e10vk
As filed with the Securities and Exchange Commission on March 30, 2010
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended December 31, 2009
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 1-3305
Merck Sharp & Dohme Corp.
One Merck Drive
Whitehouse Station, N. J. 08889-0100
(908) 423-1000
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Incorporated in New Jersey
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I.R.S. Employer
Identification No. 22-1109110 |
Securities Registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange |
Title of Each Class |
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on which Registered |
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Number of shares of Common Stock ($0.01 par value) outstanding as of January 29, 2010: 100
Aggregate market value of Common Stock ($0.01 par value) held by non-affiliates on June 30,
2009 based on closing price on June 30, 2009: $58,949,000,000.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check One):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer þ
(Do not check if a smaller reporting
company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Documents Incorporated by Reference:
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Document |
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Part of Form 10-K |
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On November 3, 2009, the Registrant and Schering-Plough Corporation (Schering-Plough)
completed their previously-announced merger (the Merger). In the Merger, Schering-Plough acquired
all of the shares of the Registrant, which became a wholly-owned subsidiary of Schering-Plough, a
reporting company under the Securities Exchange Act, which was renamed Merck & Co.,
Inc. Accordingly, as of the date of this filing, the Registrant meets the conditions set forth in
General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
PART I
Item 1. Business.
On November 3, 2009, Merck & Co., Inc. (MSD) and Schering-Plough Corporation
(Schering-Plough) completed their previously-announced merger (the
Merger). In the Merger, Schering-Plough acquired all of the shares of MSD, which became a
wholly-owned subsidiary of Schering-Plough and was renamed Merck Sharp & Dohme Corp.
Schering-Plough continued as the surviving public company and was
renamed Merck & Co., Inc. (MSDs Parent Company). MSD has
no class of securities that is registered under Section 12 of the Securities Exchange Act of 1934
and each outstanding class of securities previously issued by MSD pursuant to an effective
registration statement under the Securities Act of 1933 is held of record by fewer than 300
holders. As such, MSD does not expect to continue to file periodic or current reports with the
Securities and Exchange Commission (SEC) following the filing of this report.
MSD is a global health care company that delivers innovative health solutions through its
medicines and vaccines, which are marketed directly and through joint ventures. Human health
pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. These human health pharmaceutical products are sold primarily to drug
wholesalers and retailers, hospitals, government agencies and managed health care providers such as
health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine
products consist of preventative pediatric, adolescent and adult vaccines, primarily administered
at physician offices. These human health vaccines are sold primarily to physicians, wholesalers,
physician distributors and government entities. MSDs professional representatives communicate the
effectiveness, safety and value of its pharmaceutical and vaccine products to health care
professionals in private practice, group practices and managed care organizations.
All product or service marks appearing in type form different from that of the surrounding
text are trademarks or service marks owned, licensed to, promoted or distributed by MSD, its
subsidiaries or affiliates, except as noted. Cozaar and Hyzaar are registered trademarks of E.I. du
Pont de Nemours and Company, Wilmington, DE. All other trademarks or services marks are those of
their respective owners.
Overview
MSDs worldwide sales totaled $23.6 billion for 2009, a decrease of 1% compared with 2008.
Foreign exchange unfavorably affected global sales performance by 2%. The revenue decline over 2008
largely reflects lower sales of Fosamax (alendronate sodium) for the treatment and prevention of
osteoporosis. Fosamax and Fosamax Plus D (alendronate sodium/cholecalciferol) lost market
exclusivity for substantially all formulations in the United States in February 2008 and April
2008, respectively. Revenue was also negatively affected by lower sales of Gardasil [Human
Papillomavirus Quadrivalent (Types 6, 11, 16 and 18) Vaccine, Recombinant], a vaccine to help
prevent cervical, vulvar and vaginal cancers, precancerous or dysplastic lesions, and genital warts
caused by human papillomavirus types 6, 11, 16 and 18, Cosopt (dorzolamide hydrochloride and
timolol maleate ophthalmic solution)/Trusopt (dorzolamide hydrochloride ophthalmic solution),
ophthalmic products which lost U.S. market exclusivity in October 2008, and lower revenue from
MSDs relationship with AstraZeneca LP (AZLP). Other products experiencing declines include
RotaTeq (Rotavirus Vaccine, Live, Oral, Pentavalent), a vaccine to help protect against rotavirus
gastroenteritis in infants and children, Zocor (simvastatin), a statin for modifying cholesterol,
and Primaxin (imipenem and cilastatin sodium) for the treatment of bacterial infections. These
declines were largely offset by growth in Januvia (sitagliptin phosphate) and Janumet (sitagliptin
phosphate and metformin hydrochloride) for the treatment of type 2 diabetes, Isentress
(raltegravir), an antiretroviral therapy for the treatment of HIV infection, Singulair (montelukast
sodium), a medicine indicated for the chronic treatment of asthma and the relief of symptoms of
allergic rhinitis, Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox
(varicella), and Pneumovax (pneumococcal vaccine polyvalent), a vaccine to help prevent
pneumococcal disease.
2
Product Sales
Sales of MSDs products were as follows:
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($ in millions) |
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2009 |
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2008 |
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2007 |
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Bone, Respiratory, Immunology and Dermatology |
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Singulair |
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$ |
4,659.7 |
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$ |
4,336.9 |
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$ |
4,266.3 |
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Fosamax |
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1,099.8 |
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1,552.7 |
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3,049.0 |
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Propecia |
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440.3 |
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429.1 |
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405.4 |
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Arcoxia |
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357.5 |
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377.3 |
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329.1 |
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Cardiovascular |
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Vytorin(1) |
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82.2 |
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84.2 |
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84.3 |
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Zetia(1) |
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5.2 |
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6.4 |
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6.5 |
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Diabetes and Obesity |
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Januvia |
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1,922.1 |
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1,397.1 |
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667.5 |
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Janumet |
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658.4 |
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351.1 |
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86.4 |
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Infectious Disease |
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Isentress |
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751.8 |
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361.1 |
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41.3 |
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Primaxin |
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688.9 |
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760.4 |
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763.5 |
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Cancidas |
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616.7 |
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596.4 |
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536.9 |
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Invanz |
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292.9 |
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265.0 |
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190.2 |
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Crixivan/Stocrin |
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206.1 |
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275.1 |
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310.2 |
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Mature Brands |
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Cozaar/Hyzaar |
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3,560.7 |
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3,557.7 |
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3,350.1 |
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Zocor |
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558.4 |
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660.1 |
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876.5 |
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Vasotec/Vaseretic |
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310.8 |
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356.7 |
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494.6 |
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Proscar |
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290.9 |
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323.5 |
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411.0 |
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Neurosciences and Ophthalmology |
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Maxalt |
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574.5 |
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529.2 |
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467.3 |
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Cosopt/Trusopt |
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503.5 |
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781.2 |
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786.8 |
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Oncology |
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Emend |
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313.1 |
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259.7 |
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201.7 |
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Vaccines(2) |
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ProQuad/M-M-R II/Varivax |
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1,368.5 |
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1,268.5 |
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1,347.1 |
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Gardasil |
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1,118.4 |
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1,402.8 |
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1,480.6 |
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RotaTeq |
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521.9 |
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664.5 |
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524.7 |
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Pneumovax |
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345.6 |
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249.3 |
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233.2 |
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Zostavax |
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277.4 |
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312.4 |
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236.0 |
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Other Pharmaceutical(3) |
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667.1 |
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922.9 |
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1,136.6 |
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Other(4) |
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1,450.8 |
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1,769.0 |
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1,914.9 |
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$ |
23,643.2 |
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$ |
23,850.3 |
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$ |
24,197.7 |
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(1) |
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Sales of Zetia and Vytorin reflect MSDs sales of these products in Latin
America which was not part of the MSP Partnership. |
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(2) |
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These amounts do not reflect sales of vaccines sold in most major European markets
through MSDs joint venture, Sanofi Pasteur MSD, the results of which are reflected in Equity
income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur MSD. |
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(3) |
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Other pharmaceutical primarily includes sales of other human pharmaceutical
products, including products within the franchises not listed separately. |
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(4) |
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Reflects revenue from MSDs relationship with AZLP primarily relating to sales of
Nexium, as well as Prilosec. Revenue from AZLP was $1.4 billion, $1.6 billion and $1.7 billion
in 2009, 2008 and 2007, respectively. |
MSDs pharmaceutical products include therapeutic and preventive agents, generally sold by
prescription, for the treatment of human disorders. Among these are:
Bone, Respiratory, Immunology and Dermatology: Singulair; Fosamax; Propecia (finasteride), a
product for the treatment of male pattern hair loss; and Arcoxia (etoricoxib) for the treatment of
arthritis and pain;
Cardiovascular Disease: Zetia (ezetimibe) (marketed as Ezetrol outside the United States) and
Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States), cholesterol
modifying medicines marketed primarily through the MSP Partnership (as defined below).
Diabetes and Obesity: Januvia and Janumet.
3
Infectious Disease: Isentress; Primaxin; Cancidas (caspofungin acetate), an anti-fungal
product; Invanz (ertapenem sodium) for the treatment of certain infections; and Crixivan (indinavir
sulfate) and Stocrin (efavirenz), antiretroviral therapies for the treatment of HIV infection.
Mature Brands: Cozaar (losartan potassium); Hyzaar (losartan potassium and
hydrochlorothiazide); Vasotec (enalapril maleate) and Vaseretic (enalapril
maleate-hydrochlorothiazide), MSDs most significant hypertension and/or heart failure products;
Zocor; and Proscar (finasteride), a urology product for the treatment of symptomatic benign
prostate enlargement.
Neurosciences and Ophthalmology: Maxalt (rizatriptan benzoate), an acute migraine product;
and Cosopt and Trusopt, MSDs largest-selling ophthalmological products.
Oncology: Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative
nausea and vomiting.
Vaccines: M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine against
measles, mumps and rubella; ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a
pediatric combination vaccine against measles, mumps, rubella and varicella; Varivax; Gardasil;
RotaTeq; Pneumovax; and Zostavax (Zoster Vaccine Live).
Product Approvals
In July 2009, the U.S. Food and Drug Administration (FDA) approved an expanded indication
for Isentress. The broadened indication now includes use in the treatment of adult patients
starting HIV-1 therapy for the first time (treatment-naïve), as well as in treatment-experienced
adult patients.
In October 2009, the FDA approved Gardasil for use in boys and men 9 through 26 years of age
for the prevention of genital warts caused by human papillomavirus (HPV) types 6 and 11, making
Gardasil the only HPV vaccine approved for use in males. Gardasil is also the only HPV vaccine that
protects against HPV types 6 and 11 which cause approximately 90 percent of all genital warts
cases. In addition, on October 21, 2009, MSD announced that the U.S. Centers for Disease Control
and Preventions Advisory Committee on Immunization Practices (ACIP) supports the permissive use
of Gardasil for boys and young men ages 9 to 26, which means that Gardasil may be given to males
ages 9 to 26 to reduce the likelihood of acquiring genital warts at the discretion of the patients
health care provider. The ACIP also voted to recommend that funding be provided for the use of
Gardasil in males through the Vaccines for Children program.
Distribution
MSD sells its human health pharmaceutical products primarily to drug wholesalers and
retailers, hospitals, government agencies and managed health care providers such as health
maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccines
are sold primarily to physicians, wholesalers, physician distributors and government entities.
MSDs professional representatives communicate the effectiveness, safety and value of MSDs
pharmaceutical and vaccine products to health care professionals in private practice, group
practices and managed care organizations.
Raw Materials
Raw materials and supplies, which are generally available from multiple sources, are purchased
worldwide and are normally available in quantities adequate to meet the needs of MSDs business.
Patents, Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of material importance in MSDs
marketing of human health products in the United States and in most major foreign markets. Patents
may cover products per se, pharmaceutical formulations, processes for or intermediates useful in
the manufacture of products or the uses of products. Protection for individual products extends for
varying periods in accordance with the legal life of patents in the various countries. The
protection afforded, which may also vary from country to country, depends upon the type of patent
and its scope of coverage.
The FDA Modernization Act includes a Pediatric Exclusivity Provision that may provide an
additional six months of market exclusivity in the United States for indications of new or
currently marketed drugs if certain agreed upon pediatric
studies are completed by the applicant. These exclusivity provisions were re-authorized by the
Prescription Drug User Fee
4
Act passed in September 2007. Current U.S. patent law provides
additional patent term under Patent Term Restoration for periods when the patented product was
under regulatory review before the FDA.
Patent portfolios developed for products introduced by MSD normally provide market
exclusivity. MSD has the following key U.S. patent protection (including Patent Term Restoration
and Pediatric Exclusivity) for major marketed products:
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Product(1) |
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Year of Expiration (in U.S.) |
Cozaar |
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2010 |
Hyzaar |
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2010 |
Crixivan |
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2012 (compound)/2018 (formulation) |
Maxalt |
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2012 (compound)/2014 (other) |
Singulair |
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2012 |
Cancidas |
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2013 (compound)/2015 (composition) |
Propecia(2) |
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2013 (formulation/use) |
Emend |
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2015 |
Zolinza |
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2015 |
Invanz |
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2016 (compound)/2017 (composition) |
Zostavax |
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2016 |
RotaTeq |
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2019 |
Comvax |
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2020 (method of making/vectors) |
Recombivax |
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2020 (method of making/vectors) |
Januvia/Janumet |
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2022 (compound)/2026 (salt) |
Isentress |
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2023 |
Gardasil |
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2026 (method of making/use/product by process) |
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(1) |
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Compound patent unless otherwise noted. |
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(2) |
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By agreement, Dr. Reddys Laboratories may launch a generic on January 1, 2013. |
While the expiration of a product patent normally results in a loss of market exclusivity
for the covered pharmaceutical product, commercial benefits may continue to be derived from:
(i) later-granted patents on processes and intermediates related to the most economical method of
manufacture of the active ingredient of such product; (ii) patents relating to the use of such
product; (iii) patents relating to novel compositions and formulations; and (iv) in the United
States and certain other countries, market exclusivity that may be available under relevant law.
The effect of product patent expiration on pharmaceutical products also depends upon many other
factors such as the nature of the market and the position of the product in it, the growth of the
market, the complexities and economics of the process for manufacture of the active ingredient of
the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act
or similar laws and regulations in other countries.
The patents that provide U.S. market exclusivity for Cozaar and Hyzaar expire in April 2010.
In addition, the patent for Cozaar expired in a number of major European markets in March 2010.
Hyzaar lost patent protection in major European markets in February 2010. MSD expects that sales of
these products will decline rapidly after expiration of these patents. In addition, the patent that
provides U.S. market exclusivity for Singulair expires in August 2012. MSD expects that within the
two years following patent expiration, it will lose substantially all U.S. sales of Singulair, with
most of those declines coming in the first full year following patent expiration. Also, the patent
for Singulair will expire in a number of major European markets in August 2012 and MSD expects
sales of Singulair in those markets will decline significantly thereafter.
Additions to market exclusivity are sought in the United States and other countries through
all relevant laws, including laws increasing patent life. Some of the benefits of increases in
patent life have been partially offset by a general increase in the number of incentives for and
use of generic products. Additionally, improvements in intellectual property laws are sought in the
United States and other countries through reform of patent and other relevant laws and
implementation of international treaties.
For further information with respect to MSDs patents, see Item 1A. Risk Factors and Item 3.
Legal Proceedings Patent Litigation below.
Worldwide, all of MSDs important products are sold under trademarks that are considered in
the aggregate to be of material importance. Trademark protection continues in some countries as
long as used; in other countries, as long as registered. Registration is for fixed terms and can be
renewed indefinitely.
5
Research and Development
MSDs business is characterized by the introduction of new products or new uses for existing
products through a strong research and development program.
MSD maintains a number of long-term exploratory and fundamental research programs in biology
and chemistry as well as research programs directed toward product development. MSDs research and
development model is designed to increase productivity and improve the probability of success by
prioritizing MSDs research and development resources on disease areas of unmet medical needs,
scientific opportunity and commercial opportunity. MSD is managing its research and development
portfolio across diverse approaches to discovery and development by balancing investments
appropriately on novel, innovative targets with the potential to have a major impact on human
health, on developing best-in-class approaches, and on delivering maximum value of its new
medicines and vaccines through new indications and new formulations. Another important component of
MSDs science-based diversification is based on expanding MSDs portfolio of modalities to include
not only small molecules and vaccines, but also biologics, peptides and RNAi. Further, MSD moved to
diversify its portfolio by creating a new division, Merck BioVentures, which has the potential to
harness the market opportunity presented by biological medicine patent expiries by delivering high
quality follow-on biologic products to enhance access for patients worldwide. MSD will continue to
pursue appropriate external licensing opportunities.
MSD currently has one candidate under regulatory review internationally. Additionally, MSD has
11 drug candidates in Phase III development. These candidates do not include candidates in Phase
III being developed by other subsidiaries of MSDs Parent Company in which MSD has no ownership
interest.
MK-6621, vernakalant (IV), is an investigational candidate for the treatment of atrial
fibrillation currently undergoing regulatory review in the European Union (EU). In April 2009,
MSD and Cardiome Pharma Corp. announced a collaboration and license agreement for the development
and commercialization of vernakalant which provides MSD exclusive rights outside of the United
States, Canada and Mexico to the intravenous formulation of vernakalant. Vernakalant (oral) is
currently in Phase II development. MSD has exclusive global rights to the oral formulation of
vernakalant for the maintenance of normal heart rhythm in patients with atrial fibrillation.
MK-8669, ridaforolimus, is a novel mTOR (mammalian target of rapamycin) inhibitor being
evaluated for the treatment of cancer. The drug candidate is being jointly developed and
commercialized with ARIAD Pharmaceuticals, Inc., under an agreement entered into in 2007. A
Phase III study (SUCCEED) in patients with metastatic soft-tissue or bone sarcomas is underway. MSD
anticipates filing an NDA for ridaforolimus with the FDA in late 2010 or in 2011, subject to a
review of the results from the planned interim analysis of SUCCEED.
MK-2452, tafluprost, is a preservative free, synthetic analogue of the prostaglandin
F2a for the reduction of elevated intraocular pressure in appropriate patients with
primary open-angle glaucoma and ocular hypertension. In April 2009, MSD and Santen Pharmaceutical
Co., Ltd. announced a worldwide licensing agreement for tafluprost.
As previously disclosed, MSD submitted for filing an NDA with the FDA for MK-0653C, ezetimibe
combined with atorvastatin, which is an investigational medication for the treatment of
dyslipidemia, and the FDA refused to file the application. The FDA has identified additional
manufacturing and stability data that are needed and MSD is assessing the FDAs response and
anticipates filing in 2011.
MK-0431C, a candidate currently in Phase III clinical development, combines Januvia with
pioglitazone, another type 2 diabetes therapy. MSD continues to anticipate filing an NDA for
MK-0431C with the FDA in 2011.
MK-0822, odanacatib, is an oral, once-weekly investigational treatment for osteoporosis.
Osteoporosis is a disease which reduces bone density and strength and results in an increased risk
of bone fractures. Odanacatib is a cathepsin K inhibitor that selectively inhibits the cathepsin K
enzyme. Cathepsin K is known to play a central role in the function of osteoclasts, which are cells
that break down existing bone tissue, particularly the protein components of bone. Inhibition of
cathepsin K is a novel approach to the treatment of osteoporosis. In September 2009, data from a
Phase IIB clinical study of odanacatib were presented at the 31st Annual Meeting of the American
Society for Bone and Mineral Research which showed that when stopping treatment after two years the
increases in lower back (lumbar spine) bone mineral density
(BMD) were reversed over the next year, while BMD at the hip (femoral neck) remained above
levels observed at the start of the study. Additionally, three years of treatment with odanacatib
50 mg demonstrated increases in BMD at key fracture sites and minimal impact on the formation of
new bone as measured by biochemical markers of bone turnover. Odanacatib is
6
currently in Phase III
clinical trials and is being evaluated in a large-scale, global outcomes study to determine its
effects on vertebral, hip and non-vertebral fractures. MSD continues to anticipate filing an NDA
with the FDA in 2012.
V503 is a nine-valent HPV vaccine in development to expand protection against cancer-causing
HPV types. The Phase III clinical program is underway and MSD anticipates filing a BLA with the FDA
in 2012.
MK-0524A is a drug candidate that combines extended-release (ER) niacin and a novel flushing
inhibitor, laropiprant. MK-0524A has demonstrated the ability to lower LDL-cholesterol (LDL-C or
bad cholesterol), raise HDL-cholesterol (HDL-C or good cholesterol) and lower triglycerides
with significantly less flushing than traditional extended release niacin alone. High LDL-C, low
HDL-C and elevated triglycerides are risk factors associated with heart attacks and strokes. In
April 2008, MSD received a non-approvable action letter from the FDA in response to its NDA for
MK-0524A. At a meeting to discuss the letter, the FDA stated that additional efficacy and safety
data were required and suggested that MSD wait for the results of the Treatment of HDL to Reduce
the Incidence of Vascular Events (HPS2-THRIVE) cardiovascular outcomes study, which is expected
to be completed in 2012. MSD anticipates filing an NDA with the FDA for MK-0524A in 2012. MK-0524A
has been approved in more than 45 countries outside the United States for the treatment of
dyslipidemia, particularly in patients with combined mixed dyslipidemia (characterized by elevated
levels of LDL-C and triglycerides and low HDL-C) and in patients with primary hypercholesterolemia
(heterozygous familial and non-familial) and is marketed as Tredaptive (or as Cordaptive in certain
countries). Tredaptive should be used in patients in combination with statins, when the cholesterol
lowering effects of statin monotherapy is inadequate. Tredaptive can be used as monotherapy only in
patients in whom statins are considered inappropriate or not tolerated.
MK-0524B is a drug candidate that combines the novel approach to raising HDL-C and lowering
triglycerides from ER niacin combined with laropiprant with the proven benefits of simvastatin in
one combination product. MSD will not seek approval for MK-0524B in the United States until it
files its complete response to the FDA relating to MK-0524A.
MK-0859, anacetrapib, is an inhibitor of the cholesteryl ester transfer protein (CETP) that
has shown promise in lipid management by raising HDL-C and reducing LDL-C without raising blood
pressure. In November 2009, MSD announced that in a Phase IIb study in 589 patients with primary
hypercholesterolemia or mixed hyperlipidemia treated with anacetrapib as monotherapy or
co-administered with atorvastatin, there were persistent lipid effects in the higher dose arms in
both the monotherapy and co-administration treatment groups eight weeks after stopping active
therapy with anacetrapib. The effect of CETP inhibition on cardiovascular risk has yet to be
established. A Phase III trial, titled DEFINE, is ongoing to further evaluate the safety and
efficacy of anacetrapib in patients with coronary heart disease. MSD anticipates filing an NDA with
the FDA beyond 2015.
As previously disclosed, in 2009, MSD announced it was delaying the filing of the
U.S. application for telcagepant (MK-0974), MSDs investigational calcitonin gene-related peptide
receptor antagonist for the intermittent treatment of acute migraine. The decision was based on
findings from a Phase IIa exploratory study in which a small number of patients taking telcagepant
twice daily for three months for the prevention of migraine were found to have marked elevations in
liver transaminases. The daily dosing regimen in the prevention study was different than the dosing
regimen used in Phase III studies in which telcagepant was intermittently administered in one or
two doses to treat individual migraine attacks as they occurred. Other studies with telcagepant for
the acute, intermittent treatment of migraine continue. Following meetings with regulatory agencies
at the end of 2009, MSD is planning to conduct an additional safety study as part of the overall
Phase III program for telcagepant. The results of this study will inform planned filings for
approval.
As previously disclosed, in 2007, Cubist Pharmaceuticals, Inc. (Cubist) entered into a
license agreement with MSD for the development and commercialization of Cubicin (daptomycin for
injection, MK-3009) in Japan. MSD will develop and commercialize Cubicin through its wholly-owned
subsidiary, Banyu Pharmaceutical Co., Ltd. Cubist commercializes Cubicin in the United States.
MK-3009 is currently in Phase III development.
MK-4305 is an orexin receptor antagonist, a potential new approach to the treatment of chronic
insomnia, currently in Phase III development.
As previously disclosed, in 2009, MSD announced that preliminary results for the pivotal
Phase III study of rolofylline (MK-7418), its investigational medicine for the treatment of acute
heart failure, showed that rolofylline did not meet the primary or secondary efficacy endpoints.
MSD terminated the clinical development program for rolofylline.
7
Item 1A. Risk Factors.
Investors in MSDs debt securities should carefully consider all of the information set forth
in this Form 10-K, including the following risk factors, before deciding to invest in any of MSDs
debt securities. The risks below are not the only ones MSD faces. Additional risks not currently
known to MSD or that MSD presently deems immaterial may also impair its business operations. MSDs
business, financial condition, results of operations or prospects could be materially adversely
affected by any of these risks. This Form 10-K also contains forward-looking statements that
involve risks and uncertainties. MSDs results could materially differ from those anticipated in
these forward-looking statements as a result of certain factors, including the risks it faces as
described below and elsewhere. See Cautionary Factors that May Affect Future Results below.
Certain of MSDs major products are going to lose patent protection in the near future and,
when that occurs, MSD expects a significant decline in sales of those products.
MSD depends upon patents to provide it with exclusive marketing rights for its products for
some period of time. As product patents for several of MSDs products have recently expired, or are
about to expire, in the United States and in other countries, MSD faces strong competition from
lower priced generic drugs. Loss of patent protection for one of MSDs products typically leads to
a rapid loss of sales for that product, as lower priced generic versions of that drug become
available. In the case of products that contribute significantly to MSDs sales, the loss of patent
protection can have a material adverse effect on MSDs business, cash flow, results of operations,
financial position and prospects. The patents that provide U.S. market exclusivity for Cozaar and
Hyzaar expire in April 2010. In addition, the patent for Cozaar expired in a number of major
European markets in March 2010. Hyzaar lost patent protection in major European markets in
February 2010. MSD expects significant declines in sales of these products after such times. In
addition, the patent that provides U.S. market exclusivity for Singulair expires in August 2012.
MSD expects that within the two years following patent expiration, it will lose substantially all
U.S. sales of Singulair, with most of those declines coming in the first full year following patent
expiration. Also, the patent for Singulair will expire in a number of major European markets in
August 2012 and MSD expects sales of Singulair in those markets will decline significantly
thereafter.
A chart listing the U.S. patent protection for MSDs major marketed products is set forth
above in Item 1. Business Patents, Trademarks and Licenses.
Key MSD products generate a significant amount of MSDs profits and cash flows, and any events
that adversely affect the markets for its leading products could have a material and negative
impact on results of operations and cash flows.
MSDs ability to generate profits and operating cash flow depends largely upon the continued
profitability of MSDs key products, such as Singulair, Vytorin, Zetia, Januvia, and Gardasil. As a
result of MSDs dependence on key products, any event that adversely affects any of these products
or the markets for any of these products could have a significant impact on results of operations
and cash flows. These events could include loss of patent protection, increased costs associated
with manufacturing, generic or over-the-counter (OTC) availability of MSDs product or a
competitive product, the discovery of previously unknown side effects, increased competition from
the introduction of new, more effective treatments and discontinuation or removal from the market
of the product for any reason.
MSDs research and development efforts may not succeed in developing commercially successful
products and MSD may not be able to acquire commercially successful products in other ways; in
consequence, MSD may not be able to replace sales of successful products that have lost patent
protection.
In order to remain competitive, MSD must continue to launch new products each year. Declines
in sales of products, such as Fosamax, Cozaar and Hyzaar, after the loss of market exclusivity mean
that MSDs future success is dependent on its pipeline of new products, including new products
which it may develop through joint ventures and products which it is able to obtain through license
or acquisition. To accomplish this, MSD commits substantial effort, funds and other resources to
research and development, both through its own dedicated resources and through various
collaborations with third parties. There is a high rate of failure inherent in the research to
develop new drugs to treat diseases. As a result, there is a high risk that funds invested by MSD
in research programs will not generate financial returns. This risk profile is compounded by the
fact that this research has a long investment cycle. To bring a pharmaceutical compound from the
discovery phase to market may take a decade or more and failure can occur at any point in the
process, including later in the process after significant funds have been invested.
8
Each phase of testing is highly regulated, and during each phase there is a substantial risk
that MSD will encounter serious obstacles or will not achieve its goals, and accordingly MSD may
abandon a product in which it has invested substantial amounts of time and resources. Some of the
risks encountered in the research and development process include the following: pre-clinical
testing of a new compound may yield disappointing results; clinical trials of a new drug may not be
successful; a new drug may not be effective or may have harmful side effects; a new drug may not be
approved by the FDA for its intended use; it may not be possible to obtain a patent for a new drug;
or sales of a new product may be disappointing.
MSD cannot state with certainty when or whether any of its products now under development will
be approved or launched; whether it will be able to develop, license or otherwise acquire
compounds, product candidates or products; or whether any products, once launched, will be
commercially successful. MSD must maintain a continuous flow of successful new products and
successful new indications or brand extensions for existing products sufficient both to cover its
substantial research and development costs and to replace sales that are lost as profitable
products, such as Fosamax, Cozaar and Hyzaar, lose patent protection or are displaced by competing
products or therapies. Failure to do so in the short term or long term would have a material
adverse effect on MSDs business, results of operations, cash flow, financial position and
prospects.
MSDs success is dependent on the successful development and marketing of new products, which
are subject to substantial risks.
Products that appear promising in development may fail to reach market for numerous reasons,
including the following:
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findings of ineffectiveness, superior safety or efficacy of competing products, or
harmful side effects in clinical or pre-clinical testing; |
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failure to receive the necessary regulatory approvals, including delays in the
approval of new products and new indications, and increasing uncertainties about the time
required to obtain regulatory approvals and the benefit/risk standards applied by
regulatory agencies in determining whether to grant approvals; |
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lack of economic feasibility due to manufacturing costs or other factors; and |
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preclusion from commercialization by the proprietary rights of others. |
MSDs products, including products in development, can not be marketed unless MSD obtains and
maintains regulatory approval.
MSDs activities, including research, preclinical testing, clinical trials and manufacturing
and marketing its products, are subject to extensive regulation by numerous federal, state and
local governmental authorities in the United States, including the FDA, and by foreign regulatory
authorities, including the European Commission. In the United States, the FDA is of particular
importance to MSD, as it administers requirements covering the testing, approval, safety,
effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many
cases, the FDA requirements have increased the amount of time and money necessary to develop new
products and bring them to market in the United States. Regulation outside the United States also
is primarily focused on drug safety and effectiveness and, in many cases, cost reduction. The FDA
and foreign regulatory authorities have substantial discretion to require additional testing, to
delay or withhold registration and marketing approval and to mandate product withdrawals.
Even if MSD is successful in developing new products, it will not be able to market any of
those products unless and until it has obtained all required regulatory approvals in each
jurisdiction where it proposes to market the new products. Once obtained, MSD must maintain
approval as long as it plans to market its new products in each jurisdiction where approval is
required. MSDs failure to obtain approval, significant delays in the approval process, or its
failure to maintain approval in any jurisdiction will prevent it from selling the new products in
that jurisdiction until approval is obtained, if ever. MSD would not be able to realize revenues
for those new products in any jurisdiction where it does not have approval.
9
MSD is dependent on its patent rights, and if its patent rights are invalidated or
circumvented, its business would be adversely affected.
Patent protection is considered, in the aggregate, to be of material importance in MSDs
marketing of human health products in the United States and in most major foreign markets. Patents
covering products that it has introduced normally provide market exclusivity, which is important
for the successful marketing and sale of its products. MSD seeks patents covering each of its
products in each of the markets where it intends to sell the products and where meaningful patent
protection is available.
Even if MSD succeeds in obtaining patents covering its products, third parties or government
authorities may challenge or seek to invalidate or circumvent its patents and patent applications.
It is important for MSDs business to defend successfully the patent rights that provide market
exclusivity for its products. MSD is often involved in patent disputes relating to challenges to
its patents or infringement and similar claims against MSD. MSD aggressively defends its important
patents both within and outside the United States, including by filing claims of infringement
against other parties. See Item 3. Legal Proceedings Patent Litigation below. In particular,
manufacturers of generic pharmaceutical products from time to time file Abbreviated New Drug
Applications (ANDA) with the FDA seeking to market generic forms of MSDs products prior to the
expiration of relevant patents owned by MSD. MSD normally responds by vigorously defending its
patent, including by filing lawsuits alleging patent infringement. Patent litigation and other
challenges to MSDs patents are costly and unpredictable and may deprive MSD of market exclusivity
for a patented product or, in some cases, third party patents may prevent MSD from marketing and
selling a product in a particular geographic area.
Additionally, certain foreign governments have indicated that compulsory licenses to patents
may be granted in the case of national emergencies, which could diminish or eliminate sales and
profits from those regions and negatively affect MSDs results of operations. Further, recent court
decisions relating to other companies U.S. patents, potential U.S. legislation relating to patent
reform, as well as regulatory initiatives may result in further erosion of intellectual property
protection.
If one or more important products lose patent protection in profitable markets, sales of those
products are likely to decline significantly as a result of generic versions of those products
becoming available and, in the case of certain products, such a loss could result in an impairment
charge. MSDs results of operations may be adversely affected by the lost sales unless and until
MSD has successfully launched commercially successful replacement products.
MSDs hypertension products Cozaar and Hyzaar will each lose patent protection in the
United States in April 2010. In addition, the patent for Cozaar expired in a number of major
European markets in March 2010. Hyzaar lost patent protection in major European markets in
February 2010. MSD expects significant declines in the sales of these products after such times. In
addition, the patent that provides U.S. market exclusivity for Singulair expires in August 2012.
MSD expects that within the two years following patent expiration, it will lose substantially all
U.S. sales of Singulair, with most of those declines coming in the first full year following patent
expiration. Also, the patent for Singulair will expire in a number of major European markets in
August 2012 and MSD expects sales of Singulair in those markets will decline significantly
thereafter.
MSD faces intense competition from lower-cost generic products.
In general, MSD faces increasing competition from lower-cost generic products. The patent
rights that protect its products are of varying strengths and durations. In addition, in some
countries, patent protection is significantly weaker than in the United States or the EU. In the
United States, political pressure to reduce spending on prescription drugs has led to legislation
which encourages the use of generic products. Although it is MSDs policy to actively protect its
patent rights, generic challenges to MSDs products can arise at any time, and it may not be able
to prevent the emergence of generic competition for its products.
Loss of patent protection for a product typically is followed promptly by generic substitutes,
reducing MSDs sales of that product. Availability of generic substitutes for MSDs drugs may
adversely affect its results of operations and cash flow. In addition, proposals emerge from time
to time in the United States and other countries for legislation to further encourage the early and
rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this
substantial negative effect on MSDs sales and, potentially, its business, cash flow, results of
operations, financial position and prospects.
10
MSD faces intense competition from new products.
MSDs products face intense competition from competitors products. This competition may
increase as new products enter the market. In such an event, the competitors products may be safer
or more effective or more effectively marketed and sold than MSDs products. Alternatively, in the
case of generic competition, they may be equally safe and effective products that are sold at a
substantially lower price than MSDs products. As a result, if MSD fails to maintain its
competitive position, this could have a material adverse effect on its business, cash flow, results
of operations, financial position and prospects.
MSD faces pricing pressure with respect to its products.
MSD faces increasing pricing pressure globally from managed care organizations, institutions
and government agencies and programs that could negatively affect MSDs sales and profit margins.
In the United States, these include (i) practices of managed care groups and institutional and
governmental purchasers and (ii) U.S. federal laws and regulations related to Medicare and
Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
2003 Act). The 2003 Act included a prescription drug benefit for individuals that first went into
effect on January 1, 2006. The increased purchasing power of entities that negotiate on behalf of
Medicare beneficiaries could result in further pricing pressures.
Outside the United States, numerous major markets have pervasive government involvement in
funding healthcare and, in that regard, fix the pricing and reimbursement of pharmaceutical and
vaccine products. Consequently, in those markets, MSD is subject to government decision making and
budgetary actions with respect to its products.
MSD expects pricing pressures to increase in the future.
The health care industry will continue to be subject to increasing regulation and political
action.
MSD believes that the health care industry will continue to be subject to increasing regulation
as well as political and legal action, as health care reform
is implemented at the state and federal levels.
Some of the
provisions that were passed in federal
health care reform could adversely affect MSDs sales and profit margins.
The provisions will create greater cost control pressure on the U.S. health care system, which could lead to greater pressure
on pharmaceutical pricing and changes in government reimbursement. The new law will also increase rebates and discounts on
sales related to the state and federal Medicaid program and the Medicare drug program, as well as require pharmaceutical
manufacturers to pay a health care reform fee.
In addition, individual states have enacted or proposed regulations that restrict certain sales and marketing
activities and/or require tracking and disclosure of payments and other financial support to
health care professionals. Such regulations could adversely affect MSDs sales and profit margins.
The implementation of health care reform or other related legislative
initiatives may further increase government
regulation or other government involvement in health care, lower reimbursement rates and
otherwise change the operating environment for health care companies. Government regulations
applicable to MSDs current or future products, or the interpretation of existing regulations,
might change and thereby prevent MSD from marketing some or all of its products and services for a
period of time or indefinitely.
MSD cannot predict the likelihood of all future changes in the health care industry in general,
or the pharmaceutical industry in particular, or what impact they may have on MSDs results of
operations, financial condition or business.
MSD is experiencing difficulties and delays in the manufacturing of certain of its products.
As previously disclosed, MSD has, in the past, experienced difficulties in manufacturing
certain of its vaccines and other products. These issues are continuing, in particular, with
respect to the manufacture of bulk varicella which is required for production of MSDs varicella
zoster virus-containing vaccines, such as Varivax, ProQuad and Zostavax. MSD is working on these
issues, but there can be no assurance of when or if these issues will be finally resolved.
