primarily by the effects of the loss of market exclusivity for certain products, particularlySingulair.(4.3)%24.9% and 29.5%32.1% for the second quarter of 2013 and 2012, respectively, and 8.7% and 30.8% for the first quartersix months of 2013 and 2012, respectively, reflect the impacts of acquisition-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective tax rates for the second quarter and first six months of 2013 reflect net benefits from reductions in tax reserves upon expiration of applicable statute of limitations. Additionally, the tax rate infor the first quartersix months of 2013 reflects the impact of various discrete items, including thefavorable impact of tax legislation enacted in the first quarter of 2013 that extended the R&D tax credit for both 2012 and 2013, a reduction in tax reserves upon expiration of applicable statute of limitations, as well as an out-of-period net tax benefit of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue (see note 1314 to the interim consolidated financial statements).$1.6 billion$906 million for the firstsecond quarter of 2013 compared with $1.7$1.8 billion for the second quarter of 2012 and $2.5 billion for the first quartersix months of 2013 compared with $3.5 billion for the first six months of 2012. Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders (“EPS”) for the firstsecond quarter of 2013 were $0.52$0.30 compared with $0.56$0.58 in the second quarter of 2012 and $0.82 for the first quartersix months of 2013 compared with $1.15 for the first six months of 2012. The declines in net income and EPS in the first quarter of 2013 as compared with the first quarter of 2012 were due primarily to lower sales reflecting the loss of market exclusivity for certain products, particularlySingulair, as well as higher intangible asset impairment charges and exchange losses, largelypartially offset by the favorable impact of certain tax items and lower operating expenses.- 40 - Three Months Ended
March 31, ($ in millions except per share amounts) 2013 2012 $ 1,550 $ 2,507 1,237 1,289 194 293 2,981 4,089 (66 ) 740 279 276 160 — 373 1,016 2,608 3,073 23 29 $ 2,585 $ 3,044 $ 0.52 $ 0.56 0.33 0.43 $ 0.85 $ 0.99 Three Months Ended
June 30, Six Months Ended
June 30,($ in millions except per share amounts) 2013 2012 2013 2012 Pretax income as reported under GAAP $ 1,245 $ 2,680 $ 2,795 $ 5,186 Increase (decrease) for excluded items: Acquisition-related costs 1,768 1,417 3,005 2,706 Restructuring costs 278 289 472 582 Certain other items (13 ) — (13 ) — 3,278 4,386 6,259 8,474 Taxes on income as reported under GAAP 310 860 244 1,599 Estimated tax benefit on excluded items 409 272 688 548 Net tax benefit from resolution of legacy Schering-Plough federal income tax issue — — 160 — 719 1,132 1,092 2,147 Non-GAAP net income 2,559 3,254 5,167 6,327 Less: Net income attributable to noncontrolling interests 29 27 52 56 Non-GAAP net income attributable to Merck & Co., Inc. $ 2,530 $ 3,227 $ 5,115 $ 6,271 EPS assuming dilution as reported under GAAP $ 0.30 $ 0.58 $ 0.82 $ 1.15 0.54 0.47 0.87 0.89 Non-GAAP EPS assuming dilution $ 0.84 $ 1.05 $ 1.69 $ 2.04 1314 to the interim consolidated financial statements).4142 -allergen.allergens. Merck has partnered with ALK-Abello to develop its investigational sublingual allergy immunotherapy tablets for ragweed pollen, timothyTimothy grass pollen and house dust mite in North America. Merck expects the FDA’s review for both MK-7243 and MK-3641 to be completed in the first half of 2014.Also in March 2013, Merck announced that the FDA had notified the Company it will take an additional three months to review the New Drug Application (“NDA”) resubmission for MK-8616, sugammadex sodium injection, an investigational agent for the reversal of neuromuscular blockade induced by rocuronium or vecuronium (neuromuscular blocking agents). Merck anticipates the FDA’s review will be completed in the second half of 2013. Sugammadex sodium injection is approved and has been launched in many countries outside of the United States where it is marketed asBridion.lambrolizumab (MK-3475)MK-3475 as a Breakthrough Therapy for the treatment of patients with advanced melanoma. LambrolizumabMK-3475 is Merck’s investigational antibody therapy targeting