In addition to the difficulties that MSD is experiencing currently, MSD may experience
difficulties and delays inherent in manufacturing its products, such as (i) failure of MSD or any
of its vendors or suppliers to comply with Current Good
11
Manufacturing Practices and other applicable regulations and quality assurance guidelines that
could lead to manufacturing shutdowns, product shortages and delays in product manufacturing;
(ii) construction delays related to the construction of new facilities or the expansion of existing
facilities, including those intended to support future demand for MSDs products; and (iii) other
manufacturing or distribution problems including changes in manufacturing production sites and
limits to manufacturing capacity due to regulatory requirements, changes in types of products
produced, or physical limitations that could impact continuous supply. Manufacturing difficulties
can result in product shortages, leading to lost sales.
MSD faces significant litigation related to Vioxx.
On September 30, 2004, MSD voluntarily withdrew Vioxx, its arthritis and acute pain
medication, from the market worldwide. Although MSD has settled the major portion of the
U.S. Product Liability litigation, MSD still faces material litigation arising from the voluntary
withdrawal of Vioxx.
In addition to the Vioxx Product Liability Lawsuits, various purported class actions and
individual lawsuits have been brought against MSD and several current and former officers and
directors of MSD alleging that MSD made false and misleading statements regarding Vioxx in
violation of the federal and state securities laws (all of these suits are referred to as the
Vioxx Securities Lawsuits). On April 12, 2007, Judge Chesler granted defendants motion to
dismiss the complaint with prejudice. Plaintiffs appealed Judge Cheslers decision to the United
States Court of Appeals for the Third Circuit. On September 9, 2008, the Third Circuit issued an
opinion reversing Judge Cheslers order and remanding the case to the District Court. MSD filed a
petition for a writ of certiorari with the United States Supreme Court, which was granted. Oral
argument was held in the Supreme Court on November 30, 2009 and a decision is expected in the first
half of 2010. While MSDs petition for certiorari was pending, plaintiffs filed their Consolidated
and Fifth Amended Class Action Complaint in the District Court. On May 1, 2009, defendants moved to
dismiss the Fifth Amended Class Action Complaint; that motion has been withdrawn without prejudice
to refile it pending the outcome in the Supreme Court. In addition, various putative class actions
have been brought against MSD and several current and former employees, officers, and directors of
MSD alleging violations of ERISA. (All of these suits are referred to as the Vioxx ERISA Lawsuits
and, together with the Vioxx Securities Lawsuits, the Vioxx Shareholder Lawsuits. The Vioxx
Shareholder Lawsuits are discussed more fully in Item 3. Legal Proceedings below.) MSD has also
been named as a defendant in actions in various countries outside the United States. (All of these
suits are referred to as the Vioxx Foreign Lawsuits.) MSD has also been sued by ten states, five
counties and New York City with respect to the marketing of Vioxx.
The U.S. Department of Justice (DOJ) has issued subpoenas requesting information relating to
MSDs research, marketing and selling activities with respect to Vioxx in a federal health care
investigation under criminal statutes. This investigation includes subpoenas for witnesses to
appear before a grand jury. There are also ongoing investigations by local authorities in Europe.
MSD is cooperating with authorities in all of these investigations. (All of these investigations
are referred to as the Vioxx Investigations.) MSD cannot predict the outcome of any of these
investigations; however, they could result in potential civil and/or criminal remedies.
The Vioxx product liability litigation is discussed more fully in Item 3. Legal Proceedings
below. A trial in a representative action in Australia concluded on June 25, 2009, in the Federal
Court of Australia. The named plaintiff, who alleged he suffered an MI, seeks to represent others
in Australia who ingested Vioxx and suffered an MI, thrombotic stroke, unstable angina, transient
ischemic attack or peripheral vascular disease. On March 5, 2010, the trial judge delivered his
judgment. The Court decided to dismiss all claims against MSD, specifically finding that MSD had
done everything that might reasonably be expected of it in the discharge of its duty of care. With
regard to MSDs Australian subsidiary, Merck Sharp & Dohme (Australia) Pty. Ltd., the Court decided
to dismiss certain claims but to award the named plaintiff, who the Court found suffered a
myocardial infarction (MI) after ingesting Vioxx for approximately 33 months, compensation based
on statutory claims that Vioxx was not fit for purpose or of merchantable quality, even though the
Court rejected the applicants claim that MSD knew or ought to have known prior to the voluntary
withdrawal of Vioxx in September 2004 that Vioxx materially increased the risk of MI. On May 7,
2010, the Court will conduct a hearing to determine the orders to be entered giving effect to the
judgment, in which the court will determine which of its findings of fact and law are common to the
claims of other group members and will consider any other motions that might be brought. MSDs
subsidiary intends to appeal the adverse findings after the orders have been entered.
MSD currently anticipates that two U.S. Vioxx Product Liability Lawsuits will be tried in
2010. MSD cannot predict the timing of any other trials related to the Vioxx Litigation. MSD
believes that it has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx
Shareholder Lawsuits and Vioxx Foreign Lawsuits (collectively, the Vioxx Lawsuits) and will
vigorously defend against them. MSDs insurance coverage with respect to the Vioxx Lawsuits
will not be adequate to cover its defense costs and any losses.
12
During 2009, MSD spent approximately $244 million in the aggregate in legal defense costs
worldwide related to (i) the Vioxx Lawsuits, and (ii) the Vioxx Investigations (collectively, the
Vioxx Litigation). In 2009, $75 million of charges were recorded, including $35 million in the
fourth quarter, to add to the reserve solely for its future legal defense costs related to the
Vioxx Litigation which was $279 million at December 31, 2008 and $110 million (the Vioxx Reserve)
at December 31, 2009. The amount of the Vioxx Reserve is based on certain assumptions, described
below under Item 3. Legal Proceedings, and is the best estimate of the minimum amount that MSD
believes will be incurred in connection with the remaining aspects of the Vioxx Litigation,
however, events such as additional trials in the Vioxx Litigation and other events that could arise
in the course of the Vioxx Litigation could affect the ultimate amount of defense costs to be
incurred by MSD.
MSD is not currently able to estimate any additional amounts that it may be required to pay in
connection with the Vioxx Lawsuits or Vioxx Investigations. These proceedings are still expected to
continue for years and MSD cannot predict the course the proceedings will take. In view of the
inherent difficulty of predicting the outcome of litigation, particularly where there are many
claimants and the claimants seek unspecified damages, MSD 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 Vioxx Lawsuits not included in the Settlement Program. Other than a reserve
established in connection with the settlement of the shareholder derivative actions discussed below
under Item 3. Legal Proceedings, MSD has not established any reserves for any potential liability
relating to the Vioxx Lawsuits not included in the Settlement Program or the Vioxx Investigations.
A series of unfavorable outcomes in the Vioxx Lawsuits or the Vioxx Investigations, resulting
in the payment of substantial damages or fines or resulting in criminal penalties, could have a
material adverse effect on MSDs business, cash flow, results of operations, financial position and
prospects.
Issues concerning Vytorin and the ENHANCE and SEAS clinical trials have had an adverse effect
on sales of Vytorin and Zetia in the United States and results from ongoing trials could have an
adverse effect on such sales.
The MSP Partnership sells Vytorin and Zetia. As previously disclosed, in January 2008, MSD and
MSDs Parent Company announced the results of the Effect of Combination Ezetimibe and High-Dose
Simvastatin vs. Simvastatin Alone on the Atherosclerotic Process in Patients with Heterozygous
Familial Hypercholesterolemia (ENHANCE) clinical trial, an imaging trial in 720 patients with
heterozygous familial hypercholesterolemia, a rare genetic condition that causes very high levels
of LDL bad cholesterol and greatly increases the risk for premature coronary artery disease. As
previously reported, despite the fact that ezetimibe/simvastatin 10/80 mg (Vytorin) significantly
lowered LDL bad cholesterol more than simvastatin 80 mg alone, there was no significant
difference between treatment with ezetimibe/simvastatin and simvastatin alone on the pre-specified
primary endpoint, a change in the thickness of carotid artery walls over two years as measured by
ultrasound. The Improved Reduction in High-Risk Subjects Presenting with Acute Coronary Syndrome
(IMPROVE-IT) trial is underway and is designed to provide cardiovascular outcomes data for
ezetimibe/simvastatin in patients with acute coronary syndrome. No incremental benefit of
ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated
for simvastatin has been established. In January 2009, the FDA announced that it had completed its
review of the final clinical study report of ENHANCE. The FDA stated that the results from ENHANCE
did not change its position that elevated LDL cholesterol is a risk factor for cardiovascular
disease and that lowering LDL cholesterol reduces the risk for cardiovascular disease. For a
discussion concerning litigation arising out of the ENHANCE study, see Item 3. Legal Proceedings
below.
As previously disclosed, MSD (as well as MSDs Parent Company) has received several letters
from the House Committee on Energy and Commerce, its Subcommittee on
Oversight and Investigations (O&I), and the Ranking Minority Member of the Senate Finance
Committee, collectively seeking a combination of witness interviews, documents and information on a
variety of issues related to the ENHANCE clinical trial, the sale and promotion of Vytorin, as well
as sales of stock by corporate officers. In addition, MSD (as well as MSDs Parent Company) has received three
additional letters each from O&I, seeking certain information and documents related to the Simvastatin
and Ezetimibe in Aortic Stenosis (SEAS) clinical trial, which is described in more detail below.
As previously disclosed, MSD received subpoenas from the New York State Attorney
Generals Office and a letter from the Connecticut Attorney General seeking similar information and
documents. Finally, in September 2008, the companies received a letter from the Civil
Division of the DOJ informing it that the DOJ is investigating whether the companies conduct
relating to the promotion of Vytorin caused false claims to be submitted to federal health care
programs. MSD is cooperating with these investigations. As previously
disclosed, a number of shareholder lawsuits arising out of the ENHANCE study have been brought
against MSD and Schering-Plough.
13
In July 2008, efficacy and safety results from the SEAS study were announced. SEAS was
designed to evaluate whether intensive lipid lowering with Vytorin 10/40 mg would reduce the need
for aortic valve replacement and the risk of cardiovascular morbidity and mortality versus placebo
in patients with asymptomatic mild to moderate aortic stenosis who had no indication for statin
therapy. Vytorin failed to meet its primary endpoint for the reduction of major cardiovascular
events. In the study, patients in the group who took Vytorin 10/40 mg had a higher incidence of
cancer than the group who took placebo. There was also a nonsignificant increase in deaths from
cancer in patients in the group who took Vytorin versus those who took placebo. Cancer and cancer
deaths were distributed across all major organ systems. MSD believes the cancer finding in SEAS is
likely to be an anomaly that, taken in light of all the available data, does not support an
association with Vytorin. In August 2008, the FDA announced that it was investigating the results
from the SEAS trial. In December 2009, the FDA announced that it had completed its review of the
data from the SEAS trial as well as a review of interim data from the Study of Heart and Renal
Protection (SHARP) and IMPROVE-IT trials. Based on currently available information, the FDA
indicated it believed it is unlikely that Vytorin or Zetia increase the risk of cancer-related
death. The SHARP trial is expected to be completed in 2010. The IMPROVE-IT trial is scheduled for
completion in 2013. As noted above, the SHARP trial is expected to be completed in 2010. Negative
results from the SHARP trial could also have an adverse affect on the sales of Vytorin and Zetia.
Following the announcements of the ENHANCE and SEAS clinical trial results, sales of Vytorin
and Zetia declined in 2008 and 2009 in the United States. These issues concerning the ENHANCE and
SEAS clinical trials have had an adverse effect on sales of Vytorin and Zetia and could continue to
have an adverse effect on such sales. If sales of such products are materially adversely affected,
MSDs business, cash flow, results of operations, financial position and prospects could also be
materially adversely affected. In addition, unfavorable outcomes resulting from the litigation
concerning the sale and promotion of these products could have a material adverse effect on MSDs
business, cash flow, results of operations, financial position and prospects.
Pharmaceutical products can develop unexpected safety or efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or
not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well
as product liability, consumer fraud and/or other claims.
Changes in laws and regulations could adversely affect MSDs business.
All aspects of MSDs business, including research and development, manufacturing, marketing,
pricing, sales, litigation and intellectual property rights, are subject to extensive legislation
and regulation. Changes in applicable federal and state laws and agency regulations could have a
material adverse effect on MSDs business.
Reliance on third party relationships and outsourcing arrangements could adversely affect
MSDs business.
MSD depends on third parties, including suppliers, alliances with other pharmaceutical and
biotechnology companies, and third party service providers, for key aspects of its business
including development, manufacture and commercialization of its products and support for its
information technology systems. Failure of these third parties to meet their contractual,
regulatory and other obligations to MSD or the development of factors that materially disrupt the
relationships between MSD and these third parties could have a material adverse effect on MSDs
business.
MSD is increasingly dependent on sophisticated information technology and infrastructure.
MSD is increasingly dependent on sophisticated information technology and infrastructure. Any
significant breakdown, intrusion, interruption or corruption of these systems or data breaches
could have a material adverse effect on our business. In addition, MSD currently is proceeding with
a multi-year implementation of an enterprise wide resource planning system, which includes
modification to the design, operation and documentation of its internal controls over financial
reporting, and intends to implement the resource planning system in the United States in 2010. Any
material problems in the implementation could have a material adverse effect on MSDs business.
14
Developments following regulatory approval may adversely affect sales of MSDs products.
Even after a product reaches market, certain developments following regulatory approval,
including results in post-marketing Phase IV trials, may decrease demand for MSDs products,
including the following:
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the re-review of products that are already marketed; |
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new scientific information and evolution of scientific theories; |
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the recall or loss of marketing approval of products that are already marketed; |
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changing government standards or public expectations regarding safety, efficacy or
labeling changes; and |
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greater scrutiny in advertising and promotion. |
In the past several years, clinical trials and post-marketing surveillance of certain marketed
drugs of MSD and of competitors within the industry have raised safety concerns that have led to
recalls, withdrawals or adverse labeling of marketed products. Clinical trials and post-marketing
surveillance of certain marketed drugs also have raised concerns among some prescribers and
patients relating to the safety or efficacy of pharmaceutical products in general that have
negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of
clinical trials has led to increased volatility in market reaction. Further, these matters often
attract litigation and, even where the basis for the litigation is groundless, considerable
resources may be needed to respond.
In addition, following the wake of product withdrawals and other significant safety issues,
health authorities such as the FDA, the European Medicines Agency and the Pharmaceutical and
Medical Device Agency have increased their focus on safety when assessing the benefit/risk balance
of drugs. Some health authorities appear to have become more cautious when making decisions about
approvability of new products or indications and are re-reviewing select products that are already
marketed, adding further to the uncertainties in the regulatory processes. There is also greater
regulatory scrutiny, especially in the United States, on advertising and promotion and, in
particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is an increase in negative
publicity regarding known side effects of any of MSDs products, it could significantly reduce
demand for the product or require MSD to take actions that could negatively affect sales, including
removing the product from the market, restricting its distribution or applying for labeling
changes. Further, in the current environment in which all pharmaceutical companies operate, MSD is
at risk for product liability claims for its products.
MSD is subject to evolving and complex tax laws, which may result in additional liabilities
that may affect results of operations.
MSD is subject to evolving and complex tax laws in the jurisdictions in which it operates.
Significant judgment is required for determining MSDs tax liabilities, and MSDs tax returns are
periodically examined by various tax authorities. MSD believes that its accrual for tax
contingencies is adequate for all open years based on past experience, interpretations of tax law,
and judgments about potential actions by tax authorities; however, due to the complexity of tax
contingencies, the ultimate resolution of any tax matters may result in payments greater or less
than amounts accrued.
In February 2010, President Obamas administration proposed significant changes to the
U.S. international tax laws, including changes that would limit U.S. tax deductions for expenses
related to un-repatriated foreign-source income and modify the U.S. foreign tax credit rules. We
cannot determine whether these proposals will be enacted into law or what, if any, changes may be
made to such proposals prior to their being enacted into law. If these or other changes to the
U.S. international tax laws are enacted, they could have a significant impact on the financial
results of MSD.
In addition, MSD may be impacted by changes in tax laws, including tax rate changes, changes
to the laws related to the remittance of foreign earnings (deferral), or other limitations
impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law
interpretations in domestic and foreign jurisdictions.
15
MSDs debt obligations incurred to finance the Merger could adversely affect its business.
While MSDs financing strategy for the Merger was focused on preserving financial strength and
flexibility to continue to invest in MSDs business and key growth drivers post-merger, debt
obligations incurred to finance the Merger could affect MSDs flexibility in planning for, or
reacting to, changes in its business and the industry in which it operates, thereby placing it at a
competitive disadvantage compared to competitors that have less indebtedness. Further, if MSD
decides to retire or pay down indebtedness early it may be required to dedicate a substantial
portion of its cash flow from operations to do so, thereby reducing the availability of its cash
flow for other purposes.
Product liability insurance for products may be limited, cost prohibitive or unavailable.
As a result of a number of factors, product liability insurance has become less available
while the cost has increased significantly. With respect to product liability, MSD self-insures
substantially all of its risk, as the availability of commercial insurance has become more
restrictive. MSD has evaluated its risks and has determined that the cost of obtaining product
liability insurance outweighs the likely benefits of the coverage that is available and, as such,
has no insurance for certain product liabilities effective August 1, 2004, including liability for
MSD products first sold after that date. MSD will continually assess the most efficient means to
address its risk; however, there can be no guarantee that insurance coverage will be obtained or,
if obtained, will be sufficient to fully cover product liabilities that may arise.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This report, including the Annual Report, and other written reports and oral statements made
from time to time by MSD may contain so-called forward-looking statements, all of which are based
on managements current expectations and are subject to risks and uncertainties which may cause
results to differ materially from those set forth in the statements. One can identify these
forward-looking statements by their use of words such as expects, plans, will, estimates,
forecasts, projects and other words of similar meaning. One can also identify them by the fact
that they do not relate strictly to historical or current facts. These statements are likely to
address MSDs growth strategy, financial results, product development, product approvals, product
potential, and development programs. One must carefully consider any such statement and should
understand that many factors could cause actual results to differ materially from MSDs
forward-looking statements. These factors include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and some that are not. No
forward-looking statement can be guaranteed and actual future results may vary materially. MSD does
not assume the obligation to update any forward-looking statement. MSD cautions you not to place
undue reliance on these forward-looking statements. Although it is not possible to predict or
identify all such factors, they may include the following:
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Competition from generic products as MSDs products lose patent protection. |
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Increased brand competition in therapeutic areas important to MSDs long-term business
performance. |
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The difficulties and uncertainties inherent in new product development. The outcome of the
lengthy and complex process of new product development is inherently uncertain. A drug
candidate can fail at any stage of the process and one or more late-stage product candidates
could fail to receive regulatory approval. New product candidates may appear promising in
development but fail to reach the market because of efficacy or safety concerns, the inability
to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture
and/or the infringement of patents or intellectual property rights of others. Furthermore, the
sales of new products may prove to be disappointing and fail to reach anticipated levels. |
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Pricing pressures, both in the United States and abroad, including rules and practices of
managed care groups, judicial decisions and governmental laws and regulations related to
Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in
general. |
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Changes in government laws and regulations and the enforcement thereof affecting MSDs
business. |
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Efficacy or safety concerns with respect to marketed products, whether or not scientifically
justified, leading to product recalls, withdrawals or declining sales. |
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Significant litigation related to Vioxx, and Vytorin and Zetia. |
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Legal factors, including product liability claims, antitrust litigation and governmental
investigations, including tax disputes, environmental concerns and patent disputes with
branded and generic competitors, any of which could preclude commercialization of products or
negatively affect the profitability of existing products. |
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Lost market opportunity resulting from delays and uncertainties in the approval process of
the FDA and foreign regulatory authorities. |
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Increased focus on privacy issues in countries around the world, including the United States
and the EU. The legislative and regulatory landscape for privacy and data protection continues
to evolve, and there has been an increasing amount of focus on privacy and data protection
issues with the potential to affect directly MSDs business, including recently enacted laws
in a majority of states in the United States requiring security breach notification. |
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Changes in tax laws including changes related to the taxation of foreign earnings. |
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Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies,
including the Financial Accounting Standards Board and the SEC, that are adverse to MSD. |
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Economic factors over which MSD has no control, including changes in inflation, interest
rates and foreign currency exchange rates. |
This list should not be considered an exhaustive statement of all potential risks and
uncertainties. See Risk Factors above.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
MSDs corporate headquarters is located in Whitehouse Station, New Jersey. MSDs
U.S. commercial operations are headquartered in Upper Gwynedd, Pennsylvania. MSDs
U.S. pharmaceutical business is conducted through divisional headquarters located in Upper Gwynedd
and Whitehouse Station, New Jersey. MSDs vaccines business is conducted through divisional
headquarters located in West Point, Pennsylvania. MSDs principal research facilities are located
in Rahway, New Jersey, West Point, Pennsylvania and Montreal, Canada. MSD also has production
facilities for human health products at seven locations in the United States and Puerto Rico.
Outside the United States, through subsidiaries, MSD owns or has an interest in manufacturing
plants or other properties in Australia, Canada, Japan, Singapore, South Africa, and other
countries in Western Europe, Central and South America, and Asia.
Capital expenditures for 2009 and 2008 were $1.3 billion. In the United States, these amounted
to $942.4 million for 2009 and $946.6 million for 2008. Abroad, such expenditures amounted to
$351.9 million for 2009 and $351.7 million for 2008.
MSD and its subsidiaries own their principal facilities and manufacturing plants under titles
that they consider to be satisfactory. MSD considers that its properties are in good operating
condition and that its machinery and equipment have been well maintained. Plants for the
manufacture of products are suitable for their intended purposes and have capacities and projected
capacities adequate for current and projected needs for existing MSD products. Some capacity of the
plants is being converted, with any needed modification, to the requirements of newly introduced
and future products.
Item 3. Legal Proceedings.
MSD is involved in various claims and legal proceedings of a nature considered normal to its
business, including product liability, intellectual property, and commercial litigation, as well as
additional matters such as antitrust actions.
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Vioxx Litigation
Product Liability Lawsuits
As previously disclosed, individual and putative class actions have been filed against MSD in
state and federal courts alleging personal injury and/or economic loss with respect to the purchase
or use of Vioxx. All such actions filed in federal court are coordinated in a multidistrict
litigation in the U.S. District Court for the Eastern District of Louisiana (the MDL) before
District Judge Eldon E. Fallon. A number of such actions filed in state court are coordinated in
separate coordinated proceedings in state courts in New Jersey, California and Texas, and the
counties of Philadelphia, Pennsylvania and Washoe and Clark Counties, Nevada. As of December 31,
2009, MSD had been served or was aware that it had been named as a defendant in approximately 9,100
pending lawsuits, which include approximately 19,400 plaintiff groups, alleging personal injuries
resulting from the use of Vioxx, and in approximately 44 putative class actions alleging personal
injuries and/or economic loss. (All of the actions discussed in this paragraph and in Other
Lawsuits below are collectively referred to as the Vioxx Product Liability Lawsuits.) Of these
lawsuits, approximately 7,350 lawsuits representing approximately 15,525 plaintiff groups are or
are slated to be in the federal MDL and approximately 10 lawsuits representing approximately 10
plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court before Judge
Carol E. Higbee.
Of the plaintiff groups described above, most are currently in the Vioxx Settlement Program,
described below. As of December 31, 2009, 80 plaintiff groups who were otherwise eligible for the
Settlement Program have not participated and their claims remain pending against MSD. In addition,
the claims of approximately 275 plaintiff groups who are not eligible for the Settlement Program
remain pending against MSD. A number of these 275 plaintiff groups are subject to various motions
to dismiss for failure to comply with court-ordered deadlines. Since December 31, 2009, certain of
these plaintiff groups have since been dismissed. In addition, the claims of over 35,600 plaintiffs
had been dismissed as of December 31, 2009, the vast majority of which were dismissed as a result
of the settlement process discussed below.
On November 9, 2007, MSD announced that it had entered into an agreement (the Settlement
Agreement) with the law firms that comprise the executive committee of the Plaintiffs Steering
Committee (PSC) of the federal Vioxx MDL, as well as representatives of plaintiffs counsel in
the Texas, New Jersey and California state coordinated proceedings, to resolve state and federal
MI and ischemic stroke (IS) claims filed as of that date in the United States. The Settlement
Agreement applies only to U.S. legal residents and those who allege that their MI or IS occurred in
the United States. The Settlement Agreement provided for MSD to pay a fixed aggregate amount of
$4.85 billion into two funds ($4.0 billion for MI claims and $850 million for IS claims).
Interim and final payments have been made to certain qualifying claimants. It is expected that
the remainder of the full $4.85 billion will be distributed in the first half of 2010. MSD has
completed making payments into the settlement funds.
There are two U.S. Vioxx Product Liability Lawsuits currently scheduled for trial in 2010. MSD
has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits that were tried
prior to 2010.
Of the cases that went to trial, the McDarby matter was resolved in the fourth quarter of
2009, leaving only two unresolved post-trial appeals: Ernst v. Merck and Garza v. Merck.
As previously reported, in September 2006, MSD filed a notice of appeal of the August 2005
jury verdict in favor of the plaintiff in the Texas state court case, Ernst v. Merck. On May 29,
2008, the Texas Court of Appeals reversed the trial courts judgment and issued a judgment in favor
of MSD. The Court of Appeals found the evidence to be legally insufficient on the issue of
causation. Plaintiff filed a motion for rehearing en banc in the Court of Appeals. On June 4, 2009,
in response to plaintiffs motion for rehearing, the Court of Appeals issued a new opinion
reversing the jurys verdict and rendered judgment for MSD. On September 8, 2009, plaintiff filed a
second motion for rehearing en banc, which the Court of Appeals denied on November 19, 2009. On
December 7, 2009, plaintiff filed another motion for rehearing, which the Court of Appeals again
denied. Plaintiff filed a petition for review with the Supreme Court of Texas on February 3, 2010.
As previously reported, in April 2006, in Garza v. Merck, a jury in state court in Rio Grande
City, Texas returned a verdict in favor of the family of decedent Leonel Garza. The jury awarded a
total of $7 million in compensatory damages to Mr. Garzas widow and three sons. The jury also
purported to award $25 million in punitive damages even though under Texas law, in this case,
potential punitive damages were capped at $750,000. In May 2008, the San Antonio Court of Appeals
reversed the judgment and rendered a judgment in favor of MSD. In December 2008, the Court of
Appeals, on rehearing, vacated its prior ruling and issued a replacement. In the new ruling, the
court ordered a take-nothing judgment for MSD on the design defect claim, but reversed and remanded
for a new trial as to the strict liability claim because of juror misconduct.
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In January 2009, MSD filed a petition for review with the Texas Supreme Court. The Texas
Supreme Court granted MSDs petition for review and oral argument was held on January 20, 2010.
Other Lawsuits
Approximately 190 claims by individual private third-party payors were filed in the New Jersey
court and in federal court in the MDL. On September 15, 2009, MSD announced it had finalized a
settlement agreement, which it had previously disclosed, to resolve all pending lawsuits in which
U.S.-based private third-party payors (TPPs) sought reimbursement for covering Vioxx purchased by
their plan members. Certain other claimants participated in the resolution as well. The agreement
provided that MSD did not admit wrongdoing or fault. Under the settlement agreement, MSD paid a
fixed total of $80 million. This amount includes a settlement fund that will be divided among the
TPPs (insurers, employee benefit plans and union welfare funds) participating in the resolution in
accordance with a formula that is based on product volume and a provision for potential payment of
attorneys fees. In return, the settling TPPs will dismiss their lawsuits and release their claims
against MSD. Stipulated dismissals of the settled TTP actions were filed in New Jersey and the MDL
in December 2009. MSD recorded a charge of $80 million in the second quarter of 2009 related to the
settlement and paid the $80 million in the fourth quarter of 2009. Since the settlement, one
additional TPP case has been filed which is pending in the MDL proceeding.
Separately, there are also still pending in various U.S. courts putative class actions
purportedly brought on behalf of individual purchasers or users of Vioxx and seeking reimbursement
of alleged economic loss. In the MDL proceeding, 33 such class actions remain. In 2005, MSD moved
to dismiss a master complaint that includes these cases, but the MDL court has not yet ruled on
that motion.
On March 17, 2009, the New Jersey Superior Court denied plaintiffs motion for class
certification in Martin-Kleinman v. Merck, a putative consumer class action. Plaintiffs moved for
leave to appeal the decision to the New Jersey Supreme Court on November 6, 2009. On January 12,
2010, the New Jersey Supreme Court denied plaintiffs request for appellate review of the denial of
class certification.
On June 12, 2008, a Missouri state court certified a class of Missouri plaintiffs seeking
reimbursement for out-of-pocket costs relating to Vioxx. The plaintiffs do not allege any personal
injuries from taking Vioxx. The Missouri Court of Appeals affirmed the trial courts certification
of a class on May 12, 2009, and the Missouri Supreme Court denied MSDs application for review of
that decision on September 1, 2009. Trial has been set for April 11, 2011. In addition, in Indiana,
plaintiffs have filed a motion to certify a class of Indiana Vioxx purchasers in a case pending
before the Circuit Court of Marion County, Indiana; discovery in that case is ongoing. Briefing is
complete on plaintiffs motion to certify a class of Kentucky Vioxx purchasers before the Circuit
Court of Pike County, Kentucky. A hearing on this matter was held on February 26, 2010. A judge in
Cook County, Illinois has consolidated three putative class actions brought by Vioxx purchasers.
The plaintiffs in those actions recently voluntarily dismissed their lawsuits.
Plaintiffs also filed a class action in California state court seeking certification of a
class of California third-party payors and end-users. The trial court denied the motion for class
certification on April 30, 2009, and the Court of Appeal affirmed that ruling on December 15, 2009.
On January 25, 2010, plaintiffs filed a petition for review with the California Supreme Court.
MSD has also been named as a defendant in twenty-one separate lawsuits brought by government
entities, including the Attorneys General of thirteen states, five counties, the City of New York,
and private citizens (who have brought qui tam and taxpayer derivative suits). These actions allege
that MSD misrepresented the safety of Vioxx and seek: (i) recovery of the cost of Vioxx purchased
or reimbursed by the government entity and its agencies; (ii) reimbursement of all sums paid by the
government entity and its agencies for medical services for the treatment of persons injured by
Vioxx; (iii) damages under various common law theories; and/or (iv) remedies under various state
statutory theories, including state consumer fraud and/or fair business practices or Medicaid fraud
statutes, including civil penalties. Nine of the thirteen cases are pending in the MDL proceeding,
two are subject to conditional orders transferring them to the MDL proceeding, and two were
remanded to state court. One of the lawsuits brought by the counties is a class action filed by
Santa Clara County, California on behalf of all similarly situated California counties.
MSDs motion for summary judgment was granted in November 2009 in a case brought by the
Attorney General of Texas that was scheduled to go to trial in early 2010. The Texas Attorney
General did not appeal. In the Michigan Attorney General case, MSD is currently seeking appellate
review of the trial courts order denying MSDs motion to dismiss. The trial court has entered a
stay of proceedings (including discovery) pending the result of that appeal. Finally, the Attorney
General
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actions in the MDL described in the previous paragraph are in the discovery phase. The
Louisiana Attorney General case is currently scheduled for trial in the MDL court on April 12,
2010.
Shareholder Lawsuits
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, MSD and various
current and former officers and directors are defendants in various putative class actions and
individual lawsuits under the federal securities laws and state securities laws (the Vioxx
Securities Lawsuits). All of the Vioxx Securities Lawsuits pending in federal court have been
transferred by the Judicial Panel on Multidistrict Litigation (the JPML) to the U.S. District
Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a
nationwide MDL (the Shareholder MDL). Judge Chesler has consolidated the Vioxx Securities
Lawsuits for all purposes. The putative class action, which requested damages on behalf of
purchasers of MSD stock between May 21, 1999 and October 29, 2004, alleged that the defendants made
false and misleading statements regarding Vioxx in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and sought unspecified compensatory damages and the costs of suit,
including attorneys fees. The complaint also asserted claims under Section 20A of the Securities
and Exchange Act against certain defendants relating to their sales of MSD stock and under
Sections 11, 12 and 15 of the Securities Act of 1933 against certain defendants based on statements
in a registration statement and certain prospectuses filed in connection with the MSD Stock
Investment Plan, a dividend reinvestment plan. On April 12, 2007, Judge Chesler granted defendants
motion to dismiss the complaint with prejudice. Plaintiffs appealed Judge Cheslers decision to the
U.S. Court of Appeals for the Third Circuit. On September 9, 2008, the Third Circuit issued an
opinion reversing Judge Cheslers order and remanding the case to the District Court. MSD filed a
petition for a writ of certiorari with the United States Supreme Court on January 15, 2009, which
the Supreme Court granted on May 26, 2009. Oral argument was held on November 30, 2009 and a
decision is expected in the first half of 2010. While the petition for certiorari was pending,
plaintiffs filed their Consolidated and Fifth Amended Class Action Complaint in the District Court.
MSD filed a motion to dismiss that complaint on May 1, 2009, following which the District Court
proceedings were stayed pending the outcome of the Supreme Court appeal. The motion to dismiss in
the District Court has been withdrawn without prejudice to MSDs right to re-file such a motion
pending the outcome of the Supreme Court appeal.
In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging
violations of federal securities laws as well as violations of state law against MSD and certain
officers. Pursuant to the Case Management Order governing the Shareholder MDL, the case, which is
based on the same allegations as the Vioxx Securities Lawsuits, was consolidated with the Vioxx
Securities Lawsuits. Defendants motion to dismiss the pension funds complaint was filed on
August 3, 2007. In September 2007, the Dutch pension fund filed an amended complaint rather than
responding to defendants motion to dismiss. In addition, in 2007, six new complaints were filed in
the District of New Jersey on behalf of various foreign institutional investors also alleging
violations of federal securities laws as well as violations of state law against MSD and certain
officers. By stipulation, defendants are not required to respond to these complaints until the
resolution of any motion to dismiss in the consolidated securities action.
In addition, as previously disclosed, various putative class actions filed in federal court
under the Employee Retirement Income Security Act (ERISA) against MSD and certain current and
former officers and directors (the Vioxx ERISA Lawsuits and, together with the Vioxx Securities
Lawsuits and the Vioxx Derivative Lawsuits described below, the Vioxx Shareholder Lawsuits) have
been transferred to the Shareholder MDL and consolidated for all purposes. The consolidated
complaint asserts claims for breach of fiduciary duty on behalf of certain of MSDs current and
former employees who are participants in certain of MSDs retirement plans. The complaint makes
similar allegations with respect to Vioxx to the allegations contained in the Vioxx Securities
Lawsuits. On July 11, 2006, Judge Chesler granted in part and denied in part defendants motion to
dismiss the ERISA complaint. On October 19, 2007, plaintiffs moved for certification of a class of
individuals who were participants in and beneficiaries of MSDs retirement savings plans at any
time between October 1, 1998 and September 30, 2004 and whose plan accounts included investments in
the MSD Common Stock Fund and/or MSD common stock. On February 9, 2009, the court denied the motion
for certification of a class as to one count and granted the motion as to the remaining counts. The
court also excluded from the class definition those individuals who (i) were not injured in
connection with their investments in MSD stock and (ii) executed post-separation settlement
agreements that released their claims under ERISA. On March 23, 2009, Judge Chesler denied
defendants motion for judgment on the pleadings. On May 11, 2009, Judge Chesler entered an order
denying plaintiffs motion for partial summary judgment against certain individual defendants,
which had been filed on December 24, 2008.
As previously disclosed, on October 29, 2004, two individual shareholders made a demand on
MSDs Board to take legal action against Mr. Raymond Gilmartin, former Chairman, President and
Chief Executive Officer, and other individuals for allegedly causing damage to MSD with respect to
the allegedly improper marketing of Vioxx. In December 2004, the Special Committee of the Board of
Directors retained the Honorable John S. Martin, Jr. of Debevoise & Plimpton LLP to
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conduct an independent investigation of, among other things, the allegations set forth in the
demand. Judge Martins report was made public in September 2006. Based on the Special Committees
recommendation made after careful consideration of the Martin report and the impact that derivative
litigation would have on MSD, the Board rejected the demand. On October 11, 2007, two shareholders
filed a shareholder derivative lawsuit purportedly on MSDs behalf in state court in Atlantic
County, New Jersey against current and former officers and directors of MSD. Plaintiffs alleged
that the Boards rejection of their demand was unreasonable and improper, and that the defendants
breached various duties to MSD in allowing Vioxx to be marketed. The parties reached a proposed
settlement and, on February 8, 2010, the court issued an order preliminarily approving the
settlement and requiring that notice of the proposed settlement be made to MSDs Parent Companys shareholders. On
February 9, 2010, MSDs Parent Company notified shareholders of the proposed settlement and its terms. On March
22, 2010, the court approved the settlement. Under the settlement, certain
corporate governance changes will be made and policies and procedures previously established
will be supplemented. In addition, MSD will pay an award of fees and expenses to plaintiffs attorneys in an amount to be
determined by the court, not to exceed $12.15 million. In addition, MSD, the plaintiffs and the
individual defendants will exchange full, mutual releases of all claims that were, or could have
been, asserted in the derivative actions. The settlement does not constitute an admission of
liability or wrongful conduct by MSD or by any of the defendants named in the actions. This
settlement also resolves the federal consolidated shareholder derivative action described below.
As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the Vioxx
Derivative Lawsuits). On May 5, 2006, Judge Chesler granted defendants motion to dismiss on the
grounds that plaintiffs had failed to demonstrate that demand should be excused and denied
plaintiffs request for leave to amend their complaint. Plaintiffs appealed, arguing that Judge
Chesler erred in denying plaintiffs leave to amend their complaint with documents acquired by
stipulation of the parties. On July 18, 2007, the United States Court of Appeals for the Third
Circuit reversed the District Courts decision on the grounds that Judge Chesler should have
allowed plaintiffs to seek leave to amend their complaint using the documents acquired by
stipulation, and remanded the case for the District Courts consideration of whether, even with the
additional materials, plaintiffs proposed amendment would be futile. Plaintiffs filed their brief
in support of their request for leave to amend their complaint, along with their proposed amended
complaint, on November 9, 2007. The Court denied the motion on June 17, 2008, and again dismissed
the case. One of the plaintiffs appealed Judge Cheslers decision to the United States Court of
Appeals for the Third Circuit. Oral argument on the appeal was held on July 15, 2009. On
November 10, 2009, before any decision was issued, the appeal was stayed pending approval of the
settlement reached in the derivative action pending in the New Jersey Superior Court discussed
above.
International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, MSD has been named as a
defendant in litigation relating to Vioxx in various countries (collectively, the Vioxx Foreign
Lawsuits) in Europe, as well as Canada, Brazil, Argentina, Australia, Turkey, Israel, The
Philippines and Singapore.
In November 2006, the Superior Court in Quebec authorized the institution of a class action on
behalf of all individuals who, in Quebec, consumed Vioxx and suffered damages arising out of its
ingestion. On May 7, 2009, the plaintiffs served an introductory motion for a class action based
upon that authorization, and the case remains in preliminary stages of litigation. On May 30, 2008,
the provincial court of Queens Bench in Saskatchewan, Canada entered an order certifying a class
of Vioxx users in Canada, except those in Quebec. MSD appealed the certification order and, on
March 30, 2009, the Court of Appeal granted MSDs appeal and quashed the certification order. On
October 22, 2009, the Supreme Court of Canada dismissed plaintiffs appeal application and decided
not to review the judgment of the Saskatchewan Court of Appeal. On July 28, 2008, the Superior
Court in Ontario denied MSDs motion to stay class proceedings in Ontario and decided to certify an
overlapping class of Vioxx users in Canada, except those in Quebec and Saskatchewan, who allege
negligence and an entitlement to elect to waive the tort. On February 13, 2009, the Ontario
Divisional Court dismissed the appeal from the order denying the stay and, on May 15, 2009, the
Ontario Court of Appeal denied leave to appeal. On October 22, 2009, the Supreme Court of Canada
dismissed MSDs application and decided not to review the judgment of the Ontario Court of Appeal.
After the Court of Appeal for Saskatchewan quashed the multi-jurisdictional certification order
entered in that province, MSD applied to the Ontario Court of Appeal for leave to appeal from the
Ontario certification order. Leave to appeal was granted, the appeal was filed on May 20, 2009 and,
in accordance with the courts decision, MSD sought leave to appeal to the Divisional Court, which
was denied on December 7, 2009. These procedural decisions in the Canadian litigation do not
address the merits of the plaintiffs claims and litigation in Canada remains in an early stage.
A trial in a representative action in Australia concluded on June 25, 2009, in the Federal
Court of Australia. The named plaintiff, who alleged he suffered an MI, seeks to represent others
in Australia who ingested Vioxx and suffered an MI,
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thrombotic stroke, unstable angina, transient ischemic attack or peripheral vascular disease.
On March 30, 2009, the trial judge entered an order directing that, in advance of all other issues
in the proceeding, the issues to be determined during the trial are those issues of fact and law in
the named plaintiffs individual case, and those issues of fact and law that the trial judge finds,
after hearing the evidence, are common to the claims of the group members that the named plaintiff
has alleged that he represents. On March 5, 2010, the trial judge delivered his judgment. The
Court decided to dismiss all claims against MSD, specifically finding that MSD had done everything
that might reasonably be expected of it in the discharge of its duty of care. With regard to MSDs
Australian subsidiary, Merck Sharp & Dohme (Australia) Pty. Ltd., the Court decided to dismiss
certain claims but to award the named plaintiff, who the Court found suffered an MI after ingesting
Vioxx for approximately 33 months, compensation based on statutory claims that Vioxx was not fit
for purpose or of merchantable quality, even though the Court rejected the applicants claim that
MSD knew or ought to have known prior to the voluntary withdrawal of Vioxx in September 2004 that
Vioxx materially increased the risk of MI. On May 7, 2010, the Court will conduct a hearing to
determine the orders to be entered giving effect to the judgment, in which the court will determine
which of its findings of fact and law are common to the claims of other group members and will
consider any other motions that might be brought. MSDs subsidiary intends to appeal the adverse
findings after the orders have been entered.
Insurance
As previously disclosed, MSD has Directors and Officers insurance coverage applicable to the
Vioxx Securities Lawsuits and Vioxx Derivative Lawsuits with stated upper limits of approximately
$190 million. MSD has Fiduciary and other insurance for the Vioxx ERISA Lawsuits with stated upper
limits of approximately $275 million. As a result of the previously disclosed 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 MSDs 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.
Investigations
As previously disclosed, MSD has received subpoenas from the DOJ requesting information
related to MSDs research, marketing and selling activities with respect to Vioxx in a federal
health care investigation under criminal statutes. This investigation includes subpoenas for
witnesses to appear before a grand jury. As previously disclosed, in March 2009, MSD received a
letter from the U.S. Attorneys Office for the District of Massachusetts identifying it as a target
of the grand jury investigation regarding Vioxx. Further, as previously disclosed, investigations
are being conducted by local authorities in certain cities in Europe in order to determine whether
any criminal charges should be brought concerning Vioxx. MSD is cooperating with these governmental
entities in their respective investigations (the Vioxx Investigations). MSD cannot predict the
outcome of these inquiries; however, they could result in potential civil and/or criminal remedies.
In addition, MSD received a subpoena in September 2006 from the State of California Attorney
General seeking documents and information related to the placement of Vioxx on Californias
Medi-Cal formulary. MSD is cooperating with the Attorney General in responding to the subpoena.
Reserves
As discussed above, on November 9, 2007, MSD entered into the Settlement Agreement with the
law firms that comprise the executive committee of the PSC of the federal Vioxx MDL as well as
representatives of plaintiffs counsel in the Texas, New Jersey and California state coordinated
proceedings to resolve state and federal MI and IS claims filed as of that date in the United
States. In 2007, as a result of entering into the Settlement Agreement, MSD recorded a pretax
charge of $4.85 billion which represents the fixed aggregate amount to be paid to plaintiffs
qualifying for payment under the Settlement Program.
There are two U.S. Vioxx Product Liability Lawsuit trials scheduled for trial in 2010. MSD
cannot predict the timing of any other trials related to the Vioxx Litigation. MSD believes that it
has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx Shareholder Lawsuits and
Vioxx Foreign Lawsuits (collectively the Vioxx Lawsuits) and will vigorously defend against them.
In view of the inherent difficulty of predicting the outcome of litigation, particularly where
there are many claimants and the claimants seek indeterminate damages, MSD 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 Vioxx Lawsuits not included in the Settlement Program. MSD has not
established any reserves for any potential liability relating to the Vioxx Lawsuits not included in
the Settlement Program, other than a reserve established in connection with the resolution of the
shareholder derivative lawsuits discussed above, or the Vioxx Investigations. Unfavorable outcomes
in the Vioxx Litigation could have a material adverse effect on MSDs financial position, liquidity
and results of operations.
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Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2008, MSD had an aggregate reserve of
approximately $4.379 billion (the Vioxx Reserve) for the Settlement Program and future legal
defense costs related to the Vioxx Litigation.
During 2009, MSD spent approximately $244 million in the aggregate in legal defense costs
worldwide, including approximately $54 million in the fourth quarter of 2009, related to (i) the
Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii) the Vioxx Foreign
Lawsuits, and (iv) the Vioxx Investigations (collectively, the Vioxx Litigation). In addition,
during 2009, MSD paid an additional $4.1 billion into the settlement funds in connection with the
Settlement Program. Also, during 2009, $75 million of charges were recorded, including $35 million
in the fourth quarter, solely for future legal defense costs for the Vioxx Litigation.
Consequently, as of December 31, 2009, the aggregate amount of the Vioxx Reserve was approximately
$110 million, which is solely for future legal defense costs for the Vioxx Litigation. Some of the
significant factors considered in the review of the Vioxx Reserve were as follows: the actual costs
incurred by MSD; the development of MSDs legal defense strategy and structure in light of the
scope of the Vioxx Litigation, including the Settlement Agreement and the expectation that certain
lawsuits will continue to be pending; the number of cases being brought against MSD; the costs and
outcomes of completed trials and the most current information regarding anticipated timing,
progression, and related costs of pre-trial activities and trials in the Vioxx Litigation. The
amount of the Vioxx Reserve as of December 31, 2009 represents MSDs best estimate of the minimum
amount of defense costs to be incurred in connection with the remaining aspects of the Vioxx
Litigation; however, events such as additional trials in the Vioxx Litigation and other events that
could arise in the course of the Vioxx Litigation could affect the ultimate amount of defense costs
to be incurred by MSD.
MSD will continue to monitor its legal defense costs and review the adequacy of the associated
reserves and may determine to increase the Vioxx Reserve at any time in the future if, based upon
the factors set forth, it believes it would be appropriate to do so.
Other Product Liability Litigation
Fosamax
As previously disclosed, MSD is a defendant in product liability lawsuits in the United States
involving Fosamax (the Fosamax Litigation). As of December 31, 2009, approximately 978 cases,
which include approximately 1,356 plaintiff groups, had been filed and were pending against MSD in
either federal or state court, including one case which seeks class action certification, as well
as damages and/or medical monitoring. In these actions, plaintiffs allege, among other things, that
they have suffered osteonecrosis of the jaw, generally subsequent to invasive dental procedures,
such as tooth extraction or dental implants and/or delayed healing, in association with the use of
Fosamax. In addition, plaintiffs in approximately five percent of these actions allege that they
sustained stress and/or low energy femoral fractures in association with the use of Fosamax. On
August 16, 2006, the JPML ordered that the Fosamax product liability cases pending in federal
courts nationwide should be transferred and consolidated into one multidistrict litigation (the
Fosamax MDL) for coordinated pre-trial proceedings. The Fosamax MDL has been transferred to Judge
John Keenan in the U.S. District Court for the Southern District of New York. As a result of the
JPML order, approximately 771 of the cases are before Judge Keenan. Judge Keenan issued a Case
Management Order (and various amendments thereto) setting forth a schedule governing the
proceedings which focused primarily upon resolving the class action certification motions in 2007
and completing fact discovery in an initial group of 25 cases by October 1, 2008. Briefing and
argument on plaintiffs motions for certification of medical monitoring classes were completed in
2007 and Judge Keenan issued an order denying the motions on January 3, 2008. On January 28, 2008,
Judge Keenan issued a further order dismissing with prejudice all class claims asserted in the
first four class action lawsuits filed against MSD that sought personal injury damages and/or
medical monitoring relief on a class wide basis. Daubert motions were filed in May 2009 and Judge
Keenan conducted a Daubert hearing in July 2009. On July 27, 2009, Judge Keenan issued his ruling
on the parties respective Daubert motions. The ruling denied the Plaintiff Steering Committees
motion and granted in part and denied in part MSDs motion. The first MDL trial Boles v. Merck
began on August 11, 2009, and ended on September 2, 2009. On September 11, 2009, the MDL court
declared a mistrial in Boles because the eight person jury could not reach a unanimous verdict and,
consequently, the Boles case is set to be retried on June 2, 2010. The second MDL case set for
trial Flemings v. Merck was scheduled to start on January 12, 2010, but Judge Keenan granted
MSDs motion for summary judgment and dismissed the case on November 23, 2009. The next MDL case
set for trial Maley v. Merck is currently scheduled to start on April 19, 2010. MSD filed a
motion for summary judgment in Maley, which the MDL court granted in part and denied in part on
January 27, 2010 and, as a result, MSD expects that the trial will commence as currently scheduled
on April 19. On February 1, 2010, Judge Keenan selected a new bellwether case Judith Graves v.
Merck to replace the Flemings bellwether case, which the MDL court dismissed when it granted
summary judgment in favor of MSD. The MDL court has set the Graves trial to begin on September 13,
2010. A trial in Alabama is currently scheduled to begin on May 3, 2010 and a trial in Florida is
currently scheduled to begin on June 21, 2010.
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In addition, in July 2008, an application was made by the Atlantic County Superior Court of
New Jersey requesting that all of the Fosamax cases pending in New Jersey be considered for mass
tort designation and centralized management before one judge in New Jersey. On October 6, 2008, the
New Jersey Supreme Court ordered that all pending and future actions filed in New Jersey arising
out of the use of Fosamax and seeking damages for existing dental and jaw-related injuries,
including osteonecrosis of the jaw, but not solely seeking medical monitoring, be designated as a
mass tort for centralized management purposes before Judge Higbee in Atlantic County Superior
Court. As of December 31, 2009, approximately 189 cases were pending against MSD in the New Jersey
coordinated proceeding. On July 20, 2009, Judge Higbee entered a Case Management Order (and various
amendments thereto) setting forth a schedule that contemplates completing fact discovery in an
initial group of 10 cases by February 28, 2010, followed by expert discovery in five of those
cases, and a projected trial date of July 12, 2010 for the first case to be tried in the New Jersey
coordinated proceeding.
Discovery is ongoing in the Fosamax MDL litigation, the New Jersey coordinated proceeding, and
the remaining jurisdictions where Fosamax cases are pending. MSD intends to defend against these
lawsuits.
As of December 31, 2008, MSD had a remaining reserve of approximately $33 million solely for
its future legal defense costs for the Fosamax Litigation. During 2009, MSD spent approximately
$35 million and $40 million was added to the reserve. Consequently, as of December 31, 2009, MSD
had a reserve of approximately $38 million solely for its future legal defense costs for the
Fosamax Litigation. Some of the significant factors considered in the establishment of the reserve
for the Fosamax Litigation legal defense costs were as follows: the actual defense costs incurred
thus far; the development of MSDs legal defense strategy and structure in light of the creation of
the Fosamax MDL; the number of cases being brought against MSD; and the anticipated timing,
progression, and related costs of pre-trial activities in the Fosamax Litigation. MSD will continue
to monitor its legal defense costs and review the adequacy of the associated reserves. Due to the
uncertain nature of litigation, MSD is unable to reasonably estimate its costs beyond the third
quarter of 2010. MSD has not established any reserves for any potential liability relating to the
Fosamax Litigation. Unfavorable outcomes in the Fosamax Litigation could have a material adverse
effect on MSDs financial position, liquidity and results of operations.
Commercial Litigation
AWP Litigation and Investigations
As previously disclosed, MSD was joined in ongoing litigation alleging manipulation by
pharmaceutical manufacturers of Average Wholesale Prices (AWP), which are sometimes used in
calculations that determine public and private sector reimbursement levels. The complaints allege
violations of federal and state law, including fraud, Medicaid fraud and consumer protection
violations, among other claims. The outcome of these litigations and investigations could include
substantial damages, the imposition of substantial fines, penalties and injunctive or
administrative remedies. In 2002, the JPML ordered the transfer and consolidation of all pending
federal AWP cases to federal court in Boston, Massachusetts. Plaintiffs filed one consolidated
class action complaint, which aggregated the claims previously filed in various federal district
court actions and also expanded the number of manufacturers to include some which, like MSD, had
not been defendants in any prior pending case. In May 2003, the court granted MSDs motion to
dismiss the consolidated class action and dismissed MSD from the class action case. MSD and many
other pharmaceutical manufacturers are defendants in similar complaints pending in federal and
state court including cases brought individually by a number of counties in the State of New York.
Fifty of the county cases have been consolidated in New York state court. MSD was dismissed from
the Suffolk County case, which was the first of the New York county cases to be filed. In addition
to the New York county cases, as of December 31, 2009, MSD was a defendant in state cases brought
by the Attorneys General of eleven states, all of which are being defended. In February 2009, the
Kansas Attorney General filed suit against MSD and several other manufacturers. AWP claims brought
by the Attorney General of Arizona against MSD were dropped in 2009. The court in the AWP cases
pending in Hawaii listed MSD and others to be set for trial in August 2010.
MSD continues to respond to litigation brought by certain states and private payors and to
investigations initiated by the Department of Health and Human Services, the Department of Justice
and several states regarding AWP. MSD is cooperating with these investigations.
Governmental Proceedings
As previously disclosed, in February 2008, MSD entered into a Corporate Integrity Agreement
(CIA) with the U.S. Department of Health and Human Services Office of Inspector General
(HHS-OIG) for a five-year term. The CIA requires, among other things, that MSD maintain its
ethics training program and policies and procedures governing promotional practices and Medicaid
price reporting. Further, as required by the CIA, MSD has retained an Independent Review
Organization to conduct a systems review of its promotional policies and procedures and to conduct,
on a sample basis, transactional reviews of MSDs promotional programs and certain Medicaid pricing
calculations. MSD is also required
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to provide regular reports and certifications to the HHS-OIG regarding its compliance with the
CIA. MSD believes that its promotional practices and Medicaid price reports meet the requirements
of the CIA.
Vytorin/Zetia Litigation
As previously disclosed, MSD (as well as MSDs Parent Company) has received several letters
from the House Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations
(O&I), and the Ranking Minority Member of the Senate Finance Committee, collectively seeking a
combination of witness interviews, documents and information on a variety of issues related to the
ENHANCE clinical trial, the sale and promotion of Vytorin, as well as sales of stock by corporate
officers. In addition, as previously disclosed, since
August 2008, MSD (as well as MSDs Parent Company) has received three
additional letters each from O&I, including identical letters dated February 19, 2009, seeking
certain information and documents related to the SEAS clinical trial. As previously disclosed, MSD
received subpoenas from the New York State Attorney Generals Office and a letter from the
Connecticut Attorney General seeking similar information and documents, and on July 15, 2009, MSD
and Schering-Plough announced that they reached a civil settlement with the Attorneys General
representing 35 states and the District of Columbia to resolve a previously disclosed investigation
by that group into whether the companies violated state consumer protection laws when marketing
Vytorin and Zetia. As part of the settlement, the companies agreed to reimburse the investigative
costs of the 35 states and the District of Columbia, which totaled $5.4 million, and to make
voluntary assurances of compliance related to the promotion of Vytorin and Zetia, including
agreeing to continue to comply with the Food, Drug and Cosmetic Act, the U.S. Food and Drug
Administration Amendments Act, and other laws requiring the truthful and non-misleading marketing
of pharmaceutical products. The settlement did not include any admission of misconduct or liability
by the companies. Furthermore, as previously disclosed, in September 2008, the companies received
letters from the Civil Division of the DOJ informing them that the DOJ is investigating whether
their conduct relating to the promotion of Vytorin caused false claims to be submitted to federal
health care programs. MSD is cooperating with these investigations and responding to the inquiries.
As previously disclosed, MSD had become aware of or been served with approximately 145 civil
class action lawsuits alleging common law and state consumer fraud claims in connection with the
MSP Partnerships sale and promotion of Vytorin and Zetia. Certain of those lawsuits alleged
personal injuries and/or sought medical monitoring. The lawsuits against MSD and Schering-Plough
were consolidated in a single multi-district litigation docket before Judge Cavanaugh of the
District of New Jersey, In re Vytorin/Zetia Marketing Sales Practices and Products Liability
Litigation. On August 5, 2009, MSD and Schering-Plough jointly announced that their cholesterol
joint venture entered into agreements to resolve, for a total fixed amount of $41.5 million, these
civil class action lawsuits. The MSP Partnership recorded these charges in the second quarter of
2009. On February 9, 2010, Judge Cavanaugh granted final approval of the settlements.
Also, as previously disclosed, on April 3, 2008, an MSD shareholder filed a putative class
action lawsuit in federal court in the Eastern District of Pennsylvania alleging that MSD and its
Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal securities
laws. This suit has since been withdrawn and re-filed in the District of New Jersey and has been
consolidated with another federal securities lawsuit under the caption In re Merck & Co., Inc.
Vytorin Securities Litigation. An amended consolidated complaint was filed on October 6, 2008, and
names as defendants MSD; Merck/Schering-Plough Pharmaceuticals, LLC; and certain of MSDs current
and former officers and directors. Specifically, the complaint alleges that MSD delayed releasing
unfavorable results of the ENHANCE clinical trial regarding the efficacy of Vytorin and that MSD
made false and misleading statements about expected earnings, knowing that once the results of the
Vytorin study were released, sales of Vytorin would decline and MSDs earnings would suffer. On
December 12, 2008, MSD and the other defendants moved to dismiss this lawsuit on the grounds that
the plaintiffs failed to state a claim for which relief can be granted. On September 2, 2009, the
court issued an opinion and order denying the defendants motion to dismiss this lawsuit, and on
October 19, 2009, MSD and the other defendants filed an answer to the amended consolidated
complaint.
As previously disclosed, on April 22, 2008, a member of an MSD ERISA plan filed a putative
class action lawsuit against MSD and certain of MSDs current and former officers and directors
alleging they breached their fiduciary duties under ERISA. Since that time, there have been other
similar ERISA lawsuits filed against MSD in the District of New Jersey, and all of those lawsuits
have been consolidated under the caption In re Merck & Co., Inc. Vytorin ERISA Litigation. A
consolidated amended complaint was filed on February 5, 2009, and names as defendants MSD and
various current and former members of MSDs Board of Directors. The plaintiffs allege that the
ERISA plans investment in MSD stock was imprudent because MSDs earnings are dependent on the
commercial success of its cholesterol drug Vytorin and that defendants knew or should have known
that the results of a scientific study would cause the medical community to turn to less expensive
drugs for cholesterol management. On April 23, 2009, MSD and the other defendants moved to dismiss
this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be
granted. On September 1, 2009, the court issued an opinion and order denying the defendants motion
to dismiss this lawsuit. On November 9, 2009, the
plaintiffs moved to strike certain of the defendants affirmative defenses. That motion was
fully briefed on December 4, 2009 and is pending before the court.
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MSD intends to defend the lawsuits referred to in this section. Unfavorable outcomes resulting
from the government investigations or the civil litigations could have a material adverse effect on
MSDs financial position, liquidity and results of operations.
In November 2008, the individual shareholder who had previously delivered a letter to MSDs
Board of Directors demanding that the Board take legal action against the responsible individuals
to recover the amounts paid by MSD in 2007 to resolve certain governmental investigations delivered
another letter to the Board demanding that the Board or a subcommittee thereof commence an
investigation into the matters raised by various civil suits and governmental investigations
relating to Vytorin.
Vaccine Litigation
As previously disclosed, MSD is a party to individual and class action product liability
lawsuits and claims in the United States involving pediatric vaccines (e.g., hepatitis B vaccine)
that contained thimerosal, a preservative used in vaccines. As of March 2010, there were
approximately 200 thimerosal related lawsuits pending in which MSD is a defendant, although the
vast majority of those lawsuits are not currently active. Other defendants include other vaccine
manufacturers who produced pediatric vaccines containing thimerosal as well as manufacturers of
thimerosal. In these actions, the plaintiffs allege, among other things, that they have suffered
neurological injuries as a result of exposure to thimerosal from pediatric vaccines. There are no
cases currently scheduled for trial. MSD will defend against these lawsuits; however, it is
possible that unfavorable outcomes could have a material adverse effect on MSDs financial
position, liquidity and results of operations.
MSD has been successful in having cases of this type either dismissed or stayed on the ground
that the action is prohibited under the National Childhood Vaccine Injury Act (the Vaccine Act).
The Vaccine Act prohibits any person from filing or maintaining a civil action (in state or federal
court) seeking damages against a vaccine manufacturer for vaccine-related injuries unless a
petition is first filed in the United States Court of Federal Claims (hereinafter the Vaccine
Court). Under the Vaccine Act, before filing a civil action against a vaccine manufacturer, the
petitioner must either (a) pursue his or her petition to conclusion in Vaccine Court and then
timely file an election to proceed with a civil action in lieu of accepting the Vaccine Courts
adjudication of the petition or (b) timely exercise a right to withdraw the petition prior to
Vaccine Court adjudication in accordance with certain statutorily prescribed time periods. MSD is
not a party to Vaccine Court proceedings because the petitions are brought against the United
States Department of Health and Human Services.
MSD is aware that there are approximately 5,000 cases pending in the Vaccine Court involving
allegations that thimerosal-containing vaccines and/or the M-M-R II vaccine cause autism spectrum
disorders. Not all of the thimerosal-containing vaccines involved in the Vaccine Court proceeding
are MSD vaccines. MSD is the sole source of the M-M-R II vaccine domestically. The Special Masters
presiding over the Vaccine Court proceedings held hearings in three test cases involving the theory
that the combination of M-M-R II vaccine and thimerosal in vaccines causes autism spectrum
disorders. On February 12, 2009, the Special Masters issued decisions in each of those cases,
finding that the theory was unsupported by valid scientific evidence and that the petitioners in
the three cases were therefore not entitled to compensation. Two of those three cases are currently
on appeal. The Special Masters held similar hearings in three different test cases involving the
theory that thimerosal in vaccines alone causes autism spectrum disorders. On March 12, 2010, the
Special Masters issued decisions in this second set of test cases, finding that the theory was also
unsupported by valid scientific evidence and that the petitions in these three cases were also not
entitled to compensation. The Special Masters had previously indicated that they would hold similar
hearings involving the theory that M-M-R II alone causes autism spectrum disorders, but they have
stated that they no longer intend to do so. The Vaccine Court has indicated that it intends to use
the evidence presented at these test case hearings to guide the adjudication of the remaining
autism spectrum disorder cases.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file ANDAs with the FDA
seeking to market generic forms of MSDs products prior to the expiration of relevant patents owned
by MSD. Generic pharmaceutical manufacturers have submitted ANDAs to the FDA seeking to market in
the United States generic forms of Fosamax, Nexium, Singulair, Emend and Cancidas prior to the
expiration of MSDs (and AstraZenecas in the case of Nexium) patents concerning these products. In
addition, an ANDA has been submitted to the FDA seeking to market in the United States a generic
form of Zetia and an ANDA has been submitted to the FDA seeking to market in the United States a
generic form of
26
Vytorin, both prior to the expiration of Schering-Ploughs patent concerning each product. The
generic companies ANDAs generally include allegations of non-infringement, invalidity and
unenforceability of the patents. MSD has filed patent infringement suits in federal court against
companies filing ANDAs for generic alendronate (Fosamax) and montelukast (Singulair) and
AstraZeneca and MSD have filed patent infringement suits in federal court against companies filing
ANDAs for generic esomeprazole (Nexium). Also, MSD and Schering-Plough have filed patent
infringement suits in federal court against companies filing ANDAs for generic versions of
ezetimibe (Zetia) and ezetimibe/simvastatin (Vytorin). Similar patent challenges exist in certain
foreign jurisdictions. MSD intends to vigorously defend its patents, which it believes are valid,
against infringement by generic companies attempting to market products prior to the expiration
dates 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.
In February 2007, Schering-Plough received a notice from a generic company indicating that it
had filed an ANDA for Zetia and that it is challenging the U.S. patents that are listed for Zetia.
Prior to the Merger, MSD marketed Zetia through a joint venture, MSP Singapore Company LLC. On
March 22, 2007, Schering-Plough and MSP Singapore Company LLC filed a patent infringement suit
against Glenmark Pharmaceuticals Inc., USA and its parent corporation (Glenmark). The lawsuit
automatically stays FDA approval of Glenmarks ANDA until October 2010 or until an adverse court
decision, if any, whichever may occur earlier. The trial in this matter is scheduled to commence on
May 3, 2010.
In
November 2009, MSDs Parent Company received notice from Mylan that it filed an
ANDA for ezetimibe/simvastatin and that it was challenging two patents listed
in the FDA Orange Book for Vytorin. On December 16, 2009, MSDs Parent
Company filed a patent infringement suit against Mylan. The lawsuit
automatically stays FDA approval of Mylans ANDA until May 2012 or until
an adverse court decision, if any, whichever may occur earlier.
As previously disclosed, in February 2007, MSD received a notice from Teva Pharmaceuticals,
Inc. (Teva), a generic company, indicating that it had filed an ANDA for montelukast and that it
is challenging the U.S. patent that is listed for Singulair. On April 2, 2007, MSD filed a patent
infringement action against Teva. A trial in this matter was held in February 2009. On August 19,
2009, the court issued a decision upholding the validity of MSDs Singulair patent and ordered that
Tevas ANDA could not be approved prior to expiry of MSDs exclusivity rights in August 2012. Teva
had appealed the decision, however, in January 2010, Teva withdrew its appeal of the trial courts
decision upholding the validity of MSDs Singulair patent. In addition, in May 2009, the United
States Patent and Trademark Office granted a petition by Article One Partners LLC to reexamine
MSDs Singulair patent. On December 15, 2009, the United States Patent and Trademark Office issued
a notice indicating that it will allow the claims of MSDs Singulair patent. Product exclusivity is
accordingly expected to be maintained until August 2012.
In May 2005, the Federal Court of Canada Trial Division issued a decision refusing to bar the
approval of generic alendronate on the grounds that MSDs patent for weekly alendronate was likely
invalid. This decision cannot be appealed and generic alendronate was launched in Canada in June
2005. In July 2005, MSD was sued in the Federal Court of Canada by Apotex Corp. (Apotex) seeking
damages for lost sales of generic weekly alendronate due to the patent proceeding. In October 2008,
the Federal Court of Canada issued a decision awarding Apotex its lost profits for its generic
alendronate product for the period of time that it was held off the market due to MSDs lawsuit. In
June 2009, the trial court decision was upheld in part and both companies sought leave to appeal to
the Supreme Court of Canada. In January 2010, the Supreme Court of Canada declined to hear the
appeal, leaving intact the decision that Apotex is entitled to damages for the discrete period of
time that its market entry was postponed due to the litigation launched by MSD.
As previously disclosed, in September 2004, MSD appealed a decision of the Opposition Division
of the European Patent Office (EPO) that revoked MSDs patent in Europe that covers the
once-weekly administration of alendronate. On March 14, 2006, the Board of Appeal of the EPO upheld
the decision of the Opposition Division revoking the patent. On March 28, 2007, the EPO issued
another patent in Europe to MSD that covers the once-weekly administration of alendronate. Under
its terms, this new patent is effective until July 2018. MSD has sued multiple parties in European
countries asserting its European patent covering once-weekly dosing of Fosamax. Decisions have been
rendered in the Netherlands and Belgium invalidating the patent in those countries. MSD has
appealed these decisions. Oppositions have been filed in the EPO against this patent. In a hearing
held March 17-19, 2009, the Opposition Division of the EPO issued an appealable decision revoking
this patent. MSD has appealed the decision.
In addition, as previously disclosed, in Japan after a proceeding was filed challenging the
validity of MSDs Japanese patent for the once-weekly administration of alendronate, the patent
office invalidated the patent. The decision is under appeal.
In October 2008, the U.S. patent for dorzolamide, covering both Trusopt and Cosopt, expired,
after which MSD experienced a significant decline in U.S. sales of these products. MSD is involved
in litigation proceedings of the corresponding patents in Canada and Great Britain and Germany. In
November 2009, the trial court in Great Britain issued a decision finding MSDs Cosopt patent
invalid. In Canada a trial was held in December 2009 regarding MSDs Canadian Trusopt and Cosopt
patents. MSD is awaiting a decision.
27
MSD and AstraZeneca received notice in October 2005 that Ranbaxy had filed an ANDA for
esomeprazole magnesium. The ANDA contains Paragraph IV challenges to patents on Nexium. In November
2005, MSD and AstraZeneca sued Ranbaxy in the U.S. District Court in New Jersey. As previously
disclosed, AstraZeneca, MSD and Ranbaxy have entered into a settlement agreement which provides
that Ranbaxy will not bring its generic esomeprazole product to market in the United States until
May 27, 2014. MSD and AstraZeneca each received a Civil Investigative Demand (CID) from the U.S.
Federal Trade Commission (FTC) in July 2008 regarding the settlement agreement with Ranbaxy. MSD
is cooperating with the FTC in responding to this CID.
MSD and AstraZeneca received notice in January 2006 that IVAX Pharmaceuticals, Inc. (IVAX),
subsequently acquired by Teva, had filed an ANDA for esomeprazole magnesium. The ANDA contains
Paragraph IV challenges to patents on Nexium. In March 2006, MSD and AstraZeneca sued Teva in the
U.S. District Court in New Jersey. On January 7, 2010, AstraZeneca, MSD and Teva/IVAX entered into
a settlement agreement which provides that Teva/IVAX will not bring its generic esomeprazole
product to market in the United States until May 27, 2014. In addition, in January 2008, MSD and
AstraZeneca sued Dr. Reddys Laboratories (Dr. Reddys) in the District Court in New Jersey based
on Dr. Reddys filing of an ANDA for esomeprazole magnesium. The trial, which had been scheduled
for January 2010 with respect to both IVAXs and Dr. Reddys ANDAs, has been postponed and no new
trial date has been set. Also, MSD and AstraZeneca received notice in December 2008 that Sandoz
Inc. (Sandoz) had filed an ANDA for esomeprazole magnesium. The ANDA contains Paragraph IV
challenges to patents on Nexium. In January 2009, MSD and AstraZeneca sued Sandoz in the District
Court in New Jersey based on Sandozs filing of an ANDA for esomeprazole magnesium. In addition,
MSD and AstraZeneca received notice in September 2009 that Lupin Ltd. (Lupin) had filed an ANDA
for esomeprazole magnesium. The ANDA contains Paragraph IV challenges to patents on Nexium. In
October 2009, MSD and AstraZeneca sued Lupin in the District Court in New Jersey based on Lupins
filing of an ANDA for esomeprazole magnesium.
In January 2009, MSD received notice from Sandoz that it had filed an ANDA and that it was
challenging five MSD patents listed in the FDA Orange Book for Emend. In February 2009, MSD filed a
patent infringement suit against Sandoz. The lawsuit automatically stays FDA approval of Sandozs
ANDA until July 2011 or until an adverse court decision, if any, whichever may occur earlier. The
case is scheduled to go to trial in December 2010.
In Europe, MSD is aware of various companies seeking registration for generic losartan (the
active ingredient for Cozaar and Hyzaar). MSD has patent rights to losartan via license from E.I.
du Pont de Nemours and Company (du Pont). MSD and du Pont have filed patent infringement
proceedings against various companies in Portugal, Spain, Norway, Finland, Belgium, the Netherlands
and Austria.
In October 2009, MSD received notice from Teva Parenteral Medicines (TPM) that it filed an
ANDA for caspofungin acetate and that it was challenging five patents listed in the FDA Orange Book
for Cancidas. On November 25, 2009, MSD filed a patent infringement suit against TPM. The lawsuit
automatically stays FDA approval of TPMs ANDA until April 2012 or until an adverse court decision,
if any, whichever may occur earlier.
Legal Proceedings Related to the Merger
In connection with the Merger, a class action lawsuit was brought against MSD challenging the
Merger and seeking other forms of relief. As previously disclosed, the lawsuit has been settled
pending court approval.
The settlement, if approved by the court, will resolve and release all claims that were or
could have been brought by any shareholder of MSD challenging any aspect of the proposed merger,
including any merger disclosure claims.
Other Litigation
There are various other legal proceedings, principally product liability and intellectual
property suits involving MSD, that are pending. While it is not feasible to predict the outcome of
such proceedings or the proceedings discussed in this Item, in the opinion of MSD, all such
proceedings are either adequately covered by insurance or, if not so covered, should not ultimately
result in any liability that would have a material adverse effect on the financial position,
liquidity or results of operations of MSD, other than proceedings for which a separate assessment
is provided in this Item.
28
Environmental Matters
MSD and its subsidiaries are parties to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund,
and other federal and state equivalents. These proceedings seek to require the operators of
hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous
waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup
costs. MSD has been made a party to these proceedings as an alleged generator of waste disposed of
at the sites. In each case, the government alleges that the defendants are jointly and severally
liable for the cleanup costs. Although joint and several liability is alleged, these proceedings
are frequently resolved so that the allocation of cleanup costs among the parties more nearly
reflects the relative contributions of the parties to the site situation. MSDs potential liability
varies greatly from site to site. For some sites the potential liability is de minimis and for
others the final costs of cleanup have not yet been determined. While it is not feasible to predict
the outcome of many of these proceedings brought by federal or state agencies or private litigants,
in the opinion of MSD, such proceedings should not ultimately result in any liability which would
have a material adverse effect on the financial position, results of operations, liquidity or
capital resources of MSD. MSD has taken an active role in identifying and providing for these costs
and such amounts do not include any reduction for anticipated recoveries of cleanup costs from
former site owners or operators or other recalcitrant potentially responsible parties.
As previously disclosed, approximately 2,200 plaintiffs have filed an amended complaint
against MSD and 12 other defendants in U.S. District Court, Eastern District of California
asserting claims under the Clean Water Act, the Resource Conservation and Recovery Act, as well as
negligence and nuisance. The suit seeks damages for personal injury, diminution of property value,
medical monitoring and other alleged real and personal property damage associated with groundwater
and soil contamination found at the site of a former MSD subsidiary in Merced, California. MSD
intends to defend itself against these claims.
In managements opinion, the liabilities for all environmental matters that are probable and
reasonably estimable have been accrued and totaled $72.7 million and $89.5 million at December 31,
2009 and 2008, respectively. These liabilities are undiscounted, do not consider potential
recoveries from other parties and will be paid out over the periods of remediation for the
applicable sites, which are expected to occur primarily over the next 15 years. Although it is not
possible to predict with certainty the outcome of these matters, or the ultimate costs of
remediation, management does not believe that any reasonably possible expenditures that may be
incurred in excess of the liabilities accrued should exceed $70.0 million in the aggregate.
Management also does not believe that these expenditures should result in a material adverse effect
on MSDs financial position, results of operations, liquidity or capital resources for any year.