Programmed Death receptor (“PD-1”) that is currently being evaluated for the treatment of patients with advanced melanoma, and other tumor types. The designation of an investigational drug as a Breakthrough Therapy is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. The implications of Breakthrough Therapy Designation cannot be determined at this time.On 22, 2013, the FDA’s Peripheral and Central Nervous System Drugs Advisory Committee will meet to discussCompany provided an update on the NDAclinical program for suvorexant (MK-4305) tablets. Suvorexant is anpreladenant, Merck’s investigational insomnia medicine in a new class of medicines called orexinadenosine A2A receptor antagonists for use in patients with insomnia, characterized by difficulty falling or staying asleep. Suvorexant will be evaluated by the Controlled Substance Staff of the FDA during NDA review. If approved by the FDA, suvorexant will become available after a schedule assessment and determination has been completed by the U.S. Drug Enforcement Administration, which routinely occurs after FDA approval. The Company has also submitted a new drug application for suvorexant to the health authorities in Japan and is continuing with plans to seek approval for suvorexant in other countries around the world.V212 is an inactivated varicella zoster virus vaccine in developmentantagonist for the preventiontreatment of herpes zoster. The Company is enrolling twoParkinson’s disease. An initial review of data from three separate Phase III trials one in autologous hematopoietic cell transplant patientsdid not provide evidence of efficacy for preladenant compared with placebo. Based on these results, Merck is taking steps to discontinue the extension phases of these studies and the other in patients with solid tumor malignancies undergoing chemotherapy and hematological malignancies.no longer plans to pursue regulatory filings for preladenant. The decision to discontinue these studies is not based on any safety finding. The Company now anticipates filing a BLA withrecorded an impairment charge of $181 million in the autologous hematopoietic cell transplant data and cancer patient data beyond 2014.4244 -May 6,July 31, 2013. Candidates shown in Phase III include specific products and the date such candidate entered into Phase III development. Candidates shown in Phase II include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Candidates in Phase I, additional indications in the same therapeutic area and additional claims, line extensions or formulations for in-line products are not shown.Phase II Phase II Phase III (Phase III entry date) Under Review Atherosclerosis Allergy AllergyAlzheimer’s Disease MK-8931(2)Asthma MK-1029Bacterial Infection MK-7655Cancer MK-0646 (dalotuzumab) MK-1775 MK-2206 MK-7965 (dinaciclib)(2) MK-8669 (ridaforolimus)CMV Prophylaxis in Transplant Patients MK-8228 (letermovir)Contraception, Medicated IUS MK-8342Contraception, Next Generation Ring MK-8175A MK-8342BDiabetes MK-8835 (ertugliflozin)(3)Hepatitis C MK-5172 MK-8742HIV MK-1439Insomnia MK-6096Melanoma MK-3475 (lambrolizumab)Migraine MK-1602Overactive Bladder MK-4618Pneumoconjugate Vaccine V114Rheumatoid Arthritis MK-8457Allergy MK-3641, Ragweed (September 2009)(1)(4)AtherosclerosisAlzheimer’s Disease MK-3415A (actoxumab/bezlotoxumab) Insomnia Asthma Contraception ContraceptionMK-4305 (suvorexant) (U.S.) MK-1029 (5)(4)Neuromuscular Blockade Reversal Bacterial Infection Diabetes Mellitus MK-8616 (sugammadex sodium MK-7655 MK-3102 (omarigliptin) (September 2012) Cancer Fertility Platinum-Resistant Ovarian Cancer MK-0646 (dalotuzumab) MK-8962 (corifollitropin alfa injection) (U.S.) MK-8109 (vintafolide) (EU) MK-1775 Hepatitis C Thrombosis MK-2206 (6)(5)MK-5348 (vorapaxar) (U.S.) MK-8669 (ridaforolimus) Herpes Zoster CMV Prophylaxis in Transplant Patients V212 (inactivated VZV vaccine) (December 2010) MK-8228 (letermovir) HPV-Related Cancers Contraception, Medicated IUS V503 (HPV vaccine (9 valent)) (September 2008) MK-8342 Osteoporosis Footnotes: Contraception, Next Generation Ring MK-0822 (odanacatib) (September 2007) Parkinson’s Disease(1) MK-3814 (preladenant) (July 2010)MK-8175A Pediatric Hexavalent Combination Vaccine V419 (April 2011)Platinum-Resistant Ovarian Cancer MK-8109 (vintafolide) (U.S.) (April 2011)Psoriasis MK-3222 (December 2012)Thrombosis MK-5348 (vorapaxar) (September 2007)Allergy MK-7243, Grass pollen (U.S.)