29
PART II
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|
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Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. |
All of the common stock of MSD is owned by MSDs Parent Company. As a result, there is no
established public market for our common stock.
The following table sets forth, for the calendar periods indicated, the dividend per share
information.
Cash Dividends Paid per Common Share
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Year |
|
4th Q |
|
3rd Q |
|
2nd Q |
|
1st Q |
|
2009 |
|
$ |
1.52 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
2008 |
|
$ |
1.52 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
Performance Graph
The following graph compares the cumulative total shareholder return (stock price appreciation
plus reinvested dividends) on MSDs Common Stock with the cumulative total return (including
reinvested dividends) of the Dow Jones US Pharmaceutical Index (DJUSPR), formerly referred to as
the Dow Jones Pharmaceutical Index United States Owned Companies, and the Standard & Poors 500
Index (S&P 500) for the period from December 31, 2004 through October 31, 2009. Amounts below
have been rounded to the nearest dollar or percent.
Comparison of Five-Year Cumulative Total Return*
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End of |
|
2009/2004 |
|
|
Period Value |
|
CAGR** |
MSD |
|
$ |
118 |
|
|
|
3 |
% |
DJUSPR |
|
|
103 |
|
|
|
1 |
|
S&P 500 |
|
|
95 |
|
|
|
-1 |
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2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
MSD |
|
|
|
100.00 |
|
|
|
|
104.06 |
|
|
|
|
148.47 |
|
|
|
|
203.90 |
|
|
|
|
111.51 |
|
|
|
|
118.03 |
|
|
|
DJUSPR |
|
|
|
100.00 |
|
|
|
|
98.35 |
|
|
|
|
112.50 |
|
|
|
|
117.52 |
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|
96.19 |
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|
103.00 |
|
|
|
S&P 500 |
|
|
|
100.00 |
|
|
|
|
104.91 |
|
|
|
|
121.46 |
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|
|
|
128.13 |
|
|
|
|
80.73 |
|
|
|
|
94.50 |
|
|
|
|
|
|
* |
|
Assumes that the value of the investment in MSD Common Stock and each
index was $100 on December 31, 2004 and that all dividends were reinvested. |
|
** |
|
Compound Annual Growth Rate from December 31, 2004 through October 31, 2009 |
30
Item 6. Selected Financial Data.
The information required by this Item is incorporated by reference to the discussion in
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Description of MSDs Business
On November 3, 2009, Merck & Co., Inc. (MSD) and Schering-Plough Corporation
(Schering-Plough) completed their previously-announced merger (the Merger). In the Merger,
Schering-Plough acquired all of the shares of MSD, which became a wholly-owned subsidiary of
Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the
surviving public company and was renamed Merck & Co., Inc. (MSDs Parent Company).
MSD is a global health care company that delivers innovative health solutions through its
medicines and vaccines, which are marketed directly and through joint ventures. Human health
pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. These human health pharmaceutical products are sold primarily to drug
wholesalers and retailers, hospitals, government agencies and managed health care providers such as
health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine
products consist of preventative pediatric, adolescent and adult vaccines, primarily administered
at physician offices. These human health vaccines are sold primarily to physicians, wholesalers,
physician distributors and government entities. MSDs professional representatives communicate the
effectiveness, safety and value of its pharmaceutical and vaccine products to health care
professionals in private practice, group practices and managed care organizations.
Operating Results
Sales
MSDs worldwide sales totaled $23.6 billion for 2009, a decrease of 1% compared with 2008.
Foreign exchange unfavorably affected global sales performance by 2%. The revenue decline over 2008
largely reflects lower sales of Fosamax for the treatment and prevention of osteoporosis. Fosamax
and Fosamax Plus D lost market exclusivity for substantially all formulations in the United States
in February 2008 and April 2008, respectively. Revenue was also negatively affected by lower sales
of Gardasil, a vaccine to help prevent cervical, vulvar and vaginal cancers, precancerous or
dysplastic lesions, and genital warts caused by human papillomavirus types 6, 11, 16 and 18,
Cosopt/Trusopt, ophthalmic products which lost U.S. market exclusivity in October 2008, and lower
revenue from MSDs relationship with AstraZeneca LP (AZLP). Other products experiencing declines
include RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and
children, Zocor, a statin for modifying cholesterol, and Primaxin for the treatment of bacterial
infections. These declines were largely offset by growth in Januvia and Janumet for the treatment
of type 2 diabetes, Isentress, an antiretroviral therapy for the treatment of HIV infection,
Singulair, a medicine indicated for the chronic treatment of asthma and the relief of symptoms of
allergic rhinitis, Varivax, a vaccine to help prevent chickenpox (varicella), and Pneumovax, a
vaccine to help prevent pneumococcal disease.
31
Sales of MSDs products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
2009 |
|
2008 |
|
2007 |
|
Bone, Respiratory, Immunology and Dermatology |
|
|
|
|
|
|
|
|
|
|
|
|
Singulair |
|
$ |
4,659.7 |
|
|
$ |
4,336.9 |
|
|
$ |
4,266.3 |
|
Fosamax |
|
|
1,099.8 |
|
|
|
1,552.7 |
|
|
|
3,049.0 |
|
Propecia |
|
|
440.3 |
|
|
|
429.1 |
|
|
|
405.4 |
|
Arcoxia |
|
|
357.5 |
|
|
|
377.3 |
|
|
|
329.1 |
|
Cardiovascular |
|
|
|
|
|
|
|
|
|
|
|
|
Vytorin(1) |
|
|
82.2 |
|
|
|
84.2 |
|
|
|
84.3 |
|
Zetia(1) |
|
|
5.2 |
|
|
|
6.4 |
|
|
|
6.5 |
|
Diabetes and Obesity |
|
|
|
|
|
|
|
|
|
|
|
|
Januvia |
|
|
1,922.1 |
|
|
|
1,397.1 |
|
|
|
667.5 |
|
Janumet |
|
|
658.4 |
|
|
|
351.1 |
|
|
|
86.4 |
|
Infectious Disease |
|
|
|
|
|
|
|
|
|
|
|
|
Isentress |
|
|
751.8 |
|
|
|
361.1 |
|
|
|
41.3 |
|
Primaxin |
|
|
688.9 |
|
|
|
760.4 |
|
|
|
763.5 |
|
Cancidas |
|
|
616.7 |
|
|
|
596.4 |
|
|
|
536.9 |
|
Invanz |
|
|
292.9 |
|
|
|
265.0 |
|
|
|
190.2 |
|
Crixivan/Stocrin |
|
|
206.1 |
|
|
|
275.1 |
|
|
|
310.2 |
|
Mature Brands |
|
|
|
|
|
|
|
|
|
|
|
|
Cozaar/Hyzaar |
|
|
3,560.7 |
|
|
|
3,557.7 |
|
|
|
3,350.1 |
|
Zocor |
|
|
558.4 |
|
|
|
660.1 |
|
|
|
876.5 |
|
Vasotec/Vaseretic |
|
|
310.8 |
|
|
|
356.7 |
|
|
|
494.6 |
|
Proscar |
|
|
290.9 |
|
|
|
323.5 |
|
|
|
411.0 |
|
Neurosciences and Ophthalmology |
|
|
|
|
|
|
|
|
|
|
|
|
Maxalt |
|
|
574.5 |
|
|
|
529.2 |
|
|
|
467.3 |
|
Cosopt/Trusopt |
|
|
503.5 |
|
|
|
781.2 |
|
|
|
786.8 |
|
Oncology |
|
|
|
|
|
|
|
|
|
|
|
|
Emend |
|
|
313.1 |
|
|
|
259.7 |
|
|
|
201.7 |
|
Vaccines(2) |
|
|
|
|
|
|
|
|
|
|
|
|
ProQuad/M-M-R II/Varivax |
|
|
1,368.5 |
|
|
|
1,268.5 |
|
|
|
1,347.1 |
|
Gardasil |
|
|
1,118.4 |
|
|
|
1,402.8 |
|
|
|
1,480.6 |
|
RotaTeq |
|
|
521.9 |
|
|
|
664.5 |
|
|
|
524.7 |
|
Pneumovax |
|
|
345.6 |
|
|
|
249.3 |
|
|
|
233.2 |
|
Zostavax |
|
|
277.4 |
|
|
|
312.4 |
|
|
|
236.0 |
|
Other pharmaceutical(3) |
|
|
667.1 |
|
|
|
922.9 |
|
|
|
1,136.6 |
|
Other (4) |
|
|
1,450.8 |
|
|
|
1,769.0 |
|
|
|
1,914.9 |
|
|
|
|
$ |
23,643.2 |
|
|
$ |
23,850.3 |
|
|
$ |
24,197.7 |
|
|
|
|
|
(1) |
|
Sales of Zetia and Vytorin reflect MSDs sales of these products in Latin
America which was not part of the Merck/Schering-Plough partnership. |
|
(2) |
|
These amounts do not reflect sales of vaccines sold in most major European markets
through MSDs joint venture, Sanofi Pasteur MSD, the results of which are reflected in Equity
income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur MSD. |
|
(3) |
|
Other pharmaceutical primarily includes sales of other human pharmaceutical
products, including products within the franchises not listed separately. |
|
(4) |
|
Reflects revenue from MSDs relationship with AZLP primarily relating to sales of
Nexium, as well as Prilosec. Revenue from AZLP was $1.4 billion, $1.6 billion and $1.7 billion
in 2009, 2008 and 2007, respectively. |
Materials and Production
In 2009, materials and production costs were $5.6 billion, comparable with 2008. Included in
materials and production costs in 2009 and 2008 were $101.3 million and $123.2 million,
respectively, of costs associated with restructuring activities, substantially all of which
represents accelerated depreciation associated with the planned sale or closure of manufacturing
facilities. (See Note 4 to the consolidated financial statements.)
Marketing and Administrative
Marketing and administrative expenses declined 1% in 2009 driven largely by initiatives to
reduce the cost base, which were in place prior to the consummation of the Merger. Separation costs
associated with sales force reductions have been incurred and are reflected in Restructuring costs
as discussed below. In addition, marketing and administrative expenses benefited from foreign
exchange. These reductions in marketing and administrative costs were partially offset by
$259.8 million of merger-related costs that were recognized in 2009 consisting of transaction costs
directly related to the Merger (including advisory and legal fees) and integration costs.
Additionally, marketing and administrative expenses in
32
2009 and 2008 included $75 million and $62 million, respectively, of additional reserves
solely for future Vioxx legal defense costs. Expenses in both 2009 and 2008 also reflect
$40 million of additional reserves solely for future legal defense costs for Fosamax litigation.
(See Note 12 to the consolidated financial statements for more information on Vioxx and Fosamax
litigation related matters).
Research and Development
Research and development expenses increased 7% in 2009 as compared with 2008. The increase
was due in part to higher costs associated with restructuring activities, which were $231.6 million
in 2009 and $128.4 million in 2008, including costs for the closure or sale of research facilities,
substantially all of which represent accelerated depreciation. (See Note 4 to the consolidated
financial statements.) In addition, research and development expenses in 2009 as compared with 2008
reflect an increase in development spending in support of the continued advancement of the research
pipeline, including investments in late-stage clinical trials.
Restructuring Costs
Restructuring costs were $545.6 million in 2009 and $1.0 billion in 2008. In February 2010,
MSDs Parent Company announced the first phase of a new global restructuring program (the Merger
Restructuring Program) in conjunction with the integration of legacy MSD and legacy
Schering-Plough businesses. Of the restructuring costs recorded in 2009, $367.4 million related to
the Merger Restructuring Program. The remaining costs recognized in 2009 and all of the costs
recognized in 2008 related other previously announced restructuring programs. In 2009 and 2008,
separation costs of $380.7 million and $957.3 million, respectively, were incurred associated with
actual headcount reductions, as well as estimated expenses under existing severance programs for
headcount reductions that were probable and could be reasonably estimated. Approximately 3,185
positions were eliminated in 2009 and 5,800 positions were eliminated in 2008 associated with
restructuring activities. These position eliminations are comprised of actual headcount reductions,
and the elimination of contractors and vacant positions. Also included in restructuring costs are
curtailment, settlement and termination charges on pension and other postretirement benefit plans
and shutdown costs. Additional costs associated with restructuring activities are included in
Materials and production costs and Research and development expenses.
Equity Income from Affiliates
Equity income from affiliates reflects the performance of MSDs joint ventures and
partnerships. Equity from affiliates declined to $2.5 billion in 2009 from $2.6 billion in 2008
primarily driven by lower equity income from the Merck/Schering-Plough partnership, and decreased
equity income from Merial Limited (Merial) due to the sale of MSDs interest in September 2009,
partially offset by higher partnership returns from AZLP.
Other (Income) Expense, Net
Included in other (income) expense, net in 2009 was a $3.2 billion gain recognized on the sale
of MSDs interest in Merial (see Note 10 to the consolidated financial statements). Also included
in other (income) expense, net in 2009 was $231 million of investment portfolio recognized net
gains, and an $80 million charge related to the settlement of Vioxx third-party payor litigation in
the United States (see Note 12 to the consolidated financial statements). Included in other
(income) expense, net in 2008 was an aggregate gain on distribution from AZLP of $2.2 billion (see
Note 10 to the consolidated financial statements), a gain of $249 million related to the sale of
the remaining worldwide rights to Aggrastat, a $300 million expense for a contribution to the Merck
Company Foundation, $117 million of investment portfolio recognized net losses and a $58 million
charge related to the resolution of an investigation into whether MSD violated state consumer
protection laws with respect to the sales and marketing of Vioxx. MSD experienced a decline in
interest income in 2009 as compared with 2008 primarily as a result of lower interest rates and a
change in the investment portfolio mix toward cash and shorter-dated securities in anticipation of
the Merger. MSD recognized higher interest expense in 2009 largely due to $174 million of
commitment fees and incremental interest expense related to the financing of the Merger.
Taxes on Income
The effective income tax rate was 25.4% in 2009 and 20.1% in 2008. The effective income tax
rate in 2009 benefited from 2009 tax settlements, including the previously announced settlement
with the Canada Revenue Agency (CRA). These favorable impacts were partially offset by the
unfavorable effect of the gain on the sale of MSDs interest in Merial being taxable in the United
States at a combined federal and state tax rate of approximately 38.0%. The 2008 effective tax rate
reflects favorable impacts relating to tax settlements, the realization of foreign tax credits and
the favorable tax impact of foreign exchange rate changes, particularly the strengthening of the
Japanese yen against the U.S. dollar, partially offset by an unfavorable impact resulting from the
AZLP gain being fully taxable in the United States at a combined federal and state tax rate of
approximately 36.3%.
33
Net Income
Net income attributable to Merck Sharp & Dohme Corp. was $8.0 billion in 2009 compared with
$7.8 billion in 2008. The increase in net income was largely driven by the gain recorded on the
sale of MSDs interest in Merial and lower restructuring costs, partially offset by merger-related
costs and higher research and development expenses.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information required by this Item is incorporated by reference to the discussion in
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data.
(a) Financial Statements
The consolidated balance sheet of Merck Sharp & Dohme Corp. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated statements of income, of equity and of
cash flows for each of the three years in the period ended December 31, 2009, the notes to
consolidated financial statements, and the report dated March 29, 2010 of PricewaterhouseCoopers
LLP, independent registered public accounting firm, are as follows:
Consolidated Statement of Income
Merck Sharp & Dohme Corp. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
Sales |
|
$ |
23,643.2 |
|
|
$ |
23,850.3 |
|
|
$ |
24,197.7 |
|
|
Costs, Expenses and Other |
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production |
|
|
5,590.8 |
|
|
|
5,582.5 |
|
|
|
6,140.7 |
|
Marketing and administrative |
|
|
7,323.8 |
|
|
|
7,377.0 |
|
|
|
7,556.7 |
|
Research and development |
|
|
5,139.2 |
|
|
|
4,805.3 |
|
|
|
4,882.8 |
|
Restructuring costs |
|
|
545.6 |
|
|
|
1,032.5 |
|
|
|
327.1 |
|
Equity income from affiliates |
|
|
(2,503.0 |
) |
|
|
(2,560.6 |
) |
|
|
(2,976.5 |
) |
U.S. Vioxx Settlement Agreement charge |
|
|
|
|
|
|
|
|
|
|
4,850.0 |
|
Other (income) expense, net |
|
|
(3,275.8 |
) |
|
|
(2,318.1 |
) |
|
|
(75.2 |
) |
|
|
|
|
12,820.6 |
|
|
|
13,918.6 |
|
|
|
20,705.6 |
|
|
Income Before Taxes |
|
|
10,822.6 |
|
|
|
9,931.7 |
|
|
|
3,492.1 |
|
Taxes on Income |
|
|
2,747.5 |
|
|
|
1,999.4 |
|
|
|
95.3 |
|
|
Net Income |
|
|
8,075.1 |
|
|
|
7,932.3 |
|
|
|
3,396.8 |
|
|
Less: Net Income Attributable to Noncontrolling Interests |
|
|
122.8 |
|
|
|
123.9 |
|
|
|
121.4 |
|
|
Net Income Attributable to Merck Sharp & Dohme Corp. |
|
$ |
7,952.3 |
|
|
$ |
7,808.4 |
|
|
$ |
3,275.4 |
|
|
The accompanying notes are an integral part of this consolidated financial statement.
34
Consolidated Balance Sheet
Merck Sharp & Dohme Corp. and Subsidiaries
December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,632.8 |
|
|
$ |
4,368.3 |
|
Short-term investments |
|
|
293.1 |
|
|
|
1,118.1 |
|
Accounts receivable (net of allowance for doubtful accounts of $39.9 in 2009 and $58.5 in 2008) |
|
|
3,280.5 |
|
|
|
2,907.7 |
|
Inventories (excludes inventories of $709.9 in 2009 and $587.3 in
2008 classified in Other assets see Note 8) |
|
|
2,147.7 |
|
|
|
2,091.0 |
|
Deferred income taxes and other current assets |
|
|
2,100.7 |
|
|
|
8,627.5 |
|
Receivables from affiliates |
|
|
1,032.7 |
|
|
|
|
|
|
Total current assets |
|
|
15,487.5 |
|
|
|
19,112.6 |
|
|
Investments |
|
|
430.3 |
|
|
|
6,491.3 |
|
|
Property, Plant and Equipment (at cost) |
|
|
|
|
|
|
|
|
Land |
|
|
325.3 |
|
|
|
386.1 |
|
Buildings |
|
|
9,618.9 |
|
|
|
9,767.4 |
|
Machinery, equipment and office furnishings |
|
|
13,002.9 |
|
|
|
13,103.7 |
|
Construction in progress |
|
|
1,231.7 |
|
|
|
871.0 |
|
|
|
|
|
24,178.8 |
|
|
|
24,128.2 |
|
Less allowance for depreciation |
|
|
12,526.0 |
|
|
|
12,128.6 |
|
|
|
|
|
11,652.8 |
|
|
|
11,999.6 |
|
|
Goodwill |
|
|
1,439.0 |
|
|
|
1,438.7 |
|
|
Other Intangibles, Net |
|
|
523.2 |
|
|
|
525.4 |
|
|
Receivables from Affiliates |
|
|
7,067.5 |
|
|
|
|
|
|
Other Assets |
|
|
5,149.4 |
|
|
|
7,628.1 |
|
|
|
|
$ |
41,749.7 |
|
|
$ |
47,195.7 |
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt |
|
$ |
450.5 |
|
|
$ |
2,297.1 |
|
Trade accounts payable |
|
|
646.8 |
|
|
|
617.6 |
|
Accrued and other current liabilities |
|
|
5,477.3 |
|
|
|
9,174.1 |
|
Income taxes payable |
|
|
583.7 |
|
|
|
1,426.4 |
|
Dividends payable |
|
|
|
|
|
|
803.5 |
|
Payables to affiliates |
|
|
859.5 |
|
|
|
|
|
|
Total current liabilities |
|
|
8,017.8 |
|
|
|
14,318.7 |
|
|
Long-Term Debt |
|
|
8,067.8 |
|
|
|
3,943.3 |
|
|
Deferred Income Taxes and Noncurrent Liabilities |
|
|
7,382.4 |
|
|
|
7,766.6 |
|
|
Merck Sharp & Dohme Corp. Stockholders Equity |
|
|
|
|
|
|
|
|
Contributed capital |
|
|
8,683.2 |
|
|
|
8,348.9 |
|
Retained earnings |
|
|
37,641.8 |
|
|
|
43,698.8 |
|
Accumulated other comprehensive loss |
|
|
(2,565.6 |
) |
|
|
(2,553.9 |
) |
|
|
|
|
43,759.4 |
|
|
|
49,493.8 |
|
Less: |
|
|
|
|
|
|
|
|
Receivables from MSDs Parent Company |
|
|
8,809.7 |
|
|
|
|
|
Investment in MSDs Parent Company |
|
|
19,080.2 |
|
|
|
|
|
Treasury stock, at cost, 875,818,333 shares |
|
|
|
|
|
|
30,735.5 |
|
|
Total Merck Sharp & Dohme Corp. stockholders equity |
|
|
15,869.5 |
|
|
|
18,758.3 |
|
|
Noncontrolling Interests |
|
|
2,412.2 |
|
|
|
2,408.8 |
|
|
Total equity |
|
|
18,281.7 |
|
|
|
21,167.1 |
|
|
|
|
$ |
41,749.7 |
|
|
$ |
47,195.7 |
|
|
The accompanying notes are an integral part of this consolidated financial statement.
35
Consolidated Statement of Equity
Merck Sharp & Dohme Corp. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
MSDs Parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Receivables |
|
Company / |
|
Non- |
|
|
|
|
Contributed |
|
Retained |
|
Comprehensive |
|
from MSDs Parent |
|
Treasury |
|
controlling |
|
|
|
|
Capital |
|
Earnings |
|
Loss |
|
Company |
|
Stock |
|
Interests |
|
Total |
|
Balance at January 1, 2007 |
|
$ |
7,196.3 |
|
|
$ |
39,095.1 |
|
|
$ |
(1,164.3 |
) |
|
$ |
|
|
|
$ |
(27,567.4 |
) |
|
$ |
2,406.1 |
|
|
$ |
19,965.8 |
|
|
Net income attributable to
Merck Sharp & Dohme Corp. |
|
|
|
|
|
|
3,275.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,275.4 |
|
|
Total other comprehensive
income, net of tax |
|
|
|
|
|
|
|
|
|
|
338.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338.2 |
|
Comprehensive income, net of
tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,613.6 |
|
|
Cumulative effect of adoption
of guidance on accounting for
unrecognized tax benefits |
|
|
|
|
|
|
81.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.0 |
|
Cash dividends declared on
common stock ($1.52 per share) |
|
|
|
|
|
|
(3,310.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,310.7 |
) |
Treasury stock shares purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,429.7 |
) |
|
|
|
|
|
|
(1,429.7 |
) |
Acquisition of NovaCardia, Inc. |
|
|
366.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366.4 |
|
Net income attributable to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121.4 |
|
|
|
121.4 |
|
Distributions attributable to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120.8 |
) |
|
|
(120.8 |
) |
Share-based compensation plans
and other |
|
|
482.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
822.4 |
|
|
|
|
|
|
|
1,304.4 |
|
|
Balance at December 31, 2007 |
|
|
8,044.7 |
|
|
|
39,140.8 |
|
|
|
(826.1 |
) |
|
|
|
|
|
|
(28,174.7 |
) |
|
|
2,406.7 |
|
|
|
20,591.4 |
|
|
Net income attributable to
Merck Sharp & Dohme Corp. |
|
|
|
|
|
|
7,808.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,808.4 |
|
Total other comprehensive
loss, net of tax |
|
|
|
|
|
|
|
|
|
|
(1,727.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,727.8 |
) |
|
Comprehensive income, net of
tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,080.6 |
|
|
Cash dividends declared on
common stock ($1.52 per share) |
|
|
|
|
|
|
(3,250.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,250.4 |
) |
Treasury stock shares purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,725.0 |
) |
|
|
|
|
|
|
(2,725.0 |
) |
Net income attributable to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123.9 |
|
|
|
123.9 |
|
Distributions attributable to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121.8 |
) |
|
|
(121.8 |
) |
Share-based compensation plans
and other |
|
|
304.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164.2 |
|
|
|
|
|
|
|
468.4 |
|
|
Balance at December 31, 2008 |
|
|
8,348.9 |
|
|
|
43,698.8 |
|
|
|
(2,553.9 |
) |
|
|
|
|
|
|
(30,735.5 |
) |
|
|
2,408.8 |
|
|
|
21,167.1 |
|
|
Net income attributable to
Merck Sharp & Dohme Corp. |
|
|
|
|
|
|
7,952.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,952.3 |
|
Total other comprehensive
loss, net of tax |
|
|
|
|
|
|
|
|
|
|
(11.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.7 |
) |
|
Comprehensive income, net of
tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,940.6 |
|
|
Cancellations of treasury stock |
|
|
(4.9 |
) |
|
|
(11,595.4 |
) |
|
|
|
|
|
|
|
|
|
|
11,600.3 |
|
|
|
|
|
|
|
|
|
Cash dividends declared on
common stock ($1.52 per share) |
|
|
|
|
|
|
(2,413.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,413.9 |
) |
Receivables from MSDs Parent Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,809.7 |
) |
|
|
|
|
|
|
|
|
|
|
(8,809.7 |
) |
Net income attributable to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.8 |
|
|
|
122.8 |
|
Distributions attributable to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120.0 |
) |
|
|
(120.0 |
) |
Share-based compensation plans
and other |
|
|
339.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.0 |
|
|
|
0.6 |
|
|
|
394.8 |
|
|
Balance at December 31, 2009 |
|
$ |
8,683.2 |
|
|
$ |
37,641.8 |
|
|
$ |
(2,565.6 |
) |
|
$ |
(8,809.7 |
) |
|
$ |
(19,080.2 |
) |
|
$ |
2,412.2 |
|
|
$ |
18,281.7 |
|
|
The accompanying notes are an integral part of this consolidated financial statement.
36
Consolidated Statement of Cash Flows
Merck Sharp & Dohme Corp. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,075.1 |
|
|
$ |
7,932.3 |
|
|
$ |
3,396.8 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposition of interest in Merial Limited |
|
|
(3,162.5 |
) |
|
|
|
|
|
|
|
|
Gain on distribution from AstraZeneca LP |
|
|
|
|
|
|
(2,222.7 |
) |
|
|
|
|
Equity income from affiliates |
|
|
(2,503.0 |
) |
|
|
(2,560.6 |
) |
|
|
(2,976.5 |
) |
Dividends and distributions from equity affiliates |
|
|
2,030.9 |
|
|
|
4,289.6 |
|
|
|
2,485.6 |
|
U.S. Vioxx Settlement Agreement charge |
|
|
|
|
|
|
|
|
|
|
4,850.0 |
|
Depreciation and amortization |
|
|
1,662.2 |
|
|
|
1,631.2 |
|
|
|
1,988.2 |
|
Deferred income taxes |
|
|
2,168.5 |
|
|
|
530.1 |
|
|
|
(1,781.9 |
) |
Share-based compensation |
|
|
376.0 |
|
|
|
348.0 |
|
|
|
330.2 |
|
In-process research and development |
|
|
|
|
|
|
|
|
|
|
325.1 |
|
Taxes paid for Internal Revenue Service settlement |
|
|
|
|
|
|
|
|
|
|
(2,788.1 |
) |
Other |
|
|
(514.8 |
) |
|
|
607.8 |
|
|
|
(186.1 |
) |
Net changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(372.8 |
) |
|
|
(889.4 |
) |
|
|
(290.7 |
) |
Inventories |
|
|
(195.5 |
) |
|
|
(452.1 |
) |
|
|
(40.7 |
) |
Trade accounts payable |
|
|
23.7 |
|
|
|
|
|
|
|
117.7 |
|
Accrued and other current liabilities |
|
|
(3,981.6 |
) |
|
|
(1,710.9 |
) |
|
|
451.1 |
|
Income taxes payable |
|
|
(128.9 |
) |
|
|
(465.3 |
) |
|
|
987.2 |
|
Noncurrent liabilities |
|
|
(155.9 |
) |
|
|
(108.0 |
) |
|
|
26.2 |
|
Other |
|
|
63.4 |
|
|
|
(358.3 |
) |
|
|
105.1 |
|
|
Net Cash Provided by Operating Activities |
|
|
3,384.8 |
|
|
|
6,571.7 |
|
|
|
6,999.2 |
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,294.3 |
) |
|
|
(1,298.3 |
) |
|
|
(1,011.0 |
) |
Purchases of securities and other investments |
|
|
(3,070.8 |
) |
|
|
(11,967.3 |
) |
|
|
(10,132.7 |
) |
Proceeds from sales of securities and other investments |
|
|
10,713.8 |
|
|
|
11,065.8 |
|
|
|
10,860.2 |
|
Proceeds from sale of interest in Merial Limited |
|
|
4,000.0 |
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired |
|
|
(130.0 |
) |
|
|
|
|
|
|
(1,135.9 |
) |
Distribution from AstraZeneca LP |
|
|
|
|
|
|
1,899.3 |
|
|
|
|
|
Decrease (increase) in restricted assets |
|
|
5,474.3 |
|
|
|
(1,629.7 |
) |
|
|
(1,401.1 |
) |
Loans to affiliates |
|
|
(7,789.8 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
33.8 |
|
|
|
95.8 |
|
|
|
10.5 |
|
|
Net Cash Provided by (Used by) Investing Activities |
|
|
7,937.0 |
|
|
|
(1,834.4 |
) |
|
|
(2,810.0 |
) |
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings |
|
|
(1,094.9 |
) |
|
|
1,859.9 |
|
|
|
11.4 |
|
Proceeds from issuance of debt |
|
|
4,228.0 |
|
|
|
|
|
|
|
|
|
Payments on debt |
|
|
(25.3 |
) |
|
|
(1,392.0 |
) |
|
|
(1,195.3 |
) |
Purchases of treasury stock |
|
|
|
|
|
|
(2,725.0 |
) |
|
|
(1,429.7 |
) |
Dividends paid to stockholders |
|
|
(3,215.0 |
) |
|
|
(3,278.5 |
) |
|
|
(3,307.3 |
) |
Other dividends paid |
|
|
(120.0 |
) |
|
|
(121.8 |
) |
|
|
(120.8 |
) |
Receivables from MSDs Parent Company |
|
|
(8,809.7 |
) |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
38.5 |
|
|
|
102.3 |
|
|
|
898.6 |
|
Other |
|
|
(124.3 |
) |
|
|
32.6 |
|
|
|
277.0 |
|
|
Net Cash Used by Financing Activities |
|
|
(9,122.7 |
) |
|
|
(5,522.5 |
) |
|
|
(4,866.1 |
) |
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
|
65.4 |
|
|
|
(182.6 |
) |
|
|
98.3 |
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
2,264.5 |
|
|
|
(967.8 |
) |
|
|
(578.6 |
) |
Cash and Cash Equivalents at Beginning of Year |
|
|
4,368.3 |
|
|
|
5,336.1 |
|
|
|
5,914.7 |
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
6,632.8 |
|
|
$ |
4,368.3 |
|
|
$ |
5,336.1 |
|
|
The accompanying notes are an integral part of this consolidated financial statement.
37
Notes to Consolidated Financial Statements
Merck Sharp & Dohme Corp. and Subsidiaries
($ in millions except per share amounts)
1. Nature of Operations
On November 3, 2009, Merck & Co., Inc. (MSD) and Schering-Plough Corporation
(Schering-Plough) completed their previously-announced merger (the Merger). In the Merger,
Schering-Plough acquired all of the shares of MSD, which became a wholly-owned subsidiary of
Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the
surviving public company and was renamed Merck & Co., Inc. (MSDs Parent Company). MSD is a
global health care company that delivers innovative health solutions through its medicines and
vaccines, which are marketed directly and through joint ventures. Human health pharmaceutical
products consist of therapeutic and preventive agents, sold by prescription, for the treatment of
human disorders. These human health pharmaceutical products are sold primarily to drug wholesalers
and retailers, hospitals, government agencies and managed health care providers such as health
maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products
consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician
offices. These human health vaccines are sold primarily to physicians, wholesalers, physician
distributors and government entities. MSDs professional representatives communicate the
effectiveness, safety and value of its pharmaceutical and vaccine products to health care
professionals in private practice, group practices and managed care organizations.
2. Summary of Accounting Policies
Principles of Consolidation The consolidated financial statements include the accounts of
MSD and all of its subsidiaries in which a controlling interest is maintained. Intercompany
balances and transactions are eliminated. Controlling interest is determined by majority ownership
interest and the absence of substantive third-party participating rights or, in the case of
variable interest entities, by majority exposure to expected losses, residual returns or both. For
those consolidated subsidiaries where MSD ownership is less than 100%, the outside shareholders
interests are shown as Noncontrolling interests in equity. Investments in affiliates over which MSD
has significant influence but not a controlling interest, such as interests in entities owned
equally by MSD and a third party that are under shared control, are carried on the equity basis.
Mergers and Acquisitions On January 1, 2009, new guidance issued by the Financial Accounting
Standards Board (FASB) was adopted which changes the way in which the acquisition method is to be
applied in a business combination. The acquisition method of accounting requires that the assets
acquired and liabilities assumed be recorded at the date of the merger or acquisition at their
respective fair values with limited exceptions. Assets acquired and liabilities assumed in a
business combination that arise from contingencies are recognized at fair value if fair value can
reasonably be estimated. If the acquisition date fair value of an asset acquired or liability
assumed that arises from a contingency cannot be determined, the asset or liability is recognized
if probable and reasonably estimable; if these criteria are not met, no asset or liability is
recognized. Fair value is defined as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date.
Accordingly, MSD may be required to value assets at fair value measures that do not reflect MSDs
intended use of those assets. Any excess of the purchase price (consideration transferred) over the
estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs
to restructure the acquired company are expensed as incurred. The operating results of the acquired
business are reflected in MSDs consolidated financial statements and results of operations after
the date of the merger or acquisition. If MSD determines the assets acquired do not meet the
definition of a business under the acquisition method of accounting, the transaction will be
accounted for as an acquisition of assets rather than a business combination, and therefore, no
goodwill will be recorded.
Foreign Currency Translation The U.S. dollar is the functional currency for MSDs foreign
subsidiaries.
Cash Equivalents Cash equivalents are comprised of certain highly liquid investments with
original maturities of less than three months.
Inventories Inventories are valued at the lower of cost or market. The cost of a substantial
majority of domestic pharmaceutical and vaccine inventories is determined using the last-in,
first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other
inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of
currently marketed products and certain products awaiting regulatory approval. In evaluating the
recoverability of inventories produced in preparation for product launches, MSD considers the
probability that revenue will be obtained from the future sale of the related inventory together
with the status of the product within the regulatory approval process.
38
Investments Investments in marketable debt and equity securities classified as
available-for-sale are reported at fair value. Fair value of MSDs investments is determined using
quoted market prices in active markets for identical assets or liabilities or quoted prices for
similar assets or liabilities or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities. Changes in
fair value that are considered temporary are reported net of tax in Accumulated other comprehensive
income (loss) (AOCI). For declines in the fair value of equity securities that are considered
other-than-temporary, impairment losses are charged to Other (income) expense, net. MSD considers
available evidence in evaluating potential impairments of its investments, including the duration
and extent to which fair value is less than cost, and for equity securities, MSDs ability and
intent to hold the investment.
On April 1, 2009, new guidance issued by the FASB was adopted which amended the
other-than-temporary recognition guidance for debt securities. Pursuant to this new guidance, an
other-than-temporary impairment has occurred if MSD does not expect to recover the entire amortized
cost basis of the debt security. If MSD does not intend to sell the impaired debt security, and it
is not more likely than not it will be required to sell the debt security before the recovery of
its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings,
recorded in Other (income) expense, net, is limited to the portion attributed to credit loss. The
remaining portion of the other-than-temporary impairment related to other factors is recognized in
AOCI. Realized gains and losses for both debt and equity securities are included in Other (income)
expense, net.
Revenue Recognition Revenues from sales of products are recognized at the time of delivery
and when title and risk of loss passes to the customer. Recognition of revenue also requires
reasonable assurance of collection of sales proceeds and completion of all performance obligations.
Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale or
indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of
rebates. Additionally, sales are generally made with a limited right of return under certain
conditions. Revenues are recorded net of provisions for sales discounts and returns, which are
established at the time of sale. Accruals for chargebacks are reflected as a direct reduction to
accounts receivable and accruals for rebates are recorded as current liabilities. The accrued
balances relative to these provisions included in Accounts receivable and Accrued and other current
liabilities were $50.4 million and $677.7 million, respectively, at December 31, 2009 and
$55.6 million and $560.7 million, respectively, at December 31, 2008.
MSD recognizes revenue from the sales of vaccines to the Federal government for placement into
stockpiles related to the Pediatric Vaccine Stockpile in accordance with Securities and Exchange
Commission (SEC) Interpretation, Commission Guidance Regarding Accounting for Sales of Vaccines
and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine
Stockpile or the Strategic National Stockpile.
Depreciation Depreciation is provided over the estimated useful lives of the assets,
principally using the straight-line method. For tax purposes, accelerated methods are used. The
estimated useful lives primarily range from 10 to 50 years for Buildings, and from 3 to 15 years
for Machinery, equipment and office furnishings.
Software Capitalization MSD capitalizes certain costs incurred in connection with obtaining
or developing internal-use software including external direct costs of material and services, and
payroll costs for employees directly involved with the software development. Capitalized software
costs are included in Property, plant and equipment and amortized beginning when the asset is
substantially ready for use. Capitalized software costs associated with MSDs multi-year
implementation of an enterprise-wide resource planning system are being amortized over 6 to
10 years. At December 31, 2009 and 2008, there was approximately $428 million and $330 million,
respectively, of remaining unamortized capitalized software costs associated with this initiative.
All other capitalized software costs are being amortized over periods ranging from 3 to 5 years.
Costs incurred during the preliminary project stage and post-implementation stage, as well as
maintenance and training costs, are expensed as incurred.
Goodwill Goodwill represents the excess of the consideration transferred over the fair value
of net assets of businesses purchased. Goodwill is assigned to reporting units and evaluated for
impairment on at least an annual basis, using a fair value based test.
Acquired Intangibles Acquired intangibles include products and product rights, tradenames
and patents, which are recorded at fair value and assigned an estimated useful life, are amortized
primarily on a straight-line basis over their estimated useful lives ranging from 3 to 20 years.
When events or circumstances warrant a review, MSD will assess recoverability from future
operations of acquired intangibles using pretax undiscounted cash flows derived from the lowest
39
appropriate asset groupings. Impairments are recognized in operating results to the extent
that carrying value of the intangible asset exceeds its fair value, which is determined based on
the net present value of estimated future cash flows.
In-Process Research and Development In-process research and development (IPR&D) represents
the fair value assigned to incomplete research projects that MSD acquires through business
combinations, which at the time of acquisition, have not reached technological feasibility. For
transactions that closed prior to 2009, the fair value of such projects was expensed upon
acquisition. For transactions that closed during 2009, the fair value of the research projects were
recorded as intangible assets on the Consolidated Balance Sheet rather than expensed. The amounts
capitalized are being accounted for as indefinite-lived intangible assets, subject to impairment
testing until completion or abandonment of the projects. Upon successful completion of each
project, MSD will make a determination as to the useful life of the intangible asset and begin
amortization. MSD tests its indefinite-lived intangibles, including in-process research and
development, for impairment at least annually, through a one-step test that compares the fair value
of the indefinite-lived intangible asset with the assets carrying value.
Research and Development Research and development is expensed as incurred. Upfront and
milestone payments due to third parties in connection with research and development collaborations
prior to regulatory approval are expensed as incurred. Payments due to third parties upon or
subsequent to regulatory approval are capitalized and amortized over the shorter of the remaining
license or product patent life. Nonrefundable advance payments for goods and services that will be
used in future research and development activities are expensed when the activity has been
performed or when the goods have been received rather than when the payment is made.
Share-Based Compensation MSD expenses all share-based payments to employees, including
grants of stock options, over the requisite service period based on the grant-date fair value of
the awards.
Restructuring Costs MSD records liabilities for costs associated with exit or disposal
activities in the period in which the liability is incurred. Costs for one-time termination
benefits in which the employee is required to render service until termination in order to receive
the benefits are recognized ratably over the future service period. Employee termination costs are
primarily recorded when actions are probable and estimable.
Contingencies and Legal Defense Costs MSD records accruals for contingencies and legal
defense costs expected to be incurred in connection with a loss contingency when it is probable
that a liability has been incurred and the amount can be reasonably estimated.
Taxes on Income Deferred taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based on enacted tax laws and rates. MSD
evaluates tax positions to determine whether the benefits of tax positions are more likely than not
of being sustained upon audit based on the technical merits of the tax position. For tax positions
that are more likely than not of being sustained upon audit, MSD recognizes the largest amount of
the benefit that is greater than 50% likely of being realized upon ultimate settlement in the
financial statements. For tax positions that are not more likely than not of being sustained upon
audit, MSD does not recognize any portion of the benefit in the financial statements. MSD
recognizes interest and penalties and exchange gains and losses associated with uncertain tax
positions as a component of Taxes on income in the Consolidated Statement of Income.
Use of Estimates The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States (GAAP) and, accordingly, include
certain amounts that are based on managements best estimates and judgments. Estimates are used
when accounting for amounts recorded in connection with mergers and acquisitions, including fair
value determinations of assets and liabilities. Additionally, estimates are used in determining
such items as provisions for sales discounts and returns, depreciable and amortizable lives,
recoverability of inventories, including those produced in preparation for product launches,
amounts recorded for contingencies, environmental liabilities and other reserves, pension and other
postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs,
impairments of long-lived assets (including intangible assets and goodwill) and investments, and
taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ
from these estimates.
Reclassifications Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
Recently Adopted Accounting Standards During 2009, several new accounting standards issued
by the FASB were adopted.
40
On January 1, 2009, new guidance on business combinations was adopted which changes the way in
which the acquisition method is to be applied in a business combination. This guidance requires an
acquirer to recognize the assets acquired and liabilities assumed at the acquisition date fair
values with limited exceptions. Additionally, the guidance requires that contingent consideration
be recorded at fair value on the acquisition date, that acquired in-process research and
development be capitalized and recorded as intangible assets at the acquisition date, and also
requires transaction costs and costs to restructure the acquired company be expensed. On April 1,
2009, additional guidance was issued further amending the accounting for contingencies in a
business combination. MSDs business combination transactions are now being accounted for under
this new guidance.
On January 1, 2009, new guidance for the accounting, reporting and disclosure of
noncontrolling interests was adopted which requires, among other things, that noncontrolling
interests be recorded as equity in the consolidated financial statements. The adoption of this new
guidance resulted in the reclassification of $2.4 billion of noncontrolling interests (formerly
referred to as minority interests) to a separate component of equity on the Consolidated Balance
Sheet (see Note 13). Additionally, net income attributable to noncontrolling interests is now shown
separately from parent net income in the Consolidated Statement of Income. Prior periods have been
restated to reflect the presentation and disclosure requirements of the new guidance.
On January 1, 2009, new guidance was adopted requiring enhanced disclosures about derivative
instruments and hedging activities to allow for a better understanding of their effects on an
entitys financial position, financial performance, and cash flows. Among other things, the new
guidance requires disclosure of the fair values of derivative instruments and associated gains and
losses in a tabular format (see Note 7). Since the new guidance requires only additional
disclosures about derivatives and hedging activities, the adoption did not affect MSDs financial
position or results of operations.
On January 1, 2009, new guidance was adopted which defines collaborative arrangements and
establishes reporting requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. The effect of adoption
was not material to MSDs financial position or results of operations. See Note 6 for the
associated disclosures of MSDs collaborative arrangements.
On January 1, 2009, new guidance was adopted which clarifies the accounting for certain
transactions and impairment considerations involving equity method investments and is effective on
a prospective basis.
On January 1, 2009, new guidance was adopted which clarifies that a defensive intangible asset
(an intangible asset that the entity does not intend to actively use, but intends to hold to
prevent others from obtaining access to the asset) should be accounted for as a separate unit of
accounting and should be assigned a useful life that reflects the entitys consumption of the
expected benefits related to the asset. This guidance is effective on a prospective basis.
On April 1, 2009, new guidance was adopted which establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This guidance was subsequently amended on
February 24, 2010 to no longer require disclosure of the date through which an entity has evaluated
subsequent events. The effect of adoption was not material.
On April 1, 2009, new guidance was adopted which provides additional guidelines for estimating
fair value when there has been a significant decrease in the volume and level of activity for an
asset or liability in relation to the normal market activity for the asset or liability (or similar
assets or liabilities). In addition, the new guidance includes guidelines for identifying
circumstances that indicate a transaction for the asset or liability is not orderly, in which case
the entity shall place little, if any, weight on that transaction price as an indicator of fair
value. The effect of adoption on MSDs financial position and results of operations was not
material.
On April 1, 2009, new guidance was adopted which amended the other-than-temporary recognition
guidance for debt securities. The impairment model for equity securities was not affected. An
impairment exists when the current fair value of an individual security is less than its amortized
cost basis. Pursuant to this new guidance, an other-than-temporary impairment has occurred if MSD
does not expect to recover the entire amortized cost basis of the debt security. If MSD does not
intend to sell the impaired debt security, and it is not more likely than not it will be required
to sell the debt security before the recovery of its amortized cost basis, the amount of the
other-than-temporary impairment recognized in earnings is limited to the portion attributed to
credit loss. The remaining portion of the other-than-temporary impairment related to other factors
is recognized in Other comprehensive income (loss). In determining if credit losses have occurred,
MSD evaluates whether expected cash flows to be received are sufficient to recover the amortized
cost basis of the security. The new guidance did not have a material effect upon adoption or during
the period from adoption through December 31, 2009.
41
As of December 31, 2009, MSD adopted new guidance amending existing authoritative literature
which provides guidance on an employers disclosures about plan assets of defined pension or other
postretirement benefit plans. The amended guidance requires disclosures about plan assets including
how investment allocation decisions are made, the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs (Level 3) on changes in plan assets for the
period, and significant concentrations of risk within plan assets. Since the amended guidance
required only additional disclosures about MSDs pension and other postretirement plan assets (see
Note 15), the adoption did not affect MSDs financial position or results of operations.
Recently Issued Accounting Standards During 2009, the FASB issued several new accounting
pronouncements, which are not yet effective for MSD.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
transfers of financial assets, which is effective January 1, 2010. The amendment eliminates the
concept of a qualifying special-purpose entity, changes the requirements for derecognizing
financial assets and requires enhanced disclosures to provide financial statement users with
greater transparency about transfers of financial assets, including securitization transactions,
and an entitys continuing involvement in and exposure to the risks related to transferred
financial assets. The effect of adoption on MSDs financial position and results of operations is
not expected to be material.
Also in June 2009, the FASB amended the existing accounting and disclosure guidance for the
consolidation of variable interest entities, which is effective January 1, 2010. The amended
guidance requires enhanced disclosures intended to provide users of financial statements with more
transparent information about an enterprises involvement in a variable interest entity. The effect
of adoption on MSDs financial position and results of operations is not expected to be material.
In October 2009, the FASB issued new guidance for revenue recognition with multiple
deliverables, which is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, although early adoption is permitted. This
guidance eliminates the residual method under the current guidance and replaces it with the
relative selling price method when allocating revenue in a multiple deliverable arrangement. The
selling price for each deliverable shall be determined using vendor specific objective evidence of
selling price, if it exists, otherwise third-party evidence of selling price shall be used. If
neither exists for a deliverable, the vendor shall use its best estimate of the selling price for
that deliverable. After adoption, this guidance will also require expanded qualitative and
quantitative disclosures. MSD is currently assessing the impact of adoption on its financial
position and results of operations.
In January 2010, the FASB amended the existing disclosure guidance on fair value measurements,
which is effective January 1, 2010, except for disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements, which is effective
January 1, 2011. Among other things, the updated guidance requires additional disclosure for the
amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires
certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to
require a greater level of disaggregated information and more robust disclosures about valuation
techniques and inputs to fair value measurements. Since the amended guidance requires only
additional disclosures, the adoption will not impact MSDs financial position or results of
operations.
3. Merger with Schering-Plough Corporation
On November 3, 2009, MSD and Schering-Plough completed the Merger. In the Merger,
Schering-Plough acquired all of the shares of MSD, which became a wholly-owned subsidiary of
Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the
surviving public company and was renamed Merck & Co., Inc. MSD shareholders received one share of
common stock of MSDs Parent Company for each share of stock that they owned.
4. Restructuring
Merger Restructuring Program
In February 2010, MSDs Parent Company announced the first phase of a new global restructuring
program (the Merger Restructuring Program) in conjunction with the integration of the legacy MSD
and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize
the cost structure of MSDs Parent Company and its subsidiaries. As part of the first phase of the
Merger Restructuring Program, by the end of 2012, MSDs Parent Company expects to reduce its total
workforce by approximately 15% across all areas of the company worldwide. These
42
workforce reductions will primarily come from the elimination of duplicative positions in
sales, administrative and headquarters organizations, as well as from the consolidation of certain
manufacturing facilities and research and development operations. This first phase of the Merger
Restructuring Program is expected to be completed by the end of 2012 with the total pretax costs,
including the portion attributable to MSD, estimated to be $2.6 billion to $3.3 billion. In
connection with the Merger Restructuring Program, separation costs under existing severance
programs worldwide were recorded in the fourth quarter of 2009 to the extent such costs were
probable and reasonably estimable. Costs under voluntary programs and enhancement programs will be
recorded in 2010 as the relevant criteria are met. Approximately 85% of the cumulative pretax costs
are estimated to be cash outlays, primarily related to employee separation expense. Approximately
15% of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation
of facilities to be closed or divested.
MSD recorded pretax restructuring costs of $403.8 million in 2009 for its estimated portion of
the Merger Restructuring Program costs, primarily representing employee separation costs.
2008 Global Restructuring Program
In October 2008, MSD announced a global restructuring program (the 2008 Restructuring
Program) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part
of the 2008 Restructuring Program, MSD expects to eliminate approximately 7,200 positions 6,800
active employees and 400 vacancies across all areas of MSD worldwide by the end of 2011. About
40% of these total reductions will occur in the United States. As part of the 2008 Restructuring
Program, MSD is streamlining management layers by reducing its total number of senior and mid-level
executives globally. As of December 31, 2009, approximately 4,910 positions have been eliminated in
connection with 2008 Restructuring Program, comprised of employee separations and the elimination
of contractors and vacant positions. During 2009, basic research facilities in Pomezia, Italy and
Tsukuba, Japan were sold and the operations conducted at the basic research facility in Seattle
were closed. MSD has also sold or closed certain other facilities and sold related assets in
connection with the 2008 Restructuring Program.
In connection with the 2008 Restructuring Program, separation costs under existing severance
programs worldwide were recorded in the third quarter of 2008 to the extent such costs were
probable and estimable. MSD commenced accruing costs related to one-time termination benefits
offered to employees under the 2008 Restructuring Program in the fourth quarter of 2008 as that is
when the necessary criteria were met. Pretax restructuring costs of $474.7 million and
$921.3 million, respectively, were recorded related to the 2008 Restructuring Program in 2009 and
2008. Since inception of the 2008 Restructuring Program through December 31, 2009, MSD has recorded
total pretax accumulated costs of $1.4 billion. The 2008 Restructuring Program is expected to be
completed by the end of 2011 with the total pretax costs estimated to be $1.6 billion to
$2.0 billion. MSD 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.
2005 Global Restructuring Program
In November 2005, MSD announced a global restructuring program (the 2005 Restructuring
Program) designed to reduce the cost structure, increase efficiency and enhance competitiveness
which was substantially complete at the end of 2008.
43
The following table summarizes the MSD charges related to Merger Restructuring Program and
2008 and 2005 Restructuring Program activities by type of cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation |
|
Accelerated |
|
|
|
|
Year Ended December 31, 2009 |
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Merger Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production |
|
$ |
|
|
|
$ |
36.4 |
|
|
$ |
|
|
|
$ |
36.4 |
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
367.1 |
|
|
|
|
|
|
|
0.3 |
|
|
|
367.4 |
|
|
|
|
|
367.1 |
|
|
|
36.4 |
|
|
|
0.3 |
|
|
|
403.8 |
|
|
2008 Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production |
|
|
|
|
|
|
70.5 |
|
|
|
(5.6 |
) |
|
|
64.9 |
|
Research and development |
|
|
|
|
|
|
227.8 |
|
|
|
3.8 |
|
|
|
231.6 |
|
Restructuring costs |
|
|
13.6 |
|
|
|
|
|
|
|
164.6 |
|
|
|
178.2 |
|
|
|
|
|
13.6 |
|
|
|
298.3 |
|
|
|
162.8 |
|
|
|
474.7 |
|
|
|
|
$ |
380.7 |
|
|
$ |
334.7 |
|
|
$ |
163.1 |
|
|
$ |
878.5 |
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production |
|
$ |
|
|
|
$ |
33.7 |
|
|
$ |
25.0 |
|
|
$ |
58.7 |
|
Research and development |
|
|
|
|
|
|
127.1 |
|
|
|
|
|
|
|
127.1 |
|
Restructuring costs |
|
|
684.9 |
|
|
|
|
|
|
|
50.6 |
|
|
|
735.5 |
|
|
|
|
|
684.9 |
|
|
|
160.8 |
|
|
|
75.6 |
|
|
|
921.3 |
|
|
2005 Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production |
|
|
|
|
|
|
55.0 |
|
|
|
9.5 |
|
|
|
64.5 |
|
Research and development |
|
|
|
|
|
|
0.9 |
|
|
|
0.4 |
|
|
|
1.3 |
|
Restructuring costs |
|
|
272.4 |
|
|
|
|
|
|
|
24.6 |
|
|
|
297.0 |
|
|
|
|
|
272.4 |
|
|
|
55.9 |
|
|
|
34.5 |
|
|
|
362.8 |
|
|
|
|
$ |
957.3 |
|
|
$ |
216.7 |
|
|
$ |
110.1 |
|
|
$ |
1,284.1 |
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production |
|
$ |
|
|
|
$ |
460.6 |
|
|
$ |
22.5 |
|
|
$ |
483.1 |
|
Research and development |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Restructuring costs |
|
|
251.4 |
|
|
|
|
|
|
|
75.7 |
|
|
|
327.1 |
|
|
|
|
$ |
251.4 |
|
|
$ |
460.6 |
|
|
$ |
98.1 |
|
|
$ |
810.1 |
|
|
Separation costs are associated with actual headcount reductions, as well as those headcount
reductions which were probable and could be reasonably estimated. Approximately 3,185 positions
were eliminated in 2009 of which approximately 3,160 related to the 2008 Restructuring Program and
approximately 25 related to the Merger Restructuring Program. During 2009, certain employees
anticipated to be separated as part of planned restructuring actions for the 2008 Restructuring
Program were instead transferred to the buyer in conjunction with the sale of a facility.
Accordingly, the accrual of separation costs associated with these employees was reversed resulting
in a reduction to expenses. Approximately 5,800 positions were eliminated in 2008 of which
approximately 1,750 related to the 2008 Restructuring Program and 4,050 related to the 2005
Restructuring Program. Approximately 2,400 positions were eliminated in 2007 in connection with the
2005 Restructuring Program. These position eliminations are comprised of actual headcount
reductions, and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing and research facilities to be
sold or closed as part of the programs. All of the sites have and will continue to operate up
through the respective closure dates, and since future cash flows were sufficient to recover the
respective book values, MSD was required to accelerate depreciation of the site assets rather than
write them off immediately. The site assets include manufacturing and research facilities and
equipment.
Other activity in 2009, 2008 and 2007 includes $14.9 million, $29.4 million and $39.4 million,
respectively, of asset abandonment, shut-down and other related costs. Additionally, other activity
includes $22.7 million, $68.4 million and $18.9 million in 2009, 2008 and 2007, respectively,
related to curtailment, settlement and termination charges on pension and other postretirement
benefit plans (see Note 15). Other activity also reflects pretax losses resulting from sales of
facilities and related assets in 2009 of $57.9 million and pretax gains on such sales in 2008 of
$61.5 million.
Adjustments to the recorded amounts were not material in any period.
44
The following table summarizes the MSD charges and spending relating to Merger Restructuring
Program and 2008 and 2005 Restructuring Program activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation |
|
Accelerated |
|
|
|
|
|
|
Costs |
|
Depreciation |
|
Other |
|
Total |
|
Merger Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves as of January 1, 2009 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Expense |
|
|
367.1 |
|
|
|
36.4 |
|
|
|
0.3 |
|
|
|
403.8 |
|
(Payments) receipts, net |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
(3.4 |
) |
Non-cash activity |
|
|
|
|
|
|
(36.4 |
) |
|
|
(0.3 |
) |
|
|
(36.7 |
) |
|
Restructuring reserves as of December 31, 2009 (1) |
|
$ |
363.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
363.7 |
|
|
2008 Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves as of January 1, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Expense |
|
|
684.9 |
|
|
|
160.8 |
|
|
|
75.6 |
|
|
|
921.3 |
|
(Payments) receipts, net |
|
|
(77.2 |
) |
|
|
|
|
|
|
(37.3 |
) |
|
|
(114.5 |
) |
Non-cash activity |
|
|
|
|
|
|
(160.8 |
) |
|
|
(38.3 |
) |
|
|
(199.1 |
) |
|
Restructuring reserves as of December 31, 2008 |
|
$ |
607.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
607.7 |
|
|
Expense |
|
$ |
13.6 |
|
|
$ |
298.3 |
|
|
$ |
162.8 |
|
|
$ |
474.7 |
|
(Payments) receipts, net |
|
|
(372.0 |
) |
|
|
|
|
|
|
(154.5) |
(2) |
|
|
(526.5 |
) |
Non-cash activity |
|
|
|
|
|
|
(298.3 |
) |
|
|
(8.3 |
) |
|
|
(306.6 |
) |
|
Restructuring reserves as of December 31, 2009 (1) |
|
$ |
249.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
249.3 |
|
|
2005 Restructuring Program |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves as of January 1, 2008 |
|
$ |
231.5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
231.5 |
|
|
Expense |
|
$ |
272.4 |
|
|
$ |
55.9 |
|
|
$ |
34.5 |
|
|
$ |
362.8 |
|
(Payments) receipts, net |
|
|
(389.1 |
) |
|
|
|
|
|
|
(23.2 |
)(2) |
|
|
(412.3 |
) |
Non-cash activity |
|
|
|
|
|
|
(55.9 |
) |
|
|
(11.3 |
) |
|
|
(67.2 |
) |
|
Restructuring reserves as of December 31, 2008 |
|
$ |
114.8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
114.8 |
|
|
(Payments) receipts, net |
|
|
(77.2 |
) |
|
|
|
|
|
|
|
|
|
|
(77.2 |
) |
|
Restructuring reserves as of December 31, 2009(1) |
|
$ |
37.6 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
37.6 |
|
|
|
|
|
(1) |
|
The cash outlays associated with the first phase of the Merger Restructuring
Program are expected to be substantially completed by the end of 2012. The cash outlays
associated with the remaining restructuring reserve for the 2008 Restructuring Program are
expected to be completed by the end of 2011. The cash outlays associated with the remaining
restructuring reserve for the 2005 Restructuring Program are expected to be completed by the
end of 2010. |
|
|
|
(2) |
|
Includes proceeds from the sales of facilities in connection with restructuring
actions. |
5. Acquisitions, Research Collaborations and License Agreements
In December 2009, MSD and Avecia Investments Limited announced a definitive agreement under
which MSD would acquire the biologics business of the Avecia group for a total purchase price of
$180 million. Avecia Biologics is a contract manufacturing organization with specific expertise in
microbial-derived biologics. Under the terms of the agreement, MSD would acquire Avecia Biologics
Limited (Avecia) and all of its assets, including all Avecias process development and scale-up,
manufacturing, quality and business support operations located in Billingham, United Kingdom. This
transaction closed on February 1, 2010, and accordingly, the results of operations of the acquired
business will be included in MSDs results of operations after the acquisition date.
In September 2009, MSD announced that it had entered into an exclusive agreement with CSL
Biotherapies (CSL), a subsidiary of CSL Limited, to market and distribute Afluria, CSLs seasonal
influenza (flu) vaccine, in the United States, for the 2010/2011-2015/2016 flu seasons. Under the
terms of the agreement, MSD will assume responsibility for all aspects of commercialization of
Afluria in the United States. CSL will supply Afluria to MSD and will retain responsibility for
marketing the vaccine outside the United States. Afluria is indicated for the active immunization
of persons ages 6 months and older against influenza disease caused by influenza virus subtypes A
and type B present in the vaccine.
In July 2009, MSD and Portola Pharmaceuticals, Inc. (Portola) signed an exclusive global
collaboration and license agreement for the development and commercialization of betrixaban
(MK-4448), an investigational oral Factor Xa inhibitor anticoagulant currently in Phase II clinical
development for the prevention of stroke in patients with atrial fibrillation. In return for an
exclusive worldwide license to betrixaban, MSD paid Portola an initial fee of $50 million at
closing, which was recorded in Research and development expense. Portola is eligible to receive
additional cash payments totaling up to $420 million upon achievement of certain development,
regulatory and commercialization milestones, as well as double-digit royalties on worldwide sales
of betrixaban, if approved. MSD will assume all development and commercialization costs,
45
including the costs of Phase III clinical trials. Portola retained an option (a) to
co-fund Phase III clinical trials in return for additional royalties and (b) to co-promote
betrixaban with MSD in the United States. The term of the agreement commenced in August 2009 and,
unless terminated earlier, will continue until there are no remaining royalty payment obligations
in a country, at which time the agreement will expire in its entirety in such country. The
agreement may be terminated by either party in the event of a material uncured breach or bankruptcy
of a party. The agreement may be terminated by MSD in the event that the parties or MSD decide to
cease development of betrixaban for safety or efficacy. In addition, MSD may terminate the
agreement at any time upon 180 days prior written notice. Portola may terminate the agreement in
the event that MSD challenges any Portola patent covering betrixaban. 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 betrixaban and, in the case of
termination for cause by MSD, certain royalty obligations.
In April 2009, MSD, Medarex, Inc. (Medarex) and Massachusetts Biologic Laboratories (MBL)
of the University of Massachusetts Medical School announced an exclusive worldwide license
agreement for CDA-1 and CDB-1 (MK-3415A) (also known as MDX-066/MDX-1388 and MBL-CDA1/MBL-CDB1), an
investigational fully human monoclonal antibody combination developed to target and neutralize
Clostridium difficile toxins A and B, for the treatment of C. difficile infection. CDA-1 and CDB-1
were co-developed by Medarex and MBL. Under the terms of the agreement, MSD gained worldwide rights
to develop and commercialize CDA-1 and CDB-1. Medarex and MBL received an aggregate upfront payment
of $60 million upon closing, which was recorded in Research and development expense, and are
potentially eligible to receive additional cash payments up to $165 million in the aggregate upon
achievement of certain milestones associated with the development and approval of a drug candidate
covered by this agreement. Upon commercialization, Medarex and MBL will also be eligible to receive
double-digit royalties on product sales and milestones if certain sales targets are met. The term
of the agreement commenced on the closing date and, unless terminated earlier, will continue until
there are no remaining royalty payment obligations in a country, at which time the agreement will
expire in its entirety in such country. Either party may terminate this agreement for uncured
material breach by the other party, or bankruptcy or insolvency of the other party. MSD may
terminate this agreement at any time upon providing 180 days prior written notice to Medarex and
MBL.
Also, in April 2009, MSD and Santen Pharmaceutical Co., Ltd. (Santen) announced a worldwide
licensing agreement for tafluprost (MK-2452), a prostaglandin analogue under investigation in the
United States. Tafluprost, preserved and preservative-free formulations, has received marketing
approval for the reduction of elevated intraocular pressure in open-angle glaucoma and ocular
hypertension in several European and Nordic countries as well as Japan and has been filed for
approval in additional European and Asia Pacific markets. Under the terms of the agreement, MSD
paid a fee, which was capitalized and will be amortized to Materials and production costs over the
life of the underlying patent, and will pay milestones and royalty payments based on future sales
of tafluprost (both preserved and preservative-free formulations) in exchange for exclusive
commercial rights to tafluprost in Western Europe (excluding Germany), North America, South America
and Africa. Santen will retain commercial rights to tafluprost in most countries in Eastern Europe,
Northern Europe and Asia Pacific, including Japan. MSD will provide promotion support to Santen in
Germany and Poland. If tafluprost is approved in the United States, Santen has an option to
co-promote it there. The agreement between MSD and Santen expires on a country-by-country basis on
the last to occur of (a) the expiry of the last to expire valid patent claim; or (b) the expiration
of the last to expire royalty. MSD may terminate the agreement at any time upon 90 days prior
written notice and also at any time upon 60 days prior written notice if MSD determines that the
product presents issues of safety or tolerability. In addition, MSD may terminate the agreement in
the event that any of the enumerated agreements between Santen and the co-owner/licensor of certain
intellectual property terminate or expire and this materially adversely affects MSD. If either MSD
or Santen materially breaches the agreement and fails to cure after receiving notice, then the
non-breaching party may terminate the agreement. The agreement provides for termination by the
non-insolvent party due to bankruptcy by the other party. Finally, the agreement will terminate if,
during the term, MSD develops or commercializes a competitive product (as that term is defined in
the agreement).
In addition, in April 2009, MSD and Cardiome Pharma Corp. (Cardiome) announced a
collaboration and license agreement for the development and commercialization of vernakalant
(MK-6621), an investigational candidate for the treatment of atrial fibrillation. The agreement
provides MSD with exclusive global rights to the oral formulation of vernakalant (vernakalant
(oral)) for the maintenance of normal heart rhythm in patients with atrial fibrillation, and
provides an MSD affiliate, Merck Sharp & Dohme (Switzerland) GmbH, with exclusive rights outside of
the United States, Canada and Mexico to the intravenous (IV) formulation of vernakalant
(vernakalant (IV)) for rapid conversion of acute atrial fibrillation to normal heart rhythm.
Under the terms of the agreement, MSD paid Cardiome an initial fee of $60 million upon closing,
which was recorded in Research and development expense. In addition, Cardiome is eligible to
receive up to $200 million in payments based on achievement of certain milestones associated with
the development and approval of vernakalant products (including $15 million for submission for
regulatory approval in Europe of vernakalant (IV), which MSD paid in 2009 as a result of that
submission, and $20 million for initiation of a planned Phase III program for vernakalant
46
(oral)) and up to $100 million for milestones associated with approvals in other subsequent
indications of both the intravenous and oral formulations. Also, Cardiome will receive tiered
royalty payments on sales of any approved products and has the potential to receive up to
$340 million in milestone payments based on achievement of significant sales thresholds. Cardiome
has retained an option to co-promote vernakalant (oral) with MSD through a hospital-based sales
force in the United States. MSD will be responsible for all future costs associated with the
development, manufacturing and commercialization of these candidates. MSD has granted Cardiome a
secured, interest-bearing credit facility of up to $100 million that Cardiome may access in
tranches over several years commencing in 2010. Cardiomes co-development partner in North America,
Astellas Pharma U.S., Inc., submitted an NDA with the FDA for Kynapid (vernakalant hydrochloride)
Injection in December 2006 that included results from two pivotal Phase III clinical trials. In
December 2007, the Cardiovascular and Renal Drugs Advisory Committee recommended that the FDA
approve vernakalant (IV) for rapid conversion of atrial fibrillation. In August 2008, the FDA
issued an Approvable action letter requesting additional information. A Phase IIb double-blind,
placebo-controlled, randomized, dose-ranging clinical trial in patients at risk of recurrent atrial
fibrillation showed that, at the 500 mg dose, vernakalant (oral) significantly reduced the rate of
atrial fibrillation relapse as compared to placebo. This agreement continues in effect until the
expiration of Cardiomes co-promotion rights and all royalty and milestone payment obligations.
This agreement may be terminated in the event of insolvency or a material uncured breach by either
party. Additionally, the collaboration may be terminated by MSD in the event that MSD determines
(in good faith) that it is not advisable to continue the development or commercialization of a
vernakalant product as a result of a serious safety issue. In addition, MSD may terminate the
agreement at any time upon 12 months prior written notice. Cardiome may terminate the agreement in
the event that MSD challenges any Cardiome patent covering vernakalant. 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 vernakalant and in some cases
continuing royalty obligations.
In March 2009, MSD acquired Insmed Inc.s (Insmed) portfolio of follow-on biologic
therapeutic candidates and its commercial manufacturing facilities located in Boulder, Colorado.
Under the terms of the agreement, MSD paid Insmed an aggregate of $130 million in cash to acquire
all rights to the Boulder facilities and Insmeds pipeline of follow-on biologic candidates.
Insmeds follow-on biologics portfolio includes two clinical candidates: MK-4214, an
investigational recombinant granulocyte-colony stimulating factor (G-CSF) that will be evaluated
for its ability to prevent infections in patients with cancer receiving chemotherapy, and MK-6302,
a pegylated recombinant G-CSF designed to allow for less frequent dosing. The transaction was
accounted for as a business combination; accordingly, the assets acquired and liabilities assumed
were recorded at their respective fair values as of the acquisition date. The determination of fair
value requires management to make significant estimates and assumptions. In connection with the
acquisition, substantially all of the purchase price was allocated to Insmeds follow-on biologics
portfolio (MK-4214 and MK-6302) and an indefinite-lived intangible asset was recorded. The fair
value was determined based upon the present value of expected future cash flows of new product
candidates resulting from Insmeds follow-on biologics portfolio adjusted for the probability of
their estimated technical and marketing success utilizing an income approach reflecting appropriate
risk-adjusted discount rates. The ongoing activity related to MK-4214 and MK-6302 is not expected
to be material to MSDs research and development expense. The remaining net assets acquired were
not material and there were no other milestone or royalty obligations associated with the
acquisition. This transaction closed on March 31, 2009, and accordingly, the results of operations
of the acquired business have been included in MSDs results of operations beginning April 1, 2009.
In September 2008, MSD and Japan Tobacco Inc. (JT) signed a worldwide licensing agreement to
develop and commercialize JTT-305 (MK-5442), an investigational oral osteoanabolic (bone growth
stimulating) agent for the treatment of osteoporosis, a disease which reduces bone density and
strength and results in an increased risk of bone fractures. JTT-305 is an investigational oral
calcium sensing receptor antagonist that is currently being evaluated by JT in Phase II clinical
trials in Japan for its effect on increasing bone density and is in Phase I clinical trials outside
of Japan. Under the terms of the agreement, MSD gained worldwide rights, except for Japan, to
develop and commercialize JTT-305 and certain other related compounds. JT received an upfront
payment of $85 million, which was recorded in Research and development expense, and is eligible to
receive additional cash payments upon achievement of certain milestones associated with the
development and approval of a drug candidate covered by this agreement. JT will also be eligible to
receive royalties from sales of any drug candidates that receive marketing approval. The license
agreement between MSD and JT will remain in effect until expiration of all royalty and milestone
obligations, and may be terminated in the event of an uncured material breach by the other party.
The agreement may also be terminated by MSD without cause before initial commercial sale of JTT-305
by giving six months prior notice to JT, and thereafter by giving one year prior notice thereof to
JT. The license agreement may also be terminated immediately by MSD if MSD determines due to safety
and/or efficacy concerns based on available scientific evidence to cease development of JTT-305
and/or to withdraw JTT-305 from the market on a permanent basis.
47
In September 2007, MSD completed the acquisition of NovaCardia, Inc. (NovaCardia), a
privately held clinical-stage pharmaceutical company focused on cardiovascular disease. MSD
acquired all of the outstanding equity of NovaCardia for a total purchase price of $366.4 million
(including $16.4 million of cash and investments on hand at closing), which was paid through the
issuance of 7.3 million shares of MSD common stock to the former NovaCardia shareholders based on
MSDs average closing stock price for the five days prior to closing of the acquisition. In
connection with the acquisition, MSD recorded a charge of $325.1 million for in-process research
and development associated with rolofylline (MK-7418), NovaCardias investigational Phase III
compound for acute heart failure, as at the acquisition date, technological feasibility had not
been established and no alternative future use existed. The charge, which is not deductible for tax
purposes, was recorded in Research and development expense and was determined based upon the
present value of expected future cash flows resulting from this technology adjusted for the
estimated probability of its technical and marketing success at that time utilizing an income
approach reflecting an appropriate risk-adjusted discount rate of 22.0%. The remaining purchase
price was allocated to cash and investments of $16.4 million, a deferred tax asset relating to a
net operating loss carryforward of $23.9 million and other net assets of $1.0 million. Because
NovaCardia was a development stage company that had not commenced its planned principal operations,
the transaction was accounted for as an acquisition of assets rather than as a business combination
and, therefore, goodwill was not recorded. NovaCardias results of operations have been included in
MSDs consolidated financial results since the acquisition date. In June 2009, MSD announced that
preliminary results for the pivotal Phase III study of rolofylline showed that rolofylline did not
meet the primary or secondary efficacy endpoints. MSD terminated the clinical development program
for rolofylline.
Also in 2007, MSD and GTx, Inc. (GTx) entered into an agreement providing for a research and
development and global strategic collaboration for selective androgen receptor modulators
(SARMs), a new investigational class of drugs with the potential to treat age-related muscle loss
(sarcopenia) as well as other musculoskeletal conditions. MSD has discontinued internal development
of MK-2866 (which is a SARM) under this agreement, and has subsequently terminated its agreement
with GTx.
Also in 2007, MSD and ARIAD Pharmaceuticals, Inc. (ARIAD) entered into a global
collaboration to jointly develop and commercialize ridaforolimus (MK-8669), ARIADs novel mTOR
inhibitor, for use in cancer. This collaboration generally continues in effect until the expiration
of all royalty and milestone payment obligations. This collaboration may generally be terminated in
the event of insolvency or a material uncured breach by either party. The collaboration agreement
between MSD and ARIAD may also be terminated by MSD upon the failure of MK-8669 to meet certain
developmental and safety requirements or in the event MSD concludes it is not advisable to continue
the development of MK-8669 for use in a cancer indication. In addition, MSD may terminate the ARIAD
collaboration agreement on or after the third anniversary of the effective date by providing at
least 12 months prior written notice. Upon termination of the ARIAD collaboration agreement,
depending upon the circumstances, the parties have varying rights and obligations with respect to
the continued development and commercialization of MK-8669 and continuing royalty obligations.
6. Collaborative Arrangements
MSD continues its strategy of establishing external alliances to complement its substantial
internal research capabilities, including research collaborations, licensing preclinical and
clinical compounds and technology platforms to drive both near- and long-term growth. MSD
supplements its internal research with an aggressive licensing and external alliance strategy
focused on the entire spectrum of collaborations from early research to late-stage compounds, as
well as new technologies across a broad range of therapeutic areas. These arrangements often
include upfront payments and royalty or profit share payments, contingent upon the occurrence of
certain future events linked to the success of the asset in development, as well as expense
reimbursements or payments to the third party.
As discussed in Note 2, on January 1, 2009, new guidance issued by the FASB was adopted which
defines collaborative arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the arrangement and third
parties. MSD reviewed its third party arrangements to determine if any arrangement is within the
scope of this new guidance. Each arrangement is unique in nature and MSDs most significant
arrangement is discussed below.