(1)(2)Insomnia MK-4305 (suvorexant) (U.S.)Neuromuscular Blockade Reversal MK-8616 (sugammadex sodium injection) (U.S.)Platinum-Resistant Ovarian Cancer MK-8109 (vintafolide) (EU)Footnotes:(1) NorthAmerican rights only.(2) Phase II/III adaptive design.MK-8342B V419 (April 2011) Licensed from Pfizer, Inc. (see discussion of collaboration agreement above).(4) On May 8, 2013, the Company announced that the BLAA new nonproprietary generic name for MK-3641 was accepted forMK-3475 is under review by the FDA.United States Adopted Names Council.Diabetes Platinum-Resistant Ovarian Cancer MK-8835 (ertugliflozin) MK-8109 (vintafolide) (U.S.) (April 2011) Hepatitis C Psoriasis (5)(4) In November 2011, Merck received a Complete Response letterLetter (“CRL”) from the FDA for NOMAC/E2 (MK-8175A). The Company is conducting an additional clinical study requested by the FDA and plans to update the application in the future.MK-5172 MK-3222 (tildrakizumab) (December 2012) MK-8742 Thrombosis HIV MK-5348 (vorapaxar) (EU) (September 2007) MK-1439 Insomnia (6)(5) For development in Japan only.MK-6096 Melanoma Migraine MK-1602 Overactive Bladder MK-4618 Pneumoconjugate Vaccine V114 Rheumatoid Arthritis MK-8457 4345 -$230$207 million and $206$229 million in the second quarter of 2013 and 2012, respectively, and were $437 million and $435 million for the first quartersix months of 2013 and 2012, respectively. SPMSD sales ofGardasil were $73$61 million and $55$60 million for the firstsecond quarter of 2013 and 2012, respectively, and were $134 million and $115 million for the first six months of 2013 and 2012, respectively.($ in millions) March 31,
2013 December 31,
2012 $ 23,970 $ 23,446 16,442 16,509 19.6 % 19.4 % ($ in millions) June 30, 2013 December 31, 2012 Cash and investments $ 26,653 $ 23,446 Working capital 18,593 16,509 Total debt to total liabilities and equity 26.3 % 19.4 % threesix months of 2013, cash provided by operating activities was $2.3$4.7 billion compared with $2.2$5.1 billion in the first threesix months of 2012. The decline in cash provided by operating activities in the first six months of 2013 reflects a payment of $480 million in connection with the previously disclosed settlement of the ENHANCE Litigation (see Note 9 to the interim consolidated financial statements). Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders. As discussed in Note 8 to the interim consolidated financial statements, the Company has preliminarily settled the ENHANCE Litigation, which settlement is subject to court approval. Assuming the settlement is approved by the court, the Company anticipates it will pay $688 million in 2013 in connection with the settlement; however, the Company expects that $195 million of this amount will be recovered through insurance.$1.2$2.3 billion in the first threesix months of 2013 compared with $270$568 million in the first threesix months of 2012 primarily reflecting higher purchases of securities and other investments, partially offset by higher proceeds from the sales of securities and other investments. Cash used in financing activities was $451 millionin the first threesix months of 2013 was $1.4 billion compared with $725 million$1.3 billion in the first threesix months of 2012. The higherlower use of cash in financing activities was driven primarily driven by proceeds from the issuance of debt, partially offset by higher purchases of treasury stock (largely under an accelerated share repurchase agreement as discussed below), as well as higher payments on debt and lower proceeds from the exercise of stock options, partially offset by an increase in short-term borrowings.- 44 -March 31,June 30, 2013, the total of worldwide cash and investments was $24.0$26.7 billion, including $16.0$18.1 billion of cash, cash equivalents and short-term investments and $7.9$8.6 billion of long-term investments. Generally 80%-90% of these cash and investments are held by foreign subsidiaries and would be subject to significant tax payments if such cash and investments were$351$764 million and $331$762 million million for the first threesix months of 2013 and 2012, respectively.