Cozaar/Hyzaar
In 1989, MSD and E.I. duPont de Nemours and Company (DuPont) agreed to form a long-term
research and marketing collaboration to develop a class of therapeutic agents for high blood
pressure and heart disease, discovered by DuPont, called angiotensin II receptor antagonists, which
include Cozaar and Hyzaar. In return, MSD provided DuPont marketing rights in the United States and
Canada to its prescription medicines, Sinemet and Sinemet CR. Pursuant to a 1994 agreement with
DuPont, MSD has an exclusive licensing agreement to market Cozaar and Hyzaar, which are both
registered
48
trademarks of DuPont, in return for royalties and profit share payments to DuPont. The patents
that provide U.S. marketing exclusivity for Cozaar and Hyzaar expire in April 2010. In addition,
the patent for Cozaar expired in a number of major European markets in March 2010. Hyzaar lost
patent protection in a number of major European markets in February 2010.
7. Financial Instruments
Derivative Instruments and Hedging Activities
MSD manages the impact of foreign exchange rate movements and interest rate movements on its
earnings, cash flows and fair values of assets and liabilities through operational means and
through the use of various financial instruments, including derivative instruments.
A significant portion of MSDs revenues and earnings in foreign affiliates is exposed to
changes in foreign exchange rates. The objectives and accounting related to MSDs foreign currency
risk management program, as well as its interest rate risk management activities are discussed
below.
Foreign Currency Risk Management
A significant portion of MSDs revenues are denominated in foreign currencies. MSD relies on
sustained cash flows generated from foreign sources to support its long-term commitment to
U.S. dollar-based research and development. To the extent the dollar value of cash flows is
diminished as a result of a strengthening dollar, MSDs ability to fund research and other
dollar-based strategic initiatives at a consistent level may be impaired. MSD has established
revenue hedging and balance sheet risk management programs to protect against volatility of future
foreign currency cash flows and changes in fair value caused by volatility in foreign exchange
rates at its U.S. functional currency entities.
The objective of the revenue hedging program is to reduce the potential for longer-term
unfavorable changes in foreign exchange to decrease the U.S. dollar value of future cash flows
derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve
this objective, MSD will partially hedge forecasted foreign currency denominated third party and
intercompany distributor entity sales that are expected to occur over its planning cycle, typically
no more than three years into the future. MSD 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, such that it is probable the
hedged transaction will occur. 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 risk in the same manner. MSD manages its anticipated transaction
exposure principally with purchased local currency put options, which provide MSD 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 cash flows of the
hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the options value reduces
to zero, but MSD benefits from the increase in the value of the anticipated foreign currency cash
flows. MSD also utilizes forward contracts in its revenue hedging program. If the U.S. dollar
strengthens relative to the currency of the hedged anticipated sales, the increase in the fair
value of the forward contracts offsets the decrease in the expected future U.S. dollar cash flows
of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the decrease in the
fair value of the forward contracts offsets the increase in the value of the anticipated foreign
currency cash flows.
These derivative instruments are designated as cash flow hedges and the fair value of these
contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the
Consolidated Balance Sheet. Accordingly, the effective portion of the unrealized gains or losses on
these contracts is recorded in AOCI and reclassified into Sales when the hedged anticipated revenue
is recognized. The hedge relationship is highly effective and hedge ineffectiveness has been de
minimis. The cash flows from these contracts are reported as operating activities in the
Consolidated Statement of Cash Flows.
The primary objective of the balance sheet risk management program is to protect the
U.S. dollar value of foreign currency denominated net monetary assets from the effects of
volatility in foreign exchange that might occur prior to their conversion to U.S. dollars. In these
instances, MSD principally utilizes forward exchange contracts, which enable MSD to buy and sell
foreign currencies in the future at fixed exchange rates and economically offset the consequences
of changes in foreign exchange on the amount of U.S. dollar cash flows derived from the net assets.
MSD routinely enters into contracts to offset the effects of exchange on exposures denominated in
developed country currencies, primarily the euro and Japanese yen. For exposures in developing
country currencies, MSD will enter into forward contracts to partially offset the effects of
exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that
considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the
hedging instrument. MSD will also minimize the effect of exchange on monetary assets and
liabilities by managing operating activities and net asset positions at the local level.
49
Foreign currency denominated monetary assets and liabilities are remeasured at spot rates in
effect on the balance sheet date with the effects of changes in spot rates reported in Other
(income) expense, net. The forward contracts are not designated as hedges and are marked to market
through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help
mitigate the changes in the value of the remeasured assets and liabilities attributable to changes
in foreign currency exchange rates, except to the extent of the spot-forward differences. These
differences are not significant due to the short-term nature of the contracts, which typically have
average maturities at inception of less than one year.
When applicable, MSD uses forward contracts to hedge the changes in fair value of certain
foreign currency denominated available-for-sale securities attributable to fluctuations in foreign
currency exchange rates. These derivative contracts are designated and qualify as fair value
hedges. Accordingly, changes in the fair value of the hedged securities due to fluctuations in spot
rates are recorded in Other (income) expense, net, and offset by the fair value changes in the
forward contracts attributable to spot rate fluctuations. Changes in the contracts fair value due
to spot-forward differences are excluded from the designated hedge relationship and recognized in
Other (income) expense, net. These amounts, as well as hedge ineffectiveness, were not significant
for the years ended December 31, 2009, 2008 or 2007. The cash flows from these contracts are
reported as operating activities in the Consolidated Statement of Cash Flows.
Interest Rate Risk Management
At December 31, 2009, MSD was a party to seven pay-floating, receive-fixed interest rate swap
contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match
the amount of the hedged fixed-rate notes. There are two swaps maturing in 2011 with notional
amounts of $125 million each that effectively convert MSDs $250 million, 5.125% fixed-rate notes
due 2011 to floating rate instruments and five swaps maturing in 2015 with notional amounts of
$150 million each that effectively convert $750 million of MSDs $1.0 billion, 4.0% fixed-rate
notes due 2015 to floating rate instruments. The interest rate swap contracts are designated hedges
of the fair value changes in the notes attributable to changes in the benchmark London Interbank
Offered Rate (LIBOR) swap rate. The fair value changes in the notes attributable to changes in
the benchmark interest rate are recorded in interest expense and offset by the fair value changes
in the swap contracts. During 2008, MSD terminated four interest rate swap contracts with notional
amounts of $250 million each, and terminated one interest rate swap contract with a notional amount
of $500 million. These swaps had effectively converted its $1.0 billion, 4.75% fixed-rate notes due
2015 and its $500 million, 4.375% fixed-rate notes due 2013 to variable rate debt. As a result of
the swap terminations, MSD received $128.3 million in cash, excluding accrued interest which was
not material. The corresponding gains related to the basis adjustment of the debt associated with
the terminated swap contracts were deferred and are being amortized as a reduction of interest
expense over the remaining term of the notes. The cash flows from these contracts are reported as
operating activities in the Consolidated Statement of Cash Flows.
Presented in the table below is the fair value of derivatives segregated between those
derivatives that are designated as hedging instruments and those that are not designated as hedging
instruments as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative |
|
U.S. Dollar |
|
|
Balance Sheet Caption |
|
Asset |
|
Liability |
|
Notional |
|
Derivatives Designated as Hedging
Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts (current) |
|
Deferred income taxes and other current assets |
|
$ |
139.3 |
|
|
$ |
|
|
|
$ |
3,050.5 |
|
Foreign Exchange Contracts (non-current) |
|
Other assets |
|
|
152.6 |
|
|
|
|
|
|
|
2,118.1 |
|
Foreign Exchange Contracts (current) |
|
Accrued and other current liabilities |
|
|
|
|
|
|
34.0 |
|
|
|
658.6 |
|
Interest Rate Swaps (non-current) |
|
Other assets |
|
|
26.7 |
|
|
|
|
|
|
|
1,000.0 |
|
|
|
|
|
|
$ |
318.6 |
|
|
$ |
34.0 |
|
|
$ |
6,827.2 |
|
|
Derivatives Not Designated as Hedging
Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts (current) |
|
Deferred income taxes and other current assets |
|
$ |
60.3 |
|
|
$ |
|
|
|
$ |
2,841.7 |
|
Foreign Exchange Contracts (current) |
|
Accrued and other current liabilities |
|
|
|
|
|
|
38.6 |
|
|
|
2,104.3 |
|
|
|
|
|
|
$ |
60.3 |
|
|
$ |
38.6 |
|
|
$ |
4,946.0 |
|
|
|
|
|
|
$ |
378.9 |
|
|
$ |
72.6 |
|
|
$ |
11,773.2 |
|
|
50
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, and (iii) not designated in a hedging relationship for the year
ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
Amount of |
|
|
Amount of |
|
Amount of |
|
Pretax |
|
Pretax |
|
|
Gain (Loss) |
|
Gain (Loss) |
|
(Gain) Loss |
|
(Gain) Loss |
|
|
Recognized in |
|
Recognized in |
|
Reclassified |
|
Recognized |
|
|
Earnings on |
|
Earnings on |
|
from AOCI |
|
in OCI on |
|
|
Derivatives(1) |
|
Hedged Item(1) |
|
into Earnings(2) |
|
Derivatives |
|
Derivatives designated in fair value hedging relationships: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts |
|
$ |
2.8 |
|
|
$ |
(2.8 |
) |
|
$ |
|
|
|
$ |
|
|
Foreign exchange contracts |
|
|
5.2 |
|
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
8.0 |
|
|
$ |
(11.9 |
) |
|
$ |
|
|
|
$ |
|
|
|
Derivatives designated in cash flow hedging relationships: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
60.5 |
|
|
$ |
310.1 |
|
Derivatives not designated in a hedging relationship: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(3) |
|
$ |
(40.8 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
(1) |
|
Recognized in Other (income) expense, net. |
|
(2) |
|
Recognized in Sales. |
|
(3) |
|
These derivative contracts mitigate changes in the value of remeasured foreign
currency denominated monetary assets and liabilities attributable to changes in foreign
currency exchange rates. |
At December 31, 2009, MSD estimates $65.6 million of pretax net unrealized loss on
derivatives maturing within the next 12 months that hedge foreign currency denominated sales over
that same period will be reclassified from AOCI to Sales. The amount ultimately reclassified to
Sales may differ as foreign exchange rates change. Realized gains and losses are ultimately
determined by actual exchange rates at maturity.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. Entities
are required to use a fair value hierarchy which maximizes the use of observable inputs and
minimizes the use of unobservable inputs when measuring fair value. There are three levels of
inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities. MSDs Level 1
assets include equity securities that are traded in an active exchange market.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. MSDs Level 2 assets
and liabilities primarily include debt securities with quoted prices that are traded less
frequently than exchange-traded instruments, corporate notes and bonds, U.S. and foreign
government and agency securities, certain mortgage-backed and asset-backed securities, municipal
securities, commercial paper and derivative contracts whose values are determined using pricing
models with inputs that are observable in the market or can be derived principally from or
corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market activity and that
are financial instruments whose values are determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant judgment or estimation. MSDs Level 3 assets mainly include certain
mortgage-backed and asset-backed securities, as well as certain corporate notes and bonds with
limited market activity. At December 31, 2009, $71.5 million, or approximately 8.4%, of MSDs
investment securities were categorized as Level 3 assets (all of which were pledged under certain
collateral arrangements (see Note 17)). All of the assets classified as Level 3 at December 31,
2009 were acquired when MSD elected to be redeemed-in-kind from a short-term fixed income fund
that restricted cash redemptions as described below.
If the inputs used to measure the financial assets and liabilities fall within more than one
level described above, the categorization is based on the lowest level input that is significant to
the fair value measurement of the instrument.
51
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
Fair Value Measurements Using |
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices |
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
In Active |
|
Significant |
|
|
|
|
|
|
|
In Active |
|
Significant
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant
|
|
|
|
|
|
Markets for |
|
Other
|
|
Significant
|
|
|
|
|
Identical |
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Identical |
|
Observable
|
|
Unobservable |
|
|
|
|
Assets |
|
Inputs
|
|
Inputs |
|
|
|
|
|
Assets |
|
Inputs
|
|
Inputs |
|
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
|
December 31, 2009 |
|
December 31, 2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities |
|
$ |
|
|
|
$ |
215.6 |
|
|
$ |
|
|
|
$ |
215.6 |
|
|
$ |
|
|
|
$ |
2,885.7 |
|
|
$ |
|
|
|
$ |
2,885.7 |
|
Corporate notes and bonds |
|
|
|
|
|
|
205.2 |
|
|
|
|
|
|
|
205.2 |
|
|
|
|
|
|
|
3,093.2 |
|
|
|
|
|
|
|
3,093.2 |
|
Municipal securities |
|
|
|
|
|
|
186.7 |
|
|
|
|
|
|
|
186.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723.9 |
|
|
|
|
|
|
|
723.9 |
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133.0 |
|
|
|
|
|
|
|
133.0 |
|
Asset-backed securities (1) |
|
|
|
|
|
|
36.0 |
|
|
|
|
|
|
|
36.0 |
|
|
|
|
|
|
|
306.7 |
|
|
|
|
|
|
|
306.7 |
|
Foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319.4 |
|
|
|
|
|
|
|
319.4 |
|
Equity securities |
|
|
37.4 |
|
|
|
39.1 |
|
|
|
|
|
|
|
76.5 |
|
|
|
71.1 |
|
|
|
73.6 |
|
|
|
|
|
|
|
144.7 |
|
Other debt securities |
|
|
|
|
|
|
3.4 |
|
|
|
|
|
|
|
3.4 |
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
37.4 |
|
|
|
686.0 |
|
|
|
|
|
|
|
723.4 |
|
|
|
71.1 |
|
|
|
7,538.3 |
|
|
|
|
|
|
|
7,609.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (2) |
|
|
|
|
|
|
55.1 |
|
|
|
71.5 |
|
|
|
126.6 |
|
|
|
|
|
|
|
2,877.9 |
|
|
|
96.6 |
|
|
|
2,974.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased currency options |
|
|
|
|
|
|
291.9 |
|
|
|
|
|
|
|
291.9 |
|
|
|
|
|
|
|
451.3 |
|
|
|
|
|
|
|
451.3 |
|
Forward exchange contracts |
|
|
|
|
|
|
60.3 |
|
|
|
|
|
|
|
60.3 |
|
|
|
|
|
|
|
73.2 |
|
|
|
|
|
|
|
73.2 |
|
Interest rate swaps |
|
|
|
|
|
|
26.7 |
|
|
|
|
|
|
|
26.7 |
|
|
|
|
|
|
|
23.9 |
|
|
|
|
|
|
|
23.9 |
|
|
|
|
|
|
|
|
|
378.9 |
|
|
|
|
|
|
|
378.9 |
|
|
|
|
|
|
|
548.4 |
|
|
|
|
|
|
|
548.4 |
|
|
Total assets |
|
$ |
37.4 |
|
|
$ |
1,120.0 |
|
|
$ |
71.5 |
|
|
$ |
1,228.9 |
|
|
$ |
71.1 |
|
|
$ |
10,964.6 |
|
|
$ |
96.6 |
|
|
$ |
11,132.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written currency options |
|
$ |
|
|
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
1.9 |
|
|
$ |
|
|
|
$ |
1.9 |
|
Forward exchange contracts |
|
|
|
|
|
|
72.3 |
|
|
|
|
|
|
|
72.3 |
|
|
|
|
|
|
|
273.1 |
|
|
|
|
|
|
|
273.1 |
|
|
Total liabilities |
|
$ |
|
|
|
$ |
72.6 |
|
|
$ |
|
|
|
$ |
72.6 |
|
|
$ |
|
|
|
$ |
275.0 |
|
|
$ |
|
|
|
$ |
275.0 |
|
|
|
|
|
(1) |
|
Substantially all of the asset-backed securities are highly-rated (Standard &
Poors rating of AAA and Moodys 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. |
|
(2) |
|
Other assets represent a portion of the pledged collateral discussed below and in
Note 17. At December 31, 2009, Level 2 other assets are comprised of $39.5 million of
asset-backed securities, $11.6 million of mortgage backed securities and $4.0 million of
corporate notes and bonds. At December 31, 2008, Level 2 other assets are comprised of
$987.4 million of corporate notes and bonds, $792.5 million of municipal securities,
$357.3 million of commercial paper, $276.0 million of mortgage-backed securities,
$240.1 million of U.S. government and agency securities and $224.6 million of asset-backed
securities. |
|
(3) |
|
The fair value determination of derivatives includes an assessment of the credit
risk of counterparties to the derivatives and MSDs own credit risk, the effects of which were
not significant. |
As of December 31, 2009, MSD had approximately $5.6 billion of cash equivalents.
Level 3 Valuation Techniques
Financial assets are considered Level 3 when their fair values are determined using pricing
models, discounted cash flow methodologies or similar techniques and at least one significant model
assumption or input is unobservable. Level 3 financial assets also include certain investment
securities for which there is limited market activity such that the determination of fair value
requires significant judgment or estimation. MSDs Level 3 investment securities at December 31,
2009, primarily include certain mortgage-backed and asset-backed securities, as well as certain
corporate notes and bonds for which there was a decrease in the observability of market pricing for
these investments. These securities were valued primarily using pricing models for which management
understands the methodologies. These models incorporate transaction details such as contractual
terms, maturity, timing and amount of future cash inflows, as well as assumptions about liquidity
and credit valuation adjustments of marketplace participants at December 31, 2009.
52
The table below provides a summary of the changes in fair value, including net transfers in
and/or out, of all financial assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Available- |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
for-Sale |
|
Other |
|
|
|
|
|
Debt |
|
Other |
|
|
|
|
Investments |
|
Assets |
|
Total |
|
Securities |
|
Assets |
|
Total |
|
Beginning balance January 1 |
|
$ |
|
|
|
$ |
96.6 |
|
|
$ |
96.6 |
|
|
$ |
314.5 |
|
|
$ |
958.6 |
|
|
$ |
1,273.1 |
|
Net transfers in to (out of) Level 3(1) |
|
|
26.7 |
|
|
|
14.5 |
|
|
|
41.2 |
|
|
|
(314.5 |
) |
|
|
(684.5 |
) |
|
|
(999.0 |
) |
Purchases, sales, settlements, net |
|
|
(26.9 |
) |
|
|
(48.8 |
) |
|
|
(75.7 |
) |
|
|
|
|
|
|
(132.8 |
) |
|
|
(132.8 |
) |
Total realized and unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings(2) |
|
|
0.5 |
|
|
|
(4.5 |
) |
|
|
(4.0 |
) |
|
|
|
|
|
|
(43.6 |
) |
|
|
(43.6 |
) |
Comprehensive income |
|
|
(0.3 |
) |
|
|
13.7 |
|
|
|
13.4 |
|
|
|
|
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
Ending balance at December 31 |
|
$ |
|
|
|
$ |
71.5 |
|
|
$ |
71.5 |
|
|
$ |
|
|
|
$ |
96.6 |
|
|
$ |
96.6 |
|
|
Losses recorded in earnings for Level 3
assets
still held at December 31 |
|
$ |
|
|
|
$ |
3.3 |
|
|
$ |
3.3 |
|
|
$ |
|
|
|
$ |
(44.3 |
) |
|
$ |
(44.3 |
) |
|
|
|
|
(1) |
|
Transfers in and out of Level 3 are deemed to occur at the beginning of the
quarter in which the transaction takes place. |
|
|
|
(2) |
|
Amounts are recorded in Other (income) expense, net. |
On January 1, 2008, MSD had $1,273.1 million invested in a short-term fixed income fund
(the Fund). Due to market liquidity conditions, cash redemptions from the Fund were restricted.
As a result of this restriction on cash redemptions, MSD did not consider the Fund to be traded in
an active market with observable pricing on January 1, 2008 and these amounts were categorized as
Level 3. On January 7, 2008, MSD elected to be redeemed-in-kind from the Fund and received its
share of the underlying securities of the Fund. As a result, the majority of the underlying
securities were transferred out of Level 3 as it was determined that these securities had
observable markets. On December 31, 2009, $71.5 million of the investment securities associated
with the redemption-in-kind were classified in Level 3 as the securities contained at least one
significant input which was unobservable. These securities account for the entire balance of MSDs
Level 3 assets at December 31, 2009. During 2009, Level 3 investments in the aggregate amount of
$26.7 million, which were no longer pledged as collateral, were reclassified from Other assets to
available-for-sale investments.
Financial Instruments not Measured at Fair Value
Some of MSDs financial instruments are not measured at fair value on a recurring basis but
are recorded at amounts that approximate fair value due to their liquid or short-term nature, such
as cash and cash equivalents, receivables and payables.
The estimated fair value of loans payable and long-term debt (including current portion) at
December 31, 2009 was $8.8 billion compared with a carrying value of $8.5 billion and at
December 31, 2008 was $6.3 billion compared with a carrying value of $6.2 billion. Fair value was
estimated using quoted dealer prices.
A summary of the December 31 gross unrealized gains and losses on available-for-sale
investments, including those pledged as collateral, recorded in AOCI is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Fair |
|
Amortized |
|
Gross Unrealized |
|
Fair |
|
Amortized |
|
Gross Unrealized |
|
|
Value |
|
Cost |
|
Gains(1) |
|
Losses(1) |
|
Value |
|
Cost |
|
Gains(1) |
|
Losses(1) |
|
U.S. government and
agency securities |
|
$ |
215.6 |
|
|
$ |
215.7 |
|
|
$ |
1.1 |
|
|
$ |
(1.2 |
) |
|
$ |
3,125.8 |
|
|
$ |
3,061.6 |
|
|
$ |
67.4 |
|
|
$ |
(3.2 |
) |
Corporate notes and bonds |
|
|
209.2 |
|
|
|
207.1 |
|
|
|
3.3 |
|
|
|
(1.2 |
) |
|
|
4,124.7 |
|
|
|
4,158.4 |
|
|
|
31.6 |
|
|
|
(65.3 |
) |
Municipal securities |
|
|
186.7 |
|
|
|
184.8 |
|
|
|
2.9 |
|
|
|
(1.0 |
) |
|
|
792.5 |
|
|
|
764.4 |
|
|
|
28.4 |
|
|
|
(0.3 |
) |
Mortgage-backed securities |
|
|
79.4 |
|
|
|
65.9 |
|
|
|
13.8 |
|
|
|
(0.3 |
) |
|
|
1,031.9 |
|
|
|
1,024.4 |
|
|
|
12.5 |
|
|
|
(5.0 |
) |
Asset-backed securities |
|
|
79.3 |
|
|
|
69.2 |
|
|
|
10.1 |
|
|
|
|
|
|
|
551.7 |
|
|
|
571.8 |
|
|
|
0.6 |
|
|
|
(20.7 |
) |
Foreign government bonds |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
319.4 |
|
|
|
305.9 |
|
|
|
13.5 |
|
|
|
|
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490.3 |
|
|
|
490.3 |
|
|
|
|
|
|
|
|
|
Other debt securities |
|
|
21.7 |
|
|
|
19.3 |
|
|
|
9.4 |
|
|
|
(7.0 |
) |
|
|
46.7 |
|
|
|
48.6 |
|
|
|
1.5 |
|
|
|
(3.4 |
) |
Equity securities |
|
|
57.7 |
|
|
|
39.9 |
|
|
|
26.0 |
|
|
|
(8.2 |
) |
|
|
100.9 |
|
|
|
86.3 |
|
|
|
17.7 |
|
|
|
(3.1 |
) |
|
|
|
$ |
850.0 |
|
|
$ |
802.3 |
|
|
$ |
66.6 |
|
|
$ |
(18.9 |
) |
|
$ |
10,583.9 |
|
|
$ |
10,511.7 |
|
|
$ |
173.2 |
|
|
$ |
(101.0 |
) |
|
|
|
|
(1) |
|
At December 31, 2009, gross unrealized gains and gross unrealized losses
related to amounts pledged as collateral (see below and Note 17) were $25.6 million and
$(0.3) million, respectively. At December 31, 2008, gross unrealized gains and gross
unrealized losses related to amounts pledged as collateral were $36.1 million and
$(30.3) million, respectively. |
53
Available-for-sale debt securities included in Short-term investments totaled
$293.1 million at December 31, 2009. Of the remaining debt securities, $141.9 million mature within
five years. There were no debt securities pledged as collateral included in current assets at
December 31, 2009. Debt securities pledged as collateral maturing within five years totaled
$37.1 million.
Letter of Credit
In August 2008, MSD executed a $4.1 billion letter of credit agreement with a financial
institution, which satisfied certain conditions set forth in the U.S. Vioxx Settlement Agreement
(see Note 12). MSD pledged collateral to the financial institution of approximately $5.1 billion
pursuant to the terms of the letter of credit agreement. Although the amount of assets pledged as
collateral was set by the letter of credit agreement and such assets were held in custody by a
third party, the assets were managed by MSD. MSD considered the assets pledged under the letter of
credit agreement to be restricted. The letter of credit amount and required collateral balances
declined as payments (after the first $750 million) under the Settlement Agreement were made. As of
December 31, 2008, $3.8 billion was recorded within Deferred income taxes and other current assets
and $1.3 billion was classified as Other assets. During 2009, MSD made all remaining payments into
the Vioxx settlement funds pursuant to the U.S. Vioxx Settlement Agreement. Accordingly, the letter
of credit agreement was terminated and the collateral was released.
Concentrations of Credit Risk
On an ongoing basis, MSD monitors concentrations of credit risk associated with corporate
issuers of securities and financial institutions with which it conducts business. Credit exposure
limits are established to limit a concentration with any single issuer or institution. Cash and
investments are placed in instruments that meet high credit quality standards, as specified in
MSDs investment policy guidelines.
Derivative financial instruments are executed under International Swaps and Derivatives
Association master agreements. The master agreements with several of MSDs financial institution
counterparties also include credit support annexes. These annexes contain provisions that require
collateral to be exchanged depending on the value of the derivative assets and liabilities, MSDs
credit rating, and the credit rating of the counterparty. As of December 31, 2009, Cash and cash
equivalents includes cash collateral of $69.2 million received from various counterparties with a
corresponding offset included in Accrued and other current liabilities. MSD had not advanced any
cash collateral to counterparties as of December 31, 2009.
MSDs four largest U.S. customers, McKesson Corporation, Cardinal Health, Inc.,
AmerisourceBergen Corporation and Medco Health Solutions, Inc., represented, in aggregate,
approximately one-fourth of accounts receivable at December 31, 2009. MSD monitors the
creditworthiness of its customers to which it grants credit terms in the normal course of business.
Bad debts have been minimal. MSD does not normally require collateral or other security to support
credit sales.
8. Inventories
Inventories at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Finished goods |
|
$ |
523.6 |
|
|
$ |
432.6 |
|
Raw materials and work in process |
|
|
2,404.8 |
|
|
|
2,147.1 |
|
Supplies |
|
|
98.8 |
|
|
|
98.6 |
|
|
Total (approximates current cost) |
|
|
3,027.2 |
|
|
|
2,678.3 |
|
Reduction to LIFO costs |
|
|
(169.6 |
) |
|
|
|
|
|
|
|
$ |
2,857.6 |
|
|
$ |
2,678.3 |
|
|
Recognized as: |
|
|
|
|
|
|
|
|
Inventories |
|
$ |
2,147.7 |
|
|
$ |
2,091.0 |
|
Other assets |
|
|
709.9 |
|
|
|
587.3 |
|
|
Inventories valued under the LIFO method comprised approximately 53% and 56% of inventories at
December 31, 2009 and 2008, respectively. Amounts recognized as Other assets are comprised almost
entirely of raw materials and work in process inventories, the majority of which are noncurrent
vaccine inventories.
54
9. Goodwill and Other Intangibles
The following table summarizes goodwill activity:
|
|
|
|
|
|
Goodwill balance as of January 1, 2008 |
|
$ |
1,454.8 |
|
Other |
|
|
(16.1 |
) |
|
Goodwill balance as of December 31, 2008 |
|
|
1,438.7 |
|
|
Additions |
|
|
0.3 |
|
|
Goodwill balance as of December 31, 2009 |
|
$ |
1,439.0 |
|
|
Other intangibles at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
Amount |
|
Amortization |
|
Net |
|
Amount |
|
Amortization |
|
Net |
|
Products and product rights |
|
$ |
1,627.0 |
|
|
$ |
1,531.2 |
|
|
$ |
95.8 |
|
|
$ |
1,629.1 |
|
|
$ |
1,501.2 |
|
|
$ |
127.9 |
|
In-process research and development(1) |
|
|
130.3 |
|
|
|
|
|
|
|
130.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames |
|
|
65.7 |
|
|
|
41.2 |
|
|
|
24.5 |
|
|
|
64.0 |
|
|
|
37.5 |
|
|
|
26.5 |
|
Other |
|
|
743.1 |
|
|
|
470.5 |
|
|
|
272.6 |
|
|
|
742.5 |
|
|
|
371.5 |
|
|
|
371.0 |
|
|
Total identifiable intangible assets |
|
$ |
2,566.1 |
|
|
$ |
2,042.9 |
|
|
$ |
523.2 |
|
|
$ |
2,435.6 |
|
|
$ |
1,910.2 |
|
|
$ |
525.4 |
|
|
|
|
|
(1) |
|
Amounts capitalized as in-process research and development are accounted for as
indefinite-lived intangible assets, subject to impairment testing until completion or
abandonment of the projects. Upon successful completion of each project, MSD will make a
separate determination as to the useful life of the assets and begin amortization. |
Aggregate amortization expense was $134.0 million in 2009, $186.1 million in 2008 and
$235.8 million in 2007. The estimated aggregate amortization expense for each of the next five
years is as follows: 2010, $130.8 million; 2011, $103.0 million; 2012, $84.0 million; 2013, $63.6
million; 2014, $4.0 million.
10. Joint Ventures and Other Equity Method Affiliates
Equity income from affiliates reflects the performance of MSDs joint ventures and other
equity method affiliates and was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Merck/Schering-Plough |
|
$ |
1,463.5 |
|
|
$ |
1,536.3 |
|
|
$ |
1,830.8 |
|
AstraZeneca LP |
|
|
674.3 |
|
|
|
598.4 |
|
|
|
820.1 |
|
Other(1) |
|
|
365.2 |
|
|
|
425.9 |
|
|
|
325.6 |
|
|
|
|
$ |
2,503.0 |
|
|
$ |
2,560.6 |
|
|
$ |
2,976.5 |
|
|
|
|
|
(1) |
|
Primarily reflects results from Merial Limited until disposition on
September 17, 2009, Sanofi Pasteur MSD and Johnson & Johnson°Merck Consumer Pharmaceuticals
Company. |
Merck/Schering-Plough Partnership
In 2000, MSD and Schering-Plough (collectively the Partners) entered into an agreement to
create an equally-owned partnership to develop and market in the United States new prescription
medicines for cholesterol management. This agreement generally provides for equal sharing of
development costs and for co-promotion of approved products by each company. In 2001, the
cholesterol-management partnership was expanded to include all the countries of the world,
excluding Japan. In 2002, ezetimibe, the first in a new class of cholesterol-lowering agents, was
launched in the United States as Zetia (marketed as Ezetrol outside the United States). In 2004, a
combination product containing the active ingredients of both Zetia and Zocor, was approved in the
United States as Vytorin (marketed as Inegy outside of the United States).
The cholesterol agreements provide for the sharing of operating income generated by the
Merck/Schering-Plough partnership (the MSP Partnership) based upon percentages that vary by
product, sales level and country. In the U.S. market, the Partners shared profits on Zetia and
Vytorin sales equally, with the exception of the first $300 million of annual Zetia sales on which
Schering-Plough receives a greater share of profits. Operating income included expenses that the
Partners contractually agreed to share, such as a portion of manufacturing costs, specifically
identified promotion costs (including direct-to-consumer advertising and direct and identifiable
out-of-pocket promotion) and other agreed upon costs for specific services such as on-going
clinical research, market support, market research, market expansion, as well as a specialty sales
force and physician education programs. Expenses incurred in support of the MSP Partnership but not
shared between the Partners, such as marketing and administrative expenses (including certain sales
force costs), as well as certain manufacturing costs, are not included in Equity income from
affiliates. However, these costs are reflected in the overall results of each
55
company. Certain research and development expenses were generally shared equally by the
Partners, after adjusting for earned milestones.
See Note 12 for information with respect to litigation involving the MSP Partnership and the
Partners related to the sale and promotion of Zetia and Vytorin.
Summarized financial information for the MSP Partnership is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Sales |
|
$ |
4,128.1 |
|
|
$ |
4,561.1 |
|
|
$ |
5,186.2 |
|
|
Vytorin |
|
|
2,060.1 |
|
|
|
2,360.0 |
|
|
|
2,779.1 |
|
Zetia |
|
|
2,068.0 |
|
|
|
2,201.1 |
|
|
|
2,407.1 |
|
Materials and production costs |
|
|
173.0 |
|
|
|
176.3 |
|
|
|
216.0 |
|
Other expense, net |
|
|
1,000.7 |
|
|
|
1,230.1 |
|
|
|
1,307.2 |
|
|
Income before taxes |
|
$ |
2,954.4 |
|
|
$ |
3,154.7 |
|
|
$ |
3,663.0 |
|
|
MSDs share of income before taxes(1) |
|
$ |
1,476.0 |
|
|
$ |
1,489.5 |
|
|
$ |
1,832.5 |
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
2009 |
|
2008 |
|
Total assets (2) |
|
$ |
506.0 |
|
|
$ |
608.0 |
|
Total liabilities (2) |
|
|
432.0 |
|
|
|
488.0 |
|
|
|
|
|
(1) |
|
MSDs share of the MSP Partnerships income before taxes differs from the
equity income recognized from the MSP Partnership primarily due to the timing of recognition
of certain transactions between MSD and the MSP Partnership during the periods presented,
including milestone payments. |
|
|
|
(2) |
|
Amounts are comprised almost entirely of current balances. |
AstraZeneca LP
In 1982, MSD entered into an agreement with Astra AB (Astra) to develop and market Astras
products under a royalty-bearing license. In 1993, MSDs total sales of Astra products reached a
level that triggered the first step in the establishment of a joint venture business carried on by
Astra Merck Inc. (AMI), in which MSD and Astra each owned a 50% share. This joint venture, formed
in 1994, developed and marketed most of Astras new prescription medicines in the United States
including Prilosec, the first of a class of medications known as proton pump inhibitors, which
slows the production of acid from the cells of the stomach lining.
In 1998, MSD and Astra completed the restructuring of the ownership and operations of the
joint venture whereby MSD acquired Astras interest in AMI, renamed KBI Inc. (KBI), and
contributed KBIs operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P.
(the Partnership), in exchange for a 1% limited partner interest. Astra contributed the net
assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a 99%
general partner interest. The Partnership, renamed AstraZeneca LP (AZLP) upon Astras 1999 merger
with Zeneca Group Plc (the AstraZeneca merger), became the exclusive distributor of the products
for which KBI retained rights.
While maintaining a 1% limited partner interest in AZLP, MSD has consent and protective rights
intended to preserve its business and economic interests, including restrictions on the power of
the general partner to make certain distributions or dispositions. Furthermore, in limited events
of default, additional rights will be granted to MSD, including powers to direct the actions of, or
remove and replace, the Partnerships chief executive officer and chief financial officer. MSD
earns ongoing revenue based on sales of current and future KBI products and such revenue was
$1.4 billion, $1.6 billion and $1.7 billion in 2009, 2008 and 2007, respectively, primarily
relating to sales of Nexium, as well as Prilosec. In addition, MSD earns certain Partnership
returns which are recorded in Equity income from affiliates as reflected in the table above. Such
returns include a priority return provided for in the Partnership Agreement, variable returns
based, in part, upon sales of certain former Astra USA, Inc. products, and a preferential return
representing MSDs share of undistributed AZLP GAAP earnings. The AstraZeneca merger triggered a
partial redemption in March 2008 of MSDs interest in certain AZLP product rights. Upon this
redemption, MSD received $4.3 billion from AZLP. This amount was based primarily on a multiple of
MSDs average annual variable returns derived from sales of the former Astra USA, Inc. products for
the three years prior to the redemption (the Limited Partner Share of Agreed Value). MSD recorded
a $1.5 billion pretax gain on the partial redemption in 2008. The partial redemption of MSDs
interest in the product rights did not result in a change in MSDs 1% limited partnership interest.
In conjunction with the 1998 restructuring, Astra purchased an option (the Asset Option) for
a payment of $443.0 million, which was recorded as deferred income, to buy MSDs interest in the
KBI products, excluding the gastrointestinal medicines Nexium and Prilosec (the Non-PPI
Products). AstraZeneca can exercise the Asset Option in the first half of 2010 at an exercise
price of $647 million which represents the net present value as of March 31, 2008 of
56
projected future pretax revenue to be received by MSD from the Non-PPI Products (the
Appraised Value). On February 26, 2010, AstraZeneca notified MSD that it was exercising the Asset
Option. MSD also had the right to require Astra to purchase such interest in 2008 at the Appraised
Value. In February 2008, MSD advised AstraZeneca that it would not exercise the Asset Option, thus
the $443.0 million remains deferred but will be recognized when the Asset Option is consummated. In
addition, in 1998 MSD granted Astra an option (the Shares Option) to buy MSDs common stock
interest in KBI, and, therefore, MSDs interest in Nexium and Prilosec, exercisable two years after
Astras exercise of the Asset Option. Astra can also exercise the Shares Option in 2017 or if
combined annual sales of the two products fall below a minimum amount provided, in each case, only
so long as AstraZenecas Asset Option has been exercised in 2010. The exercise price for the
Shares Option is based on the net present value of estimated future net sales of Nexium and
Prilosec as determined at the time of exercise, subject to certain true-up mechanisms.
The AstraZeneca merger constituted a Trigger Event under the KBI restructuring agreements. As
a result of the merger, in exchange for MSDs relinquishment of rights to future Astra products
with no existing or pending U.S. patents at the time of the merger, Astra paid $967.4 million (the
Advance Payment). The Advance Payment was deferred as it remained subject to a true-up
calculation (the True-Up Amount) that was directly dependent on the fair market value in March
2008 of the Astra product rights retained by MSD. The calculated True-Up Amount of $243.7 million
was returned to AZLP in March 2008 and MSD recognized a pretax gain of $723.7 million related to
the residual Advance Payment balance.
Under the provisions of the KBI restructuring agreements, because a Trigger Event has
occurred, the sum of the Limited Partner Share of Agreed Value, the Appraised Value and the True-Up
Amount was guaranteed to be a minimum of $4.7 billion. Distribution of the Limited Partner Share of
Agreed Value less payment of the True-Up Amount resulted in cash receipts to MSD of $4.0 billion
and an aggregate pretax gain of $2.2 billion which is included in Other (income) expense, net in
2008. AstraZenecas purchase of MSDs interest in the Non-PPI Products is contingent upon the
exercise of the Asset Option by AstraZeneca in 2010 and, therefore, payment of the Appraised Value
may or may not occur. Also, in March 2008, the $1.38 billion outstanding loan from Astra plus
interest through the redemption date was settled. As a result of these transactions, MSD received
net proceeds from AZLP of $2.6 billion.
Summarized financial information for AZLP is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Sales |
|
$ |
5,743.6 |
|
|
$ |
5,450.4 |
|
|
$ |
6,345.4 |
|
Materials and production costs |
|
|
3,136.6 |
|
|
|
2,682.4 |
|
|
|
3,364.0 |
|
Other expense, net |
|
|
1,194.2 |
|
|
|
1,408.1 |
|
|
|
1,090.1 |
|
Income before taxes |
|
|
1,412.8 |
|
|
|
1,359.9 |
|
|
|
1,891.3 |
|
|
|
December 31 |
|
2009 |
|
2008 |
|
|
|
|
|
Current assets |
|
$ |
2,956.2 |
|
|
$ |
2,023.9 |
|
|
|
|
|
Noncurrent assets |
|
|
294.5 |
|
|
|
359.0 |
|
|
|
|
|
Total liabilities (all current) |
|
|
3,489.3 |
|
|
|
3,054.4 |
|
|
|
|
|
|
|
|
Merial Limited
In 1997, MSD and Rhône-Poulenc S.A. (now sanofi-aventis) combined their animal health
businesses to form Merial Limited (Merial), a fully integrated animal health company, which was a
stand-alone joint venture, 50% owned by each party. Merial provides a comprehensive range of
pharmaceuticals and vaccines to enhance the health, well-being and performance of a wide range of
animal species.
On September 17, 2009, MSD sold its 50% interest in Merial to sanofi-aventis for $4 billion in
cash. The sale resulted in the recognition of a $3.2 billion gain in 2009 reflected in Other income
(expense), net.
Also, in connection with the sale of Merial, MSD, sanofi-aventis and Schering-Plough signed a
call option agreement. Under the terms of the call option agreement, following the closing of the
Merger, sanofi-aventis had an option to require MSDs Parent Company to combine its
Intervet/Schering-Plough Animal Health business with Merial to form an animal health joint venture
that would be owned equally by MSDs Parent Company and sanofi-aventis. On March 9, 2010, MSDs
Parent Company and sanofi-aventis announced that sanofi-aventis had exercised the option. As part
of the call option agreement, the value of Merial has been fixed at $8 billion. The minimum total
value received by MSDs Parent Company for contributing Intervet/Schering-Plough to the combined
entity would be $9.25 billion (subject to customary transaction adjustments), consisting of a floor
valuation of Intervet/Schering-Plough which is fixed at a minimum of $8.5 billion (subject to
potential upward revision based on a valuation exercise by the two parties) and an additional
payment by sanofi-aventis of
57
$750 million. Based on the valuation exercise of Intervet/Schering-Plough and the customary
transaction adjustments, if Merial and Intervet/Schering-Plough are combined, a payment may be
required to be paid by either party to make the joint venture equally owned by MSDs Parent Company
and sanofi-aventis. This payment would true-up the value of the contributions so that they are
equal. Any formation of a new animal health joint venture with sanofi-aventis is subject to
customary closing conditions including antitrust review in the United States and Europe. Prior to
the closing of the Merger, the agreements provided MSD with certain rights to terminate the call
option for a fee of $400 million. The recognition of the termination fee was deferred until the
fourth quarter of 2009 when the conditions that could have triggered its payment lapsed. The amount
is reflected in Other (income) expense, net.
Merial sales were $1.8 billion for the period from January 1, 2009 until the September 17,
2009 divestiture date, $2.6 billion for 2008 and $2.4 billion for 2007.
Sanofi Pasteur MSD
In 1994, MSD and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an
equally-owned joint venture to market vaccines in Europe and to collaborate in the development of
combination vaccines for distribution in Europe. Joint venture vaccine sales were $1.6 billion for
2009, $1.9 billion for 2008 and $1.4 billion for 2007.
Johnson & Johnson°Merck Consumer Pharmaceuticals Company
In 1989, MSD formed a joint venture with Johnson & Johnson to develop and market a broad range
of nonprescription medicines for U.S. consumers. This 50% owned venture was subsequently expanded
into Canada. Significant joint venture products are Pepcid AC, an over-the-counter form of the
ulcer medication Pepcid, as well as Pepcid Complete, an over-the-counter product which combines the
ulcer medication with antacids. Sales of products marketed by the joint venture were $203.2 million
for 2009, $212.1 million for 2008 and $219.7 million for 2007.
Investments in affiliates accounted for using the equity method, including the above joint
ventures, totaled $1.1 billion at December 31, 2009 and $1.4 billion at December 31, 2008. These
amounts are reported in Other assets. Amounts due from the above joint ventures included in
Deferred income taxes and other current assets were $552.4 million at December 31, 2009 and
$623.4 million at December 31, 2008.
Summarized information for those affiliates (excluding the MSP Partnership and AZLP disclosed
separately above) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009(1) |
|
2008 |
|
2007 |
|
Sales |
|
$ |
3,767.0 |
|
|
$ |
4,860.4 |
|
|
$ |
4,218.6 |
|
Materials and production costs |
|
|
1,225.3 |
|
|
|
1,553.6 |
|
|
|
1,346.9 |
|
Other expense, net |
|
|
1,564.1 |
|
|
|
2,297.9 |
|
|
|
1,995.2 |
|
Income before taxes |
|
|
977.6 |
|
|
|
1,008.9 |
|
|
|
876.5 |
|
|
|
December 31 |
|
2009 |
|
2008 |
|
|
|
|
|
Current assets |
|
$ |
757.2 |
|
|
$ |
1,935.8 |
|
|
|
|
|
Noncurrent assets |
|
|
270.7 |
|
|
|
1,174.4 |
|
|
|
|
|
Current liabilities |
|
|
601.3 |
|
|
|
1,152.6 |
|
|
|
|
|
Noncurrent liabilities |
|
|
84.3 |
|
|
|
266.5 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes information for Merial until divestiture on September 17, 2009. |
11. Loans Payable, Long-Term Debt and Other Commitments
Loans payable at December 31, 2009 included $298.2 million of long-dated notes that are
subject to repayment at the option of the holders on an annual basis, $106.0 million of long-dated
notes that are subject to repayment at the option of the holders beginning in 2010 that were
reclassified from long-term debt during 2009, and short-term foreign borrowing of $46.3 million.
Loans payable at December 31, 2008 included $1.9 billion of commercial paper borrowings,
$322.2 million of long-dated notes that are subject to repayment at the option of the holders on an
annual basis and $68 million of short-term foreign borrowings.
58
Long-term debt at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
1.875% notes due 2011 |
|
$ |
1,249.8 |
|
|
$ |
|
|
5.00% notes due 2019 |
|
|
1,242.5 |
|
|
|
|
|
4.75% notes due 2015 |
|
|
1,065.5 |
|
|
|
1,078.3 |
|
4.00% notes due 2015 |
|
|
1,004.4 |
|
|
|
|
|
5.85% notes due 2039 |
|
|
748.5 |
|
|
|
|
|
4.375% notes due 2013 |
|
|
522.7 |
|
|
|
530.0 |
|
6.4% debentures due 2028 |
|
|
499.4 |
|
|
|
499.3 |
|
5.75% notes due 2036 |
|
|
497.8 |
|
|
|
497.8 |
|
5.95% debentures due 2028 |
|
|
497.4 |
|
|
|
497.2 |
|
5.125% notes due 2011 |
|
|
268.5 |
|
|
|
273.7 |
|
6.3% debentures due 2026 |
|
|
248.2 |
|
|
|
248.0 |
|
Other |
|
|
223.1 |
|
|
|
319.0 |
|
|
|
|
$ |
8,067.8 |
|
|
$ |
3,943.3 |
|
|
MSD was a party to interest rate swap contracts which effectively convert the 5.125%
fixed-rate notes and $750 million of the 4.00% fixed-rate notes to floating-rate instruments (see
Note 7).
Other (as presented in the table above) at December 31, 2009 and 2008 consisted primarily of
$186.7 million and $292.7 million of borrowings at variable rates averaging 0.0% and 1.1%,
respectively. Of these borrowings, $158.7 million is subject to repayment at the option of the
holders beginning in 2011. In both years, Other also included foreign borrowings at varying rates
up to 8.5%.
On June 25, 2009, MSD closed an underwritten public offering of $4.25 billion senior unsecured
notes consisting of $1.25 billion aggregate principal amount of 1.875% notes due 2011, $1.0 billion
aggregate principal amount of 4.00% notes due 2015, $1.25 billion aggregate principal amount of
5.00% notes due 2019 and $750 million aggregate principal amount of 5.85% notes due 2039. Interest
on the notes is payable semi-annually. The notes of each series are redeemable in whole or in part
at any time, at MSDs option at the redemption prices specified in each notes associated
prospectus. Proceeds from the notes were used to fund a portion of the cash consideration of the
Merger.
Also, in connection with the Merger, effective as of November 3, 2009, MSDs Parent Company
executed a full and unconditional guarantee of the existing debt of MSD and MSD executed a full and
unconditional guarantee of the existing debt of MSDs Parent Company (excluding commercial paper),
including for payments of principal and interest.
The aggregate maturities of long-term debt for each of the next five years are as follows:
2010, $6.3 million; 2011, $1.5 billion; 2012, $4.2 million; 2013, $529.9 million; 2014,
$15.8 million.
Also, in connection with the Merger, on March 8, 2009, MSD entered into a financing commitment
letter with JPMorgan Chase Bank, N.A. and J.P. Morgan Securities Inc. (collectively JPMorgan),
under which JPMorgan committed to provide $7 billion of financing. On May 6, 2009, MSD entered into
a $3 billion 364-day senior unsecured interim term loan facility (the bridge loan facility); a
$3 billion 364-day asset sale revolving credit facility (the asset sale facility); and a
$1 billion 364-day corporate revolving credit facility (the incremental facility). In connection
with the above $4.25 billion offering, the bridge loan facility was terminated and the commitment
of the lenders under the 364-day asset sale facility was reduced. Upon completion of the sale of
Merial to sanofi-aventis (see Note 10), the asset sale facility was terminated. The incremental
facility is available to backstop commercial paper and for general corporate purposes. This
facility has not been drawn on and will expire in November 2010. MSD has incurred commitment fees
of approximately $150 million associated with these facilities which are being amortized over the
commitment period.
In April 2009, MSD amended its $1.5 billion, 5-year revolving credit facility maturing in
April 2013 to allow the facility to remain in place after the Merger. The facility provides backup
liquidity for MSDs commercial paper borrowing facility and is to be used for general corporate
purposes. MSD has not drawn funding from the facility.
Rental expense under operating leases, net of sublease income, was $193.3 million in 2009,
$222.4 million in 2008 and $197.5 million in 2007. The minimum aggregate rental commitments under
noncancellable leases are as follows: 2010, $99.2 million; 2011, $92.5 million; 2012,
$70.9 million; 2013, $47.9 million and thereafter, $68.6 million. MSD has no significant capital
leases.
59
12. Contingencies and Environmental Liabilities
MSD is involved in various claims and legal proceedings of a nature considered normal to its
business, including product liability, intellectual property and commercial litigation, as well as
additional matters such as antitrust actions. MSD records accruals for contingencies when it is
probable that a liability has been incurred and the amount can be reasonably estimated. These
accruals are adjusted periodically as assessments change or additional information becomes
available. For product liability claims, a portion of the overall accrual is actuarially determined
and considers such factors as past experience, number of claims reported and estimates of claims
incurred but not yet reported. Individually significant contingent losses are accrued when probable
and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss
contingency are accrued when probable and reasonably estimable.
MSDs decision to obtain insurance coverage is dependent on market conditions, including cost
and availability, existing at the time such decisions are made. As a result of a number of factors,
product liability insurance has become less available while the cost has increased significantly.
MSD has evaluated its risks and has determined that the cost of obtaining product liability
insurance outweighs the likely benefits of the coverage that is available and as such, has no
insurance for certain product liabilities effective August 1, 2004, including liability for MSD
products first sold after that date. MSD will continue to evaluate its insurance needs and the
costs, availability and benefits of product liability insurance in the future.
Vioxx Litigation
Product Liability Lawsuits
As previously disclosed, individual and putative class actions have been filed against MSD in
state and federal courts alleging personal injury and/or economic loss with respect to the purchase
or use of Vioxx. All such actions filed in federal court are coordinated in a multidistrict
litigation in the U.S. District Court for the Eastern District of Louisiana (the MDL) before
District Judge Eldon E. Fallon. A number of such actions filed in state court are coordinated in
separate coordinated proceedings in state courts in New Jersey, California and Texas, and the
counties of Philadelphia, Pennsylvania and Washoe and Clark Counties, Nevada. As of December 31,
2009, MSD had been served or was aware that it had been named as a defendant in approximately 9,100
pending lawsuits, which include approximately 19,400 plaintiff groups, alleging personal injuries
resulting from the use of Vioxx, and in approximately 44 putative class actions alleging personal
injuries and/or economic loss. (All of the actions discussed in this paragraph and in Other
Lawsuits below are collectively referred to as the Vioxx Product Liability Lawsuits.) Of these
lawsuits, approximately 7,350 lawsuits representing approximately 15,525 plaintiff groups are or
are slated to be in the federal MDL and approximately 10 lawsuits representing approximately 10
plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court before Judge
Carol E. Higbee.
Of the plaintiff groups described above, most are currently in the Vioxx Settlement Program,
described below. As of December 31, 2009, 80 plaintiff groups who were otherwise eligible for the
Settlement Program have not participated and their claims remain pending against MSD. In addition,
the claims of approximately 275 plaintiff groups who are not eligible for the Settlement Program
remain pending against MSD. A number of these 275 plaintiff groups are subject to various motions
to dismiss for failure to comply with court-ordered deadlines. Since December 31, 2009, certain of
these plaintiff groups have since been dismissed. In addition, the claims of over 35,600 plaintiffs
had been dismissed as of December 31, 2009, the vast majority of which were dismissed as a result
of the settlement process discussed below.
On November 9, 2007, MSD announced that it had entered into an agreement (the Settlement
Agreement) with the law firms that comprise the executive committee of the Plaintiffs Steering
Committee (PSC) of the federal Vioxx MDL, as well as representatives of plaintiffs counsel in
the Texas, New Jersey and California state coordinated proceedings, to resolve state and federal
myocardial infarction (MI) and ischemic stroke (IS) claims filed as of that date in the United
States. The Settlement Agreement applies only to U.S. legal residents and those who allege that
their MI or IS occurred in the United States. The Settlement Agreement provided for MSD to pay a
fixed aggregate amount of $4.85 billion into two funds ($4.0 billion for MI claims and $850 million
for IS claims).
Interim and final payments have been made to certain qualifying claimants. It is expected that
the remainder of the full $4.85 billion will be distributed in the first half of 2010. MSD has
completed making payments into the settlement funds.
There are two U.S. Vioxx Product Liability Lawsuits currently scheduled for trial in 2010. MSD
has previously disclosed the outcomes of several Vioxx Product Liability Lawsuits that were tried
prior to 2010.
Of the cases that went to trial, the McDarby matter was resolved in the fourth quarter of
2009, leaving only two unresolved post-trial appeals: Ernst v. Merck and Garza v. Merck.
60
As previously reported, in September 2006, MSD filed a notice of appeal of the August 2005
jury verdict in favor of the plaintiff in the Texas state court case, Ernst v. Merck. On May 29,
2008, the Texas Court of Appeals reversed the trial courts judgment and issued a judgment in favor
of MSD. The Court of Appeals found the evidence to be legally insufficient on the issue of
causation. Plaintiff filed a motion for rehearing en banc in the Court of Appeals. On June 4, 2009,
in response to plaintiffs motion for rehearing, the Court of Appeals issued a new opinion
reversing the jurys verdict and rendered judgment for MSD. On September 8, 2009, plaintiff filed a
second motion for rehearing en banc, which the Court of Appeals denied on November 19, 2009. On
December 7, 2009, plaintiff filed another motion for rehearing, which the Court of Appeals again
denied. Plaintiff filed a petition for review with the Supreme Court of Texas on February 3, 2010.
As previously reported, in April 2006, in Garza v. Merck, a jury in state court in Rio Grande
City, Texas returned a verdict in favor of the family of decedent Leonel Garza. The jury awarded a
total of $7 million in compensatory damages to Mr. Garzas widow and three sons. The jury also
purported to award $25 million in punitive damages even though under Texas law, in this case,
potential punitive damages were capped at $750,000. In May 2008, the San Antonio Court of Appeals
reversed the judgment and rendered a judgment in favor of MSD. In December 2008, the Court of
Appeals, on rehearing, vacated its prior ruling and issued a replacement. In the new ruling, the
court ordered a take-nothing judgment for MSD on the design defect claim, but reversed and remanded
for a new trial as to the strict liability claim because of juror misconduct. In January 2009, MSD
filed a petition for review with the Texas Supreme Court. The Texas Supreme Court granted MSDs
petition for review and oral argument was held on January 20, 2010.
Other Lawsuits
Approximately 190 claims by individual private third-party payors were filed in the New Jersey
court and in federal court in the MDL. On September 15, 2009, MSD announced it had finalized a
settlement agreement, which it had previously disclosed, to resolve all pending lawsuits in which
U.S.-based private third-party payors (TPPs) sought reimbursement for covering Vioxx purchased by
their plan members. Certain other claimants participated in the resolution as well. The agreement
provided that MSD did not admit wrongdoing or fault. Under the settlement agreement, MSD paid a
fixed total of $80 million. This amount includes a settlement fund that will be divided among the
TPPs (insurers, employee benefit plans and union welfare funds) participating in the resolution in
accordance with a formula that is based on product volume and a provision for potential payment of
attorneys fees. In return, the settling TPPs will dismiss their lawsuits and release their claims
against MSD. Stipulated dismissals of the settled TTP actions were filed in New Jersey and the MDL
in December 2009. MSD recorded a charge of $80 million in the second quarter of 2009 related to the
settlement and paid the $80 million in the fourth quarter of 2009. Since the settlement, one
additional TPP case has been filed which is pending in the MDL proceeding.
Separately, there are also still pending in various U.S. courts putative class actions
purportedly brought on behalf of individual purchasers or users of Vioxx and seeking reimbursement
of alleged economic loss. In the MDL proceeding, 33 such class actions remain. In 2005, MSD moved
to dismiss a master complaint that includes these cases, but the MDL court has not yet ruled on
that motion.
On March 17, 2009, the New Jersey Superior Court denied plaintiffs motion for class
certification in Martin-Kleinman v. Merck, a putative consumer class action. Plaintiffs moved for
leave to appeal the decision to the New Jersey Supreme Court on November 6, 2009. On January 12,
2010, the New Jersey Supreme Court denied plaintiffs request for appellate review of the denial of
class certification.
On June 12, 2008, a Missouri state court certified a class of Missouri plaintiffs seeking
reimbursement for out-of-pocket costs relating to Vioxx. The plaintiffs do not allege any personal
injuries from taking Vioxx. The Missouri Court of Appeals affirmed the trial courts certification
of a class on May 12, 2009, and the Missouri Supreme Court denied MSDs application for review of
that decision on September 1, 2009. Trial has been set for April 11, 2011. In addition, in Indiana,
plaintiffs have filed a motion to certify a class of Indiana Vioxx purchasers in a case pending
before the Circuit Court of Marion County, Indiana; discovery in that case is ongoing. Briefing is
complete on plaintiffs motion to certify a class of Kentucky Vioxx purchasers before the Circuit
Court of Pike County, Kentucky. A hearing on this matter was held on February 26, 2010. A judge in
Cook County, Illinois has consolidated three putative class actions brought by Vioxx purchasers.
The plaintiffs in those actions recently voluntarily dismissed their lawsuits.
Plaintiffs also filed a class action in California state court seeking certification of a
class of California third-party payors and end-users. The trial court denied the motion for class
certification on April 30, 2009, and the Court of Appeal affirmed that ruling on December 15, 2009.
On January 25, 2010, plaintiffs filed a petition for review with the California Supreme Court.
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MSD has also been named as a defendant in twenty-one separate lawsuits brought by government
entities, including the Attorneys General of thirteen states, five counties, the City of New York,
and private citizens (who have brought qui tam and taxpayer derivative suits). These actions allege
that MSD misrepresented the safety of Vioxx and seek: (i) recovery of the cost of Vioxx purchased
or reimbursed by the government entity and its agencies; (ii) reimbursement of all sums paid by the
government entity and its agencies for medical services for the treatment of persons injured by
Vioxx; (iii) damages under various common law theories; and/or (iv) remedies under various state
statutory theories, including state consumer fraud and/or fair business practices or Medicaid fraud
statutes, including civil penalties. Nine of the thirteen cases are pending in the MDL proceeding,
two are subject to conditional orders transferring them to the MDL proceeding, and two were
remanded to state court. One of the lawsuits brought by the counties is a class action filed by
Santa Clara County, California on behalf of all similarly situated California counties.
MSDs motion for summary judgment was granted in November 2009 in a case brought by the
Attorney General of Texas that was scheduled to go to trial in early 2010. The Texas Attorney
General did not appeal. In the Michigan Attorney General case, MSD is currently seeking appellate
review of the trial courts order denying MSDs motion to dismiss. The trial court has entered a
stay of proceedings (including discovery) pending the result of that appeal. Finally, the Attorney
General actions in the MDL described in the previous paragraph are in the discovery phase. The
Louisiana Attorney General case is currently scheduled for trial in the MDL court on April 12,
2010.
Shareholder Lawsuits
As previously disclosed, in addition to the Vioxx Product Liability Lawsuits, MSD and various
current and former officers and directors are defendants in various putative class actions and
individual lawsuits under the federal securities laws and state securities laws (the Vioxx
Securities Lawsuits). All of the Vioxx Securities Lawsuits pending in federal court have been
transferred by the Judicial Panel on Multidistrict Litigation (the JPML) to the U.S. District
Court for the District of New Jersey before District Judge Stanley R. Chesler for inclusion in a
nationwide MDL (the Shareholder MDL). Judge Chesler has consolidated the Vioxx Securities
Lawsuits for all purposes. The putative class action, which requested damages on behalf of
purchasers of MSD stock between May 21, 1999 and October 29, 2004, alleged that the defendants made
false and misleading statements regarding Vioxx in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and sought unspecified compensatory damages and the costs of suit,
including attorneys fees. The complaint also asserted claims under Section 20A of the Securities
and Exchange Act against certain defendants relating to their sales of MSD stock and under
Sections 11, 12 and 15 of the Securities Act of 1933 against certain defendants based on statements
in a registration statement and certain prospectuses filed in connection with the MSD Stock
Investment Plan, a dividend reinvestment plan. On April 12, 2007, Judge Chesler granted defendants
motion to dismiss the complaint with prejudice. Plaintiffs appealed Judge Cheslers decision to the
U.S. Court of Appeals for the Third Circuit. On September 9, 2008, the Third Circuit issued an
opinion reversing Judge Cheslers order and remanding the case to the District Court. MSD filed a
petition for a writ of certiorari with the United States Supreme Court on January 15, 2009, which
the Supreme Court granted on May 26, 2009. Oral argument was held on November 30, 2009 and a
decision is expected in the first half of 2010. While the petition for certiorari was pending,
plaintiffs filed their Consolidated and Fifth Amended Class Action Complaint in the District Court.
MSD filed a motion to dismiss that complaint on May 1, 2009, following which the District Court
proceedings were stayed pending the outcome of the Supreme Court appeal. The motion to dismiss in
the District Court has been withdrawn without prejudice to MSDs right to re-file such a motion
pending the outcome of the Supreme Court appeal.
In October 2005, a Dutch pension fund filed a complaint in the District of New Jersey alleging
violations of federal securities laws as well as violations of state law against MSD and certain
officers. Pursuant to the Case Management Order governing the Shareholder MDL, the case, which is
based on the same allegations as the Vioxx Securities Lawsuits, was consolidated with the Vioxx
Securities Lawsuits. Defendants motion to dismiss the pension funds complaint was filed on
August 3, 2007. In September 2007, the Dutch pension fund filed an amended complaint rather than
responding to defendants motion to dismiss. In addition, in 2007, six new complaints were filed in
the District of New Jersey on behalf of various foreign institutional investors also alleging
violations of federal securities laws as well as violations of state law against MSD and certain
officers. By stipulation, defendants are not required to respond to these complaints until the
resolution of any motion to dismiss in the consolidated securities action.
In addition, as previously disclosed, various putative class actions filed in federal court
under the Employee Retirement Income Security Act (ERISA) against MSD and certain current and
former officers and directors (the Vioxx ERISA Lawsuits and, together with the Vioxx Securities
Lawsuits and the Vioxx Derivative Lawsuits described below, the Vioxx Shareholder Lawsuits) have
been transferred to the Shareholder MDL and consolidated for all purposes. The consolidated
complaint asserts claims for breach of fiduciary duty on behalf of certain of MSDs current and
former employees who are participants in certain of MSDs retirement plans. The complaint makes
similar allegations with respect to Vioxx to the allegations contained in the Vioxx Securities
Lawsuits. On July 11, 2006, Judge Chesler granted in part and denied in part
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defendants motion to dismiss the ERISA complaint. On October 19, 2007, plaintiffs moved for certification of a class of
individuals who were participants in and beneficiaries of MSDs retirement savings plans at any
time between October 1, 1998 and September 30, 2004 and whose plan accounts included investments in
the MSD Common Stock Fund and/or MSD common stock. On February 9, 2009, the court denied the motion
for certification of a class as to one count and granted the motion as to the remaining counts. The
court also excluded from the class definition those individuals who (i) were not injured in
connection with their investments in MSD stock and (ii) executed post-separation settlement
agreements that released their claims under ERISA. On March 23, 2009, Judge Chesler denied
defendants motion for judgment on the pleadings. On May 11, 2009, Judge Chesler entered an order
denying plaintiffs motion for partial summary judgment against certain individual defendants,
which had been filed on December 24, 2008.
As previously disclosed, on October 29, 2004, two individual shareholders made a demand on
MSDs Board to take legal action against Mr. Raymond Gilmartin, former Chairman, President and
Chief Executive Officer, and other individuals for allegedly causing damage to MSD with respect to
the allegedly improper marketing of Vioxx. In December 2004, the Special Committee of the Board of
Directors retained the Honorable John S. Martin, Jr. of Debevoise & Plimpton LLP to conduct an
independent investigation of, among other things, the allegations set forth in the demand. Judge
Martins report was made public in September 2006. Based on the Special Committees recommendation
made after careful consideration of the Martin report and the impact that derivative litigation
would have on MSD, the Board rejected the demand. On October 11, 2007, two shareholders filed a
shareholder derivative lawsuit purportedly on MSDs behalf in state court in Atlantic County, New
Jersey against current and former officers and directors of MSD. Plaintiffs alleged that the
Boards rejection of their demand was unreasonable and improper, and that the defendants breached
various duties to MSD in allowing Vioxx to be marketed. The parties reached a proposed settlement
and, on February 8, 2010, the court issued an order preliminarily approving the settlement and
requiring that notice of the proposed settlement be made to
MSDs Parent Companys shareholders. On February 9,
2010, MSDs Parent Company notified shareholders of the proposed settlement and its terms. On March 22, 2010, the
court approved the settlement. Under the settlement, certain corporate
governance changes will be made and policies and procedures previously established
will be supplemented. In addition, MSD will pay an award of fees and expenses to plaintiffs attorneys in an amount to be determined
by the court, not to exceed $12.15 million. In addition, MSD, the plaintiffs and the individual
defendants will exchange full, mutual releases of all claims that were, or could have been,
asserted in the derivative actions. The settlement does not constitute an admission of liability or
wrongful conduct by MSD or by any of the defendants named in the actions. This settlement also
resolves the federal consolidated shareholder derivative action described below.
As previously disclosed, various shareholder derivative actions filed in federal court were
transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler (the Vioxx
Derivative Lawsuits). On May 5, 2006, Judge Chesler granted defendants motion to dismiss on the
grounds that plaintiffs had failed to demonstrate that demand should be excused and denied
plaintiffs request for leave to amend their complaint. Plaintiffs appealed, arguing that Judge
Chesler erred in denying plaintiffs leave to amend their complaint with documents acquired by
stipulation of the parties. On July 18, 2007, the United States Court of Appeals for the Third
Circuit reversed the District Courts decision on the grounds that Judge Chesler should have
allowed plaintiffs to seek leave to amend their complaint using the documents acquired by
stipulation, and remanded the case for the District Courts consideration of whether, even with the
additional materials, plaintiffs proposed amendment would be futile. Plaintiffs filed their brief
in support of their request for leave to amend their complaint, along with their proposed amended
complaint, on November 9, 2007. The Court denied the motion on June 17, 2008, and again dismissed
the case. One of the plaintiffs appealed Judge Cheslers decision to the United States Court of
Appeals for the Third Circuit. Oral argument on the appeal was held on July 15, 2009. On
November 10, 2009, before any decision was issued, the appeal was stayed pending approval of the
settlement reached in the derivative action pending in the New Jersey Superior Court discussed
above.
International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, MSD has been named as a
defendant in litigation relating to Vioxx in various countries (collectively, the Vioxx Foreign
Lawsuits) in Europe, as well as Canada, Brazil, Argentina, Australia, Turkey, Israel, The
Philippines and Singapore.
In November 2006, the Superior Court in Quebec authorized the institution of a class action on
behalf of all individuals who, in Quebec, consumed Vioxx and suffered damages arising out of its
ingestion. On May 7, 2009, the plaintiffs served an introductory motion for a class action based
upon that authorization, and the case remains in preliminary stages of litigation. On May 30, 2008,
the provincial court of Queens Bench in Saskatchewan, Canada entered an order certifying a class
of Vioxx users in Canada, except those in Quebec. MSD appealed the certification order and, on
March 30, 2009, the Court of Appeal granted MSDs appeal and quashed the certification order. On
October 22, 2009, the Supreme Court of Canada dismissed plaintiffs appeal application and decided
not to review the judgment of the Saskatchewan Court of Appeal. On
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July 28, 2008, the Superior
Court in Ontario denied MSDs motion to stay class proceedings in Ontario and decided to certify an
overlapping class of Vioxx users in Canada, except those in Quebec and Saskatchewan, who allege
negligence and an entitlement to elect to waive the tort. On February 13, 2009, the Ontario
Divisional Court dismissed the appeal from the order denying the stay and, on May 15, 2009, the
Ontario Court of Appeal denied leave to appeal. On October 22, 2009, the Supreme Court of Canada
dismissed MSDs application and decided not to review the judgment of the Ontario Court of Appeal.
After the Court of Appeal for Saskatchewan quashed the multi-jurisdictional certification order
entered in that province, MSD applied to the Ontario Court of Appeal for leave to appeal from the
Ontario certification order. Leave to appeal was granted, the appeal was filed on May 20, 2009 and,
in accordance with the courts decision, MSD sought leave to appeal to the Divisional Court, which
was denied on December 7, 2009. These procedural decisions in the Canadian litigation do not
address the merits of the plaintiffs claims and litigation in Canada remains in an early stage.
A trial in a representative action in Australia concluded on June 25, 2009, in the Federal
Court of Australia. The named plaintiff, who alleged he suffered an MI, seeks to represent others
in Australia who ingested Vioxx and suffered an MI, thrombotic stroke, unstable angina, transient
ischemic attack or peripheral vascular disease. On March 30, 2009, the trial judge entered an order
directing that, in advance of all other issues in the proceeding, the issues to be determined
during the trial are those issues of fact and law in the named plaintiffs individual case, and
those issues of fact and law that the trial judge finds, after hearing the evidence, are common to
the claims of the group members that the named plaintiff has alleged that he represents. On March
5, 2010, the trial judge delivered his judgment. The Court decided to dismiss all claims against
MSD, specifically finding that MSD had done everything that might reasonably be expected of it in
the discharge of its duty of care. With regard to MSDs Australian subsidiary, Merck Sharp & Dohme
(Australia) Pty. Ltd., the Court decided to dismiss certain claims but to award the named
plaintiff, who the Court found suffered an MI after ingesting Vioxx for approximately 33 months,
compensation based on statutory claims that Vioxx was not fit for purpose or of merchantable
quality, even though the Court rejected the applicants claim that MSD knew or ought to have known
prior to the voluntary withdrawal of Vioxx in September 2004 that Vioxx materially increased the
risk of MI. On May 7, 2010, the Court will conduct a hearing to determine the orders to be entered
giving effect to the judgment, in which the court will determine which of its findings of fact and
law are common to the claims of other group members and will consider any other motions that might
be brought. MSDs subsidiary intends to appeal the adverse findings after the orders have been
entered.
Insurance
As previously disclosed, MSD has Directors and Officers insurance coverage applicable to the
Vioxx Securities Lawsuits and Vioxx Derivative Lawsuits with stated upper limits of approximately
$190 million. MSD has Fiduciary and other insurance for the Vioxx ERISA Lawsuits with stated upper
limits of approximately $275 million. As a result of the previously disclosed 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 MSDs 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.
Investigations
As previously disclosed, MSD has received subpoenas from the DOJ requesting information
related to MSDs research, marketing and selling activities with respect to Vioxx in a federal
health care investigation under criminal statutes. This investigation includes subpoenas for
witnesses to appear before a grand jury. As previously disclosed, in March 2009, MSD received a
letter from the U.S. Attorneys Office for the District of Massachusetts identifying it as a target
of the grand jury investigation regarding Vioxx. Further, as previously disclosed, investigations
are being conducted by local authorities in certain cities in Europe in order to determine whether
any criminal charges should be brought concerning Vioxx. MSD is cooperating with these governmental
entities in their respective investigations (the Vioxx Investigations). MSD cannot predict the
outcome of these inquiries; however, they could result in potential civil and/or criminal remedies.
In addition, MSD received a subpoena in September 2006 from the State of California Attorney
General seeking documents and information related to the placement of Vioxx on Californias
Medi-Cal formulary. MSD is cooperating with the Attorney General in responding to the subpoena.
Reserves
As discussed above, on November 9, 2007, MSD entered into the Settlement Agreement with the
law firms that comprise the executive committee of the PSC of the federal Vioxx MDL as well as
representatives of plaintiffs counsel in the Texas, New Jersey and California state coordinated
proceedings to resolve state and federal MI and IS claims filed as of that date in the United
States. In 2007, as a result of entering into the Settlement Agreement, MSD recorded a pretax
charge of $4.85 billion which represents the fixed aggregate amount to be paid to plaintiffs
qualifying for payment under the Settlement Program.
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There are two U.S. Vioxx Product Liability Lawsuit trials scheduled for trial in 2010. MSD
cannot predict the timing of any other trials related to the Vioxx Litigation. MSD believes that it
has meritorious defenses to the Vioxx Product Liability Lawsuits, Vioxx Shareholder Lawsuits and
Vioxx Foreign Lawsuits (collectively the Vioxx Lawsuits) and will vigorously defend against them.
In view of the inherent difficulty of predicting the outcome of litigation, particularly where
there are many claimants and the claimants seek indeterminate damages, MSD 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 Vioxx Lawsuits not included in the Settlement Program. MSD has not
established any reserves for any potential liability relating to the Vioxx Lawsuits not included in
the Settlement Program, other than a reserve established in connection with the resolution of the
shareholder derivative lawsuits discussed above, or the Vioxx Investigations. Unfavorable outcomes
in the Vioxx Litigation could have a material adverse effect on MSDs financial position, liquidity
and results of operations.
Legal defense costs expected to be incurred in connection with a loss contingency are accrued
when probable and reasonably estimable. As of December 31, 2008, MSD had an aggregate reserve of
approximately $4.379 billion (the Vioxx Reserve) for the Settlement Program and future legal
defense costs related to the Vioxx Litigation.
During 2009, MSD spent approximately $244 million in the aggregate in legal defense costs
worldwide, including approximately $54 million in the fourth quarter of 2009, related to (i) the
Vioxx Product Liability Lawsuits, (ii) the Vioxx Shareholder Lawsuits, (iii) the Vioxx Foreign
Lawsuits, and (iv) the Vioxx Investigations (collectively, the Vioxx Litigation). In addition,
during 2009, MSD paid an additional $4.1 billion into the settlement funds in connection with the
Settlement Program. Also, during 2009, $75 million of charges were recorded, including $35 million
in the fourth quarter, solely for future legal defense costs for the Vioxx Litigation.