$1.3$2.6 billion for both the first threesix months of 2013 and the first threesix months of 2012. In FebruaryMay 2013, the Board of Directors declared a quarterly dividend for the third quarter of $0.43 per share on the Company’s common stock that was paid in AprilJuly 2013.overwithin 12 months following the next 12 months,date of the announcement, financed through a combination of debt issuance and operating cash flows, with the remainder to be repurchased over time with no time limit. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. During the first threesix months of 2013, the Company purchased $580124 million of its common stock (14 million shares)shares for its treasury, which includes 99.5 million shares under a plan approved by Merck’s Board of Directors in April 2011.the ASR discussed above. The Company spent $6.1 billion purchasing these shares, including $5.0 billion related to the ASR. As of March 31,June 30, 2013, the Company had approximately $1.3$10.8 billion remaining under thisthe May share repurchase program.March 31,June 30, 2013, the Company’s disclosure controls and procedures are effective. There have been no changes in internal control over financial reporting for the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.- 45 -89 included in Part I, Item 1, Financial Statements (unaudited) — Notes to Consolidated Financial Statements.threesix months months ended March 31,June 30, 2013 were as follows: ($ in millions) 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) 4,934,200 $42.31 $1,686 4,279,500 $41.94 $1,507 4,401,500 $43.57 $1,315 13,615,200 $42.60 $1,315 ($ in millions) Period April 1 - April 30 4,184,900 $46.02 $1,122 May 1 - May 31 103,546,792 $45.25 June 1 - June 30 3,088,424 $47.65 $10,790 Total 110,820,116 $45.35 $10,790 a planplans approved by the Board of Directors in April 2011 to purchase up to $5 billion in Merck shares and in May 2013 to purchase up to $15 billion in Merck shares.Amount reflects an increase of $15 billion approved by the Board of Directors in May 2013, a $4.7 billion decrease as a result of shares purchased in May at the average price indicated, including $4.5 billion in conjunction with an accelerated share repurchase agreement (“ASR”), and a $500 million decrease relating to the stock held back pending final settlement of the ASR. 4648 - 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 3.2 By-Laws of Merck & Co., Inc. (effective January 1, 2012) – Incorporated by reference to Current Report on Form 8-K filed December 21, 2011 10 Accelerated Share Purchase Agreement between Merck & Co., Inc. and Goldman, Sachs & Co. dated May 20, 2013 31.1 Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer 31.2 Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer 101 The following materials from Merck & Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31,June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Interim Consolidated Statement of Income, (ii) the Interim Consolidated Statement of Comprehensive Income, (iii) the Interim Consolidated Balance Sheet, (iv) the Consolidated Statement of Cash Flows, and (v) Notes to Interim Consolidated Financial Statements.4749 - MERCK & CO., INC. Date: May 9,August 7, 2013 BRUCE N. KUHLIK Executive Vice President and General Counsel Date: May 9,August 7, 2013 JOHN CANAN Senior Vice President Finance - Global Controller 4850 - 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 3.2 By-Laws of Merck & Co., Inc. (effective January 1, 2012) – Incorporated by reference to Current Report on Form 8-K filed December 21, 2011 10 Accelerated Share Purchase Agreement between Merck & Co., Inc. and Goldman, Sachs & Co. dated May 20, 2013 31.1 Rule 13a – 14(a)/15d – 14(a) Certification of Chief Executive Officer 31.2 Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer 101 The following materials from Merck & Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31,June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Interim Consolidated Statement of Income, (ii) the Interim Consolidated Statement of Comprehensive Income, (iii) the Interim Consolidated Balance Sheet, (iv) the Interim Consolidated Statement of Cash Flows, and (v) Notes to Interim Consolidated Financial Statements.4951 -