Consequently, as of December 31, 2009, the aggregate amount of the Vioxx Reserve was approximately
$110 million, which is solely for future legal defense costs for the Vioxx Litigation. Some of the
significant factors considered in the review of the Vioxx Reserve were as follows: the actual costs
incurred by MSD; the development of MSDs legal defense strategy and structure in light of the
scope of the Vioxx Litigation, including the Settlement Agreement and the expectation that certain
lawsuits will continue to be pending; the number of cases being brought against MSD; the costs and
outcomes of completed trials and the most current information regarding anticipated timing,
progression, and related costs of pre-trial activities and trials in the Vioxx Litigation. The
amount of the Vioxx Reserve as of December 31, 2009 represents MSDs best estimate of the minimum
amount of defense costs to be incurred in connection with the remaining aspects of the Vioxx
Litigation; however, events such as additional trials in the Vioxx Litigation and other events that
could arise in the course of the Vioxx Litigation could affect the ultimate amount of defense costs
to be incurred by MSD.
MSD will continue to monitor its legal defense costs and review the adequacy of the associated
reserves and may determine to increase the Vioxx Reserve at any time in the future if, based upon
the factors set forth, it believes it would be appropriate to do so.
Other Product Liability Litigation
Fosamax
As previously disclosed, MSD is a defendant in product liability lawsuits in the United States
involving Fosamax (the Fosamax Litigation). As of December 31, 2009, approximately 978 cases,
which include approximately 1,356 plaintiff groups, had been filed and were pending against MSD in
either federal or state court, including one case which seeks class action certification, as well
as damages and/or medical monitoring. In these actions, plaintiffs allege, among other things, that
they have suffered osteonecrosis of the jaw, generally subsequent to invasive dental procedures,
such as tooth extraction or dental implants and/or delayed healing, in association with the use of
Fosamax. In addition, plaintiffs in approximately five percent of these actions allege that they
sustained stress and/or low energy femoral fractures in association with the use of Fosamax. On
August 16, 2006, the JPML ordered that the Fosamax product liability cases pending in federal
courts nationwide should be transferred and consolidated into one multidistrict litigation (the
Fosamax MDL) for coordinated pre-trial proceedings. The Fosamax MDL has been transferred to Judge
John Keenan in the U.S. District Court for the Southern District of New York. As a result of the
JPML order, approximately 771 of the cases are before Judge Keenan. Judge Keenan issued a Case
Management Order (and various amendments thereto) setting forth a schedule governing the
proceedings which focused primarily upon resolving the class action certification motions in 2007
and completing fact discovery in an initial group of 25 cases by October 1, 2008. Briefing and
argument on plaintiffs motions for certification of medical monitoring classes were completed in
2007 and Judge Keenan issued an order denying the motions on January 3, 2008. On January 28, 2008,
Judge Keenan issued a further order dismissing with prejudice all class claims asserted in the
first four class action lawsuits filed against MSD that sought personal injury damages and/or
medical monitoring relief on a class wide basis. Daubert motions were filed in May 2009 and Judge
Keenan conducted a Daubert hearing in July 2009. On July 27, 2009, Judge Keenan issued his ruling
on the parties respective Daubert motions. The ruling denied the Plaintiff Steering
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Committees motion and granted in part and denied in part MSDs motion. The first MDL trial Boles v. Merck
began on August 11, 2009, and ended on September 2, 2009. On September 11, 2009, the MDL court
declared a mistrial in Boles because the eight person jury could not reach a unanimous verdict and,
consequently, the Boles case is set to be retried on June 2, 2010. The second MDL case set for
trial Flemings v. Merck was scheduled to start on January 12, 2010, but Judge Keenan granted
MSDs motion for summary judgment and dismissed the case on November 23, 2009. The next MDL case
set for trial Maley v. Merck is currently scheduled to start on April 19, 2010. MSD filed a
motion for summary judgment in Maley, which the MDL court granted in part and denied in part on
January 27, 2010 and, as a result, MSD expects that the trial will commence as currently scheduled
on April 19. On February 1, 2010, Judge Keenan selected a new bellwether case Judith Graves v.
Merck to replace the Flemings bellwether case, which the MDL court dismissed when it granted
summary judgment in favor of MSD. The MDL court has set the Graves trial to begin on September 13,
2010. A trial in Alabama is currently scheduled to begin on May 3, 2010 and a trial in Florida is
currently scheduled to begin on June 21, 2010.
In addition, in July 2008, an application was made by the Atlantic County Superior Court of
New Jersey requesting that all of the Fosamax cases pending in New Jersey be considered for mass
tort designation and centralized management before one judge in New Jersey. On October 6, 2008, the
New Jersey Supreme Court ordered that all pending and future actions filed in New Jersey arising
out of the use of Fosamax and seeking damages for existing dental and jaw-related injuries,
including osteonecrosis of the jaw, but not solely seeking medical monitoring, be designated as a
mass tort for centralized management purposes before Judge Higbee in Atlantic County Superior
Court. As of December 31, 2009, approximately 189 cases were pending against MSD in the New Jersey
coordinated proceeding. On July 20, 2009, Judge Higbee entered a Case Management Order (and various
amendments thereto) setting forth a schedule that contemplates completing fact discovery in an
initial group of 10 cases by February 28, 2010, followed by expert discovery in five of those
cases, and a projected trial date of July 12, 2010 for the first case to be tried in the New Jersey
coordinated proceeding.
Discovery is ongoing in the Fosamax MDL litigation, the New Jersey coordinated proceeding, and
the remaining jurisdictions where Fosamax cases are pending. MSD intends to defend against these
lawsuits.
As of December 31, 2008, MSD had a remaining reserve of approximately $33 million solely for
its future legal defense costs for the Fosamax Litigation. During 2009, MSD spent approximately
$35 million and $40 million was added to the reserve. Consequently, as of December 31, 2009, MSD
had a reserve of approximately $38 million solely for its future legal defense costs for the
Fosamax Litigation. Some of the significant factors considered in the establishment of the reserve
for the Fosamax Litigation legal defense costs were as follows: the actual defense costs incurred
thus far; the development of MSDs legal defense strategy and structure in light of the creation of
the Fosamax MDL; the number of cases being brought against MSD; and the anticipated timing,
progression, and related costs of pre-trial activities in the Fosamax Litigation. MSD will continue
to monitor its legal defense costs and review the adequacy of the associated reserves. Due to the
uncertain nature of litigation, MSD is unable to reasonably estimate its costs beyond the third
quarter of 2010. MSD has not established any reserves for any potential liability relating to the
Fosamax Litigation. Unfavorable outcomes in the Fosamax Litigation could have a material adverse
effect on MSDs financial position, liquidity and results of operations.
Commercial Litigation
AWP Litigation and Investigations
As previously disclosed, MSD was joined in ongoing litigation alleging manipulation by
pharmaceutical manufacturers of Average Wholesale Prices (AWP), which are sometimes used in
calculations that determine public and private sector reimbursement levels. The complaints allege
violations of federal and state law, including fraud, Medicaid fraud and consumer protection
violations, among other claims. The outcome of these litigations and investigations could include
substantial damages, the imposition of substantial fines, penalties and injunctive or
administrative remedies. In 2002, the JPML ordered the transfer and consolidation of all pending
federal AWP cases to federal court in Boston, Massachusetts. Plaintiffs filed one consolidated
class action complaint, which aggregated the claims previously filed in various federal district
court actions and also expanded the number of manufacturers to include some which, like MSD, had
not been defendants in any prior pending case. In May 2003, the court granted MSDs motion to
dismiss the consolidated class action and dismissed MSD from the class action case. MSD and many
other pharmaceutical manufacturers are defendants in similar complaints pending in federal and
state court including cases brought individually by a number of counties in the State of New York.
Fifty of the county cases have been consolidated in New York state court. MSD was dismissed from
the Suffolk County case, which was the first of the New York county cases to be filed. In addition
to the New York county cases, as of December 31, 2009, MSD was a defendant in state cases brought
by the Attorneys General of eleven states, all of which are being defended. In February 2009, the
Kansas Attorney General filed suit against MSD and several other manufacturers. AWP claims brought
by the Attorney General of Arizona against MSD were dropped in 2009. The court in the AWP cases
pending in Hawaii listed MSD and others to be set for trial in August 2010.
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MSD continues to respond to litigation brought by certain states and private payors and to
investigations initiated by the Department of Health and Human Services, the Department of Justice
and several states regarding AWP. MSD is cooperating with these investigations.
Governmental Proceedings
As previously disclosed, in February 2008, MSD entered into a Corporate Integrity Agreement
(CIA) with the U.S. Department of Health and Human Services Office of Inspector General
(HHS-OIG) for a five-year term. The CIA requires, among other things, that MSD maintain its
ethics training program and policies and procedures governing promotional practices and Medicaid
price reporting. Further, as required by the CIA, MSD has retained an Independent Review
Organization to conduct a systems review of its promotional policies and procedures and to conduct,
on a sample basis, transactional reviews of MSDs promotional programs and certain Medicaid pricing
calculations. MSD is also required to provide regular reports and certifications to the HHS-OIG
regarding its compliance with the CIA. MSD believes that its promotional practices and Medicaid
price reports meet the requirements of the CIA.
Vytorin/Zetia Litigation
As
previously disclosed, MSD (as well as MSDs Parent Company) has received several letters from the House
Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations (O&I), and the
Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination of
witness interviews, documents and information on a variety of issues related to the ENHANCE
clinical trial, the sale and promotion of Vytorin, as well as sales of stock by corporate officers.
In addition, as previously disclosed, since August 2008, MSD (as
well as MSDs Parent Company) has received three
additional letters each from O&I, including identical letters dated February 19, 2009, seeking
certain information and documents related to the SEAS clinical trial.
As previously disclosed, MSD received subpoenas from the New York State Attorney Generals Office and a letter
from the Connecticut Attorney General seeking similar information and documents, and on July 15,
2009, MSD and Schering-Plough announced that they reached a civil settlement with the Attorneys
General representing 35 states and the District of Columbia to resolve a previously disclosed
investigation by that group into whether the companies violated state consumer protection
laws when marketing Vytorin and Zetia. As part of the settlement, the companies agreed to
reimburse the investigative costs of the 35 states and the District
of Columbia, which totaled
$5.4 million, and to make voluntary assurances of compliance related to the promotion of Vytorin
and Zetia, including agreeing to continue to comply with the Food, Drug and Cosmetic Act, the
U.S. Food and Drug Administration Amendments Act, and other laws requiring the truthful and
non-misleading marketing of pharmaceutical products. The settlement did not include any admission
of misconduct or liability by the companies. Furthermore, as previously disclosed, in
September 2008, the companies received letters from the Civil Division of the DOJ informing
them that the DOJ is investigating whether their conduct relating to the promotion of Vytorin
caused false claims to be submitted to federal health care programs. MSD is cooperating with these
investigations and responding to the inquiries.
As
previously disclosed, MSD had become aware of or been served with
approximately 145 civil class action lawsuits alleging common law and state consumer fraud claims
in connection with the MSP Partnerships sale and promotion of Vytorin and Zetia. Certain of those
lawsuits alleged personal injuries and/or sought medical monitoring. The lawsuits against MSD and
Schering-Plough were consolidated in a single multi-district litigation docket before Judge
Cavanaugh of the District of New Jersey, In re Vytorin/Zetia Marketing Sales Practices and Products
Liability Litigation. On August 5, 2009, MSD and Schering-Plough jointly announced that their
cholesterol joint venture entered into agreements to resolve, for a total fixed amount of
$41.5 million, these civil class action lawsuits. The MSP Partnership recorded these charges in the
second quarter of 2009. On February 9, 2010, Judge Cavanaugh granted final approval of the
settlements.
Also, as previously disclosed, on April 3, 2008, an MSD shareholder filed a putative class
action lawsuit in federal court in the Eastern District of Pennsylvania alleging that MSD and its
Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal securities
laws. This suit has since been withdrawn and re-filed in the District of New Jersey and has been
consolidated with another federal securities lawsuit under the caption In re Merck & Co., Inc.
Vytorin Securities Litigation. An amended consolidated complaint was filed on October 6, 2008, and
names as defendants MSD; Merck/Schering-Plough Pharmaceuticals, LLC; and certain of MSDs current
and former officers and directors. Specifically, the complaint alleges that MSD delayed releasing
unfavorable results of the ENHANCE clinical trial regarding the efficacy of Vytorin and that MSD
made false and misleading statements about expected earnings, knowing that once the results of the
Vytorin study were released, sales of Vytorin would decline and MSDs earnings would suffer. On
December 12, 2008, MSD and the other defendants moved to dismiss this lawsuit on the grounds that
the plaintiffs failed to state a claim for which relief can be granted. On September 2, 2009, the
court issued an opinion and order denying the defendants motion to dismiss this lawsuit, and on
October 19, 2009, MSD and the other defendants filed an answer to the amended consolidated
complaint.
67
As previously disclosed, on April 22, 2008, a member of an MSD ERISA plan filed a putative
class action lawsuit against MSD and certain of MSDs current and former officers and directors
alleging they breached their fiduciary duties under ERISA. Since that time, there have been other
similar ERISA lawsuits filed against MSD in the District of New Jersey, and all of those lawsuits
have been consolidated under the caption In re Merck & Co., Inc. Vytorin ERISA Litigation. A
consolidated amended complaint was filed on February 5, 2009, and names as defendants MSD and
various current and former members of MSDs Board of Directors. The plaintiffs allege that the
ERISA plans investment in MSD stock was imprudent because MSDs earnings are dependent on the
commercial success of its cholesterol drug Vytorin and that defendants knew or should have known
that the results of a scientific study would cause the medical community to turn to less expensive
drugs for cholesterol management. On April 23, 2009, MSD and the other defendants moved to dismiss
this lawsuit on the grounds that the plaintiffs failed to state a claim for which relief can be
granted. On September 1, 2009, the court issued an opinion and order denying the defendants motion
to dismiss this lawsuit. On November 9, 2009, the plaintiffs moved to strike certain of the
defendants affirmative defenses. That motion was fully briefed on December 4, 2009 and is pending
before the court.
MSD intends to defend the lawsuits referred to in this section. Unfavorable outcomes resulting
from the government investigations or the civil litigations could have a material adverse effect on
MSDs financial position, liquidity and results of operations.
In November 2008, the individual shareholder who had previously delivered a letter to MSDs
Board of Directors demanding that the Board take legal action against the responsible individuals
to recover the amounts paid by MSD in 2007 to resolve certain governmental investigations delivered
another letter to the Board demanding that the Board or a subcommittee thereof commence an
investigation into the matters raised by various civil suits and governmental investigations
relating to Vytorin.
Vaccine Litigation
As previously disclosed, MSD is a party to individual and class action product liability
lawsuits and claims in the United States involving pediatric vaccines (e.g., hepatitis B vaccine)
that contained thimerosal, a preservative used in vaccines. As of March 2010, there were
approximately 200 thimerosal related lawsuits pending in which MSD is a defendant, although the
vast majority of those lawsuits are not currently active. Other defendants include other vaccine
manufacturers who produced pediatric vaccines containing thimerosal as well as manufacturers of
thimerosal. In these actions, the plaintiffs allege, among other things, that they have suffered
neurological injuries as a result of exposure to thimerosal from pediatric vaccines. There are no
cases currently scheduled for trial. MSD will defend against these lawsuits; however, it is
possible that unfavorable outcomes could have a material adverse effect on MSDs financial
position, liquidity and results of operations.
MSD has been successful in having cases of this type either dismissed or stayed on the ground
that the action is prohibited under the National Childhood Vaccine Injury Act (the Vaccine Act).
The Vaccine Act prohibits any person from filing or maintaining a civil action (in state or federal
court) seeking damages against a vaccine manufacturer for vaccine-related injuries unless a
petition is first filed in the United States Court of Federal Claims (hereinafter the Vaccine
Court). Under the Vaccine Act, before filing a civil action against a vaccine manufacturer, the
petitioner must either (a) pursue his or her petition to conclusion in Vaccine Court and then
timely file an election to proceed with a civil action in lieu of accepting the Vaccine Courts
adjudication of the petition or (b) timely exercise a right to withdraw the petition prior to
Vaccine Court adjudication in accordance with certain statutorily prescribed time periods. MSD is
not a party to Vaccine Court proceedings because the petitions are brought against the United
States Department of Health and Human Services.
MSD is aware that there are approximately 5,000 cases pending in the Vaccine Court involving
allegations that thimerosal-containing vaccines and/or the M-M-R II vaccine cause autism spectrum
disorders. Not all of the
68
thimerosal-containing vaccines involved in the Vaccine Court proceeding
are MSD vaccines. MSD is the sole source of the M-M-R II vaccine domestically. The Special Masters
presiding over the Vaccine Court proceedings held hearings in three test cases involving the theory
that the combination of M-M-R II vaccine and thimerosal in vaccines causes autism spectrum
disorders. On February 12, 2009, the Special Masters issued decisions in each of those cases,
finding that the theory was unsupported by valid scientific evidence and that the petitioners in
the three cases were therefore not entitled to compensation. Two of those three cases are currently
on appeal. The Special Masters held similar hearings in three different test cases involving the
theory that thimerosal in vaccines alone causes autism spectrum disorders. On March 12, 2010, the
Special Masters issued decisions in this second set of test cases, finding that the theory was also
unsupported by valid scientific evidence and that the petitions in these three cases were also not
entitled to compensation. The Special Masters had previously indicated that they would hold similar
hearings involving the theory that M-M-R II alone causes autism spectrum disorders, but they have
stated that they no longer intend to do so. The Vaccine Court has indicated that it intends to use
the evidence presented at these test case hearings to guide the adjudication of the remaining
autism spectrum disorder cases.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file ANDAs with the FDA
seeking to market generic forms of MSDs products prior to the expiration of relevant patents owned
by MSD. Generic pharmaceutical manufacturers have submitted ANDAs to the FDA seeking to market in
the United States generic forms of Fosamax, Nexium, Singulair, Emend and Cancidas prior to the
expiration of MSDs (and AstraZenecas in the case of Nexium) patents concerning these products. In
addition, an ANDA has been submitted to the FDA seeking to market in the United States a generic
form of Zetia and an ANDA has been submitted to the FDA seeking to market in the United States a
generic form of Vytorin, both prior to the expiration of Schering-Ploughs patent concerning each
product. The generic companies ANDAs generally include allegations of non-infringement,
invalidity and unenforceability of the patents. MSD has filed patent infringement suits in federal
court against companies filing ANDAs for generic alendronate (Fosamax) and montelukast (Singulair)
and AstraZeneca and MSD have filed patent infringement suits in federal court against companies
filing ANDAs for generic esomeprazole (Nexium). Also, MSD and Schering-Plough have filed patent
infringement suits in federal court against companies filing ANDAs for generic versions of
ezetimibe (Zetia) and ezetimibe/simvastatin (Vytorin). Similar patent challenges exist in certain
foreign jurisdictions. MSD intends to vigorously defend its patents, which it believes are valid,
against infringement by generic companies attempting to market products prior to the expiration
dates 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.
In February 2007, Schering-Plough received a notice from a generic company indicating that it
had filed an ANDA for Zetia and that it is challenging the U.S. patents that are listed for Zetia.
Prior to the Merger, MSD marketed Zetia through a joint venture, MSP Singapore Company LLC. On
March 22, 2007, Schering-Plough and MSP Singapore Company LLC filed a patent infringement suit
against Glenmark Pharmaceuticals Inc., USA and its parent corporation (Glenmark). The lawsuit
automatically stays FDA approval of Glenmarks ANDA until October 2010 or until an adverse court
decision, if any, whichever may occur earlier. The trial in this matter is scheduled to commence on
May 3, 2010.
In November 2009, MSDs Parent Company received notice from Mylan that it filed an ANDA for
ezetimibe/simvastatin and that it was challenging two patents listed in the FDA Orange Book for Vytorin. On
December 16, 2009, MSDs Parent Company filed a patent infringement suit against Mylan. The lawsuit automatically stays
FDA approval of Mylans ANDA until May 2012 or until an adverse court decision, if any, whichever may occur earlier.
As previously disclosed, in February 2007, MSD received a notice from Teva Pharmaceuticals,
Inc. (Teva), a generic company, indicating that it had filed an ANDA for montelukast and that it
is challenging the U.S. patent that is listed for Singulair. On April 2, 2007, MSD filed a patent
infringement action against Teva. A trial in this matter was held in February 2009. On August 19,
2009, the court issued a decision upholding the validity of MSDs Singulair patent and ordered that
Tevas ANDA could not be approved prior to expiry of MSDs exclusivity rights in August 2012. Teva
had appealed the decision, however, in January 2010, Teva withdrew its appeal of the trial courts
decision upholding the validity of MSDs Singulair patent. In addition, in May 2009, the United
States Patent and Trademark Office granted a petition by Article One Partners LLC to reexamine
MSDs Singulair patent. On December 15, 2009, the United States Patent and Trademark Office issued
a notice indicating that it will allow the claims of MSDs Singulair patent. Product exclusivity is
accordingly expected to be maintained until August 2012.
In May 2005, the Federal Court of Canada Trial Division issued a decision refusing to bar the
approval of generic alendronate on the grounds that MSDs patent for weekly alendronate was likely
invalid. This decision cannot be appealed and generic alendronate was launched in Canada in June
2005. In July 2005, MSD was sued in the Federal Court of Canada by Apotex Corp. (Apotex) seeking
damages for lost sales of generic weekly alendronate due to the patent proceeding. In October 2008,
the Federal Court of Canada issued a decision awarding Apotex its lost profits for its generic
alendronate product for the period of time that it was held off the market due to MSDs lawsuit. In
June 2009, the trial court decision was upheld in part and both companies sought leave to appeal to
the Supreme Court of Canada. In January 2010, the Supreme Court of Canada declined to hear the
appeal, leaving intact the decision that Apotex is entitled to damages for the discrete period of
time that its market entry was postponed due to the litigation launched by MSD.
69
As previously disclosed, in September 2004, MSD appealed a decision of the Opposition Division
of the European Patent Office (EPO) that revoked MSDs patent in Europe that covers the
once-weekly administration of alendronate. On March 14, 2006, the Board of Appeal of the EPO upheld
the decision of the Opposition Division revoking the patent. On March 28, 2007, the EPO issued
another patent in Europe to MSD that covers the once-weekly administration of alendronate. Under
its terms, this new patent is effective until July 2018. MSD has sued multiple parties in European
countries asserting its European patent covering once-weekly dosing of Fosamax. Decisions have been
rendered in the Netherlands and Belgium invalidating the patent in those countries. MSD has
appealed these decisions. Oppositions have been filed in the EPO against this patent. In a hearing
held March 17-19, 2009, the Opposition Division of the EPO issued an appealable decision revoking
this patent. MSD has appealed the decision.
In addition, as previously disclosed, in Japan after a proceeding was filed challenging the
validity of MSDs Japanese patent for the once-weekly administration of alendronate, the patent
office invalidated the patent. The decision is under appeal.
In October 2008, the U.S. patent for dorzolamide, covering both Trusopt and Cosopt, expired,
after which MSD experienced a significant decline in U.S. sales of these products. MSD is involved
in litigation proceedings of the corresponding patents in Canada and Great Britain and Germany. In
November 2009, the trial court in Great Britain issued a decision finding MSDs Cosopt patent
invalid. In Canada a trial was held in December 2009 regarding MSDs Canadian Trusopt and Cosopt
patents. MSD is awaiting a decision.
MSD and AstraZeneca received notice in October 2005 that Ranbaxy had filed an ANDA for
esomeprazole magnesium. The ANDA contains Paragraph IV challenges to patents on Nexium. In November
2005, MSD and AstraZeneca sued Ranbaxy in the U.S. District Court in New Jersey. As previously
disclosed, AstraZeneca, MSD and Ranbaxy have entered into a settlement agreement which provides
that Ranbaxy will not bring its generic esomeprazole product to market in the United States until
May 27, 2014. MSD and AstraZeneca each received a Civil Investigative Demand (CID) from the U.S.
Federal Trade Commission (FTC) in July 2008 regarding the settlement agreement with Ranbaxy. MSD
is cooperating with the FTC in responding to this CID.
MSD and AstraZeneca received notice in January 2006 that IVAX Pharmaceuticals, Inc. (IVAX),
subsequently acquired by Teva, had filed an ANDA for esomeprazole magnesium. The ANDA contains
Paragraph IV challenges to patents on Nexium. In March 2006, MSD and AstraZeneca sued Teva in the
U.S. District Court in New Jersey. On January 7, 2010, AstraZeneca, MSD and Teva/IVAX entered into
a settlement agreement which provides that Teva/IVAX will not bring its generic esomeprazole
product to market in the United States until May 27, 2014. In addition, in January 2008, MSD and
AstraZeneca sued Dr. Reddys Laboratories (Dr. Reddys) in the District Court in New Jersey based
on Dr. Reddys filing of an ANDA for esomeprazole magnesium. The trial, which had been scheduled
for January 2010 with respect to both IVAXs and Dr. Reddys ANDAs, has been postponed and no new
trial date has been set. Also, MSD and AstraZeneca received notice in December 2008 that Sandoz
Inc. (Sandoz) had filed an ANDA for esomeprazole magnesium. The ANDA contains Paragraph IV
challenges to patents on Nexium. In January 2009, MSD and AstraZeneca sued Sandoz in the District
Court in New Jersey based on Sandozs filing of an ANDA for esomeprazole magnesium. In addition,
MSD and AstraZeneca received notice in September 2009 that Lupin Ltd. (Lupin) had filed an ANDA
for esomeprazole magnesium. The ANDA contains Paragraph IV challenges to patents on Nexium. In
October 2009, MSD and AstraZeneca sued Lupin in the District Court in New Jersey based on Lupins
filing of an ANDA for esomeprazole magnesium.
In January 2009, MSD received notice from Sandoz that it had filed an ANDA and that it was
challenging five MSD patents listed in the FDA Orange Book for Emend. In February 2009, MSD filed a
patent infringement suit against Sandoz. The lawsuit automatically stays FDA approval of Sandozs
ANDA until July 2011 or until an adverse court decision, if any, whichever may occur earlier. The
case is scheduled to go to trial in December 2010.
In Europe, MSD is aware of various companies seeking registration for generic losartan (the
active ingredient for Cozaar and Hyzaar). MSD has patent rights to losartan via license from E.I.
du Pont de Nemours and Company (du Pont). MSD and du Pont have filed patent infringement
proceedings against various companies in Portugal, Spain, Norway, Finland, Belgium, the Netherlands
and Austria.
In October 2009, MSD received notice from Teva Parenteral Medicines (TPM) that it filed an
ANDA for caspofungin acetate and that it was challenging five patents listed in the FDA Orange Book
for Cancidas. On November 25, 2009, MSD filed a patent infringement suit against TPM. The lawsuit
automatically stays FDA approval of TPMs ANDA until April 2012 or until an adverse court decision,
if any, whichever may occur earlier.
70
Legal Proceedings Related to the Merger
In connection with the Merger, a class action lawsuit was brought against MSD challenging the
Merger and seeking other forms of relief. As previously disclosed, the lawsuit has been settled
pending court approval.
The settlement, if approved by the court, will resolve and release all claims that were or
could have been brought by any shareholder of MSD challenging any aspect of the proposed merger,
including any merger disclosure claims.
Other Litigation
There are various other legal proceedings, principally product liability and intellectual
property suits involving MSD, that are pending. While it is not feasible to predict the outcome of
such proceedings or the proceedings discussed in this note, in the opinion of MSD, all such
proceedings are either adequately covered by insurance or, if not so covered, should not ultimately
result in any liability that would have a material adverse effect on the financial position,
liquidity or results of operations of MSD, other than proceedings for which a separate assessment
is provided in this note.
Environmental Matters
MSD and its subsidiaries are parties to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund,
and other federal and state equivalents. These proceedings seek to require the operators of
hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous
waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup
costs. MSD has been made a party to these proceedings as an alleged generator of waste disposed of
at the sites. In each case, the government alleges that the defendants are jointly and severally
liable for the cleanup costs. Although joint and several liability is alleged, these proceedings
are frequently resolved so that the allocation of cleanup costs among the parties more nearly
reflects the relative contributions of the parties to the site situation. MSDs potential liability
varies greatly from site to site. For some sites the potential liability is de minimis and for
others the final costs of cleanup have not yet been determined. While it is not feasible to predict
the outcome of many of these proceedings brought by federal or state agencies or private litigants,
in the opinion of MSD, such proceedings should not ultimately result in any liability which would
have a material adverse effect on the financial position, results of operations, liquidity or
capital resources of MSD. MSD has taken an active role in identifying and providing for these costs
and such amounts do not include any reduction for anticipated recoveries of cleanup costs from
former site owners or operators or other recalcitrant potentially responsible parties.
As previously disclosed, approximately 2,200 plaintiffs have filed an amended complaint
against MSD and 12 other defendants in U.S. District Court, Eastern District of California
asserting claims under the Clean Water Act, the Resource Conservation and Recovery Act, as well as
negligence and nuisance. The suit seeks damages for personal injury, diminution of property value,
medical monitoring and other alleged real and personal property damage associated with groundwater
and soil contamination found at the site of a former MSD subsidiary in Merced, California. MSD
intends to defend itself against these claims.
In managements opinion, the liabilities for all environmental matters that are probable and
reasonably estimable have been accrued and totaled $72.7 million and $89.5 million at December 31,
2009 and 2008, respectively. These liabilities are undiscounted, do not consider potential
recoveries from other parties and will be paid out over the periods of remediation for the
applicable sites, which are expected to occur primarily over the next 15 years. Although it is not
possible to predict with certainty the outcome of these matters, or the ultimate costs of
remediation, management does not believe that any reasonably possible expenditures that may be
incurred in excess of the liabilities accrued should exceed $70.0 million in the aggregate.
Management also does not believe that these expenditures should result in a material adverse effect
on MSDs financial position, results of operations, liquidity or capital resources for any year.
71
13. Equity
Capital
Stock and Investment in MSDs Parent Company
A summary of common stock and treasury stock transactions (shares in millions) is as follows:
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
Treasury |
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|
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|
|
|
|
|
|
|
|
|
|
|
Stock / |
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|
|
|
|
|
|
Investment |
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|
|
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|
|
|
|
in MSDs |
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|
|
|
|
|
|
|
|
|
Common |
|
Parent |
|
Common |
|
Treasury |
|
Common |
|
Treasury |
|
|
Stock |
|
Company |
|
Stock |
|
Stock |
|
Stock |
|
Stock |
|
Balance as of January 1 |
|
|
2,983.5 |
|
|
|
875.8 |
|
|
|
2,983.5 |
|
|
|
811.0 |
|
|
|
2,976.2 |
|
|
|
808.4 |
|
Schering-Plough Merger |
|
|
(2,499.5 |
) |
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|
|
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|
|
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|
|
Issuances of shares in connection with the
acquisition of NovaCardia, Inc. |
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7.3 |
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|
|
|
Other issuances (1) |
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|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
(4.7 |
) |
|
|
|
|
|
|
(23.9 |
) |
Purchases of treasury stock |
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|
|
|
|
|
|
|
|
|
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|
|
|
69.5 |
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|
|
|
|
|
|
26.5 |
|
Cancellations of treasury stock (2) |
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|
(484.0 |
) |
|
|
(484.0 |
) |
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|
|
|
|
|
|
|
|
Balance as of December 31 (3) |
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|
|
|
|
|
390.3 |
|
|
|
2,983.5 |
|
|
|
875.8 |
|
|
|
2,983.5 |
|
|
|
811.0 |
|
|
|
|
|
(1) |
|
Issuances primarily reflect activity under share-based compensation plans prior
to the Merger. |
|
(2) |
|
Pursuant to the Merger agreement, certain treasury shares were cancelled. |
|
(3) |
|
At December 31, 2009,
there are 100 shares of common stock outstanding. |
Noncontrolling Interests
In connection with the 1998 restructuring of AMI, MSD assumed a $2.4 billion par value
preferred stock obligation with a dividend rate of 5% per annum, which is carried by KBI and
included in Noncontrolling interests.
14. Share-Based Compensation Plans
MSDs Parent Company has share-based compensation plans under which employees, non-employee
directors and employees of certain of MSDs equity method investees may be granted options to
purchase shares of MSDs Parent Company common stock at the fair market value at the time of grant.
In addition to stock options, MSDs Parent Company grants performance share units (PSUs) and
restricted stock units (RSUs) to certain management level employees. These plans were approved by
the MSDs Parent Companys shareholders.
As
a result of the Merger on November 3, 2009, MSD became a wholly-owned subsidiary of the MSDs
Parent Company. In conjunction with the Merger, outstanding MSD share-based compensation awards
became identical awards of MSDs Parent Company. For periods prior to the Merger, MSD
recorded the expense in accordance with applicable share-based
compensation accounting guidance. For periods subsequent to the Merger, an
allocation of the expense for employees of MSD and its subsidiaries has been recorded using a consistent method with MSDs Parent Company.
Management believes this allocation method is reasonable. The tables below reflect acvitity for
these awards for MSD employees for the pre and post-Merger periods through December 31, 2009. At
December 31, 2009, 105.5 million shares collectively were authorized for future grants under the
MSDs Parent Companys share-based compensation plans. Prior to the Merger, employee share-based
compensation awards were settled primarily with treasury shares. Subsequent to the Merger, these
awards are being settled with newly issued MSDs Parent Company shares.
Employee stock options are granted to purchase shares of MSDs Parent Company common stock at
the fair market value at the time of grant. These awards generally vest one-third each year over a
three-year period, with a contractual term of 10 years. RSUs are stock awards that are granted to
employees and entitle the holder to shares of common stock as the awards vest, as well as
non-forfeitable dividend equivalents. The fair value of the stock option and RSU awards is
determined and fixed on the grant date based on the MSDs Parent Companys stock price. PSUs are
stock awards where the ultimate number of shares issued will be
contingent on the MSDs Parent
Companys performance against a pre-set objective or set of objectives. The fair value of each PSU
is determined on the date of grant based on the MSDs Parent Companys stock price. Over the PSU
performance period, the number of shares of stock that are expected to be issued will be adjusted
based on the probability of achievement of a performance target and final compensation expense will
be recognized based on the ultimate number of shares issued. RSU and PSU distributions will be in
shares of MSDs Parent Company stock after the end of the vesting or performance period, generally
three years, subject to the terms applicable to such awards.
Total pretax share-based compensation cost recorded in 2009, 2008 and 2007 was $376.0 million,
$348.0 million and $330.2 million, respectively, with related income tax benefits of
$119.5 million, $107.5 million and $104.1 million, respectively.
72
The Black-Scholes option pricing model is used to determine the fair value of option grants.
In applying this model, both historical data and current market data are used to estimate the fair
value of options. The Black-Scholes model requires several assumptions including expected dividend
yield, risk-free interest rate, volatility, and term of the options. The expected dividend yield is
based on historical patterns of dividend payments. The risk-free rate is based on the rate at grant
date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option.
Expected volatility is estimated using a blend of historical and implied volatility. The historical
component is based on historical monthly price changes. The implied volatility is obtained from
market data on the MSDs Parent Companys traded options. The expected life represents the expected
amount of time that options granted are expected to be outstanding, based on historical and
forecasted exercise behavior.
The weighted average fair value of options granted to MSD employees in 2009, 2008 and 2007 was
$4.02, $9.80 and $9.51 per option, respectively, and were determined using the following
assumptions:
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|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Expected dividend yield |
|
|
6.3 |
% |
|
|
3.5 |
% |
|
|
3.4 |
% |
Risk-free interest rate |
|
|
2.2 |
% |
|
|
2.7 |
% |
|
|
4.4 |
% |
Expected volatility |
|
|
33.8 |
% |
|
|
31.0 |
% |
|
|
24.6 |
% |
Expected life (years) |
|
|
6.1 |
|
|
|
6.1 |
|
|
|
5.7 |
|
|
Summarized information relative to stock option plan activity for MSD employees (options in
thousands) is as follows:
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Weighted |
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|
Weighted |
|
Average |
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Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
of Options |
|
Price |
|
Term |
|
Value |
|
Balance as of January 1, 2009 |
|
|
247,651.3 |
|
|
$ |
51.50 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
34,279.2 |
|
|
|
24.31 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,483.2 |
) |
|
|
26.84 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(25,926.0 |
) |
|
|
68.30 |
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
254,521.3 |
|
|
$ |
46.27 |
|
|
|
5.22 |
|
|
$ |
560.3 |
|
|
Exercisable as of December 31, 2009 |
|
|
187,195.0 |
|
|
$ |
50.60 |
|
|
|
4.05 |
|
|
$ |
139.0 |
|
|
Additional information pertaining to stock option plans for MSD employees is provided in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Total intrinsic value of stock options exercised |
|
$ |
10.1 |
|
|
$ |
40.3 |
|
|
$ |
301.2 |
|
Fair value of stock options vested |
|
$ |
282.8 |
|
|
$ |
259.0 |
|
|
$ |
251.1 |
|
Cash received from the exercise of stock options |
|
$ |
39.8 |
|
|
$ |
102.3 |
|
|
$ |
898.6 |
|
|
A summary of nonvested RSU and PSU activity for MSD employees (shares in thousands) is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
PSUs |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
Number |
|
Grant Date |
|
Number |
|
Grant Date |
|
|
of Shares |
|
Fair Value |
|
of Shares |
|
Fair Value |
|
Nonvested as of January 1, 2009 |
|
|
6,292.2 |
|
|
$ |
39.41 |
|
|
|
1,621.4 |
|
|
$ |
41.86 |
|
Granted |
|
|
2,818.5 |
|
|
|
26.78 |
|
|
|
726.4 |
|
|
|
24.20 |
|
Vested |
|
|
(1,487.7 |
) |
|
|
35.15 |
|
|
|
(341.4 |
) |
|
|
35.14 |
|
Forfeited |
|
|
(169.6 |
) |
|
|
37.95 |
|
|
|
(158.9 |
) |
|
|
35.72 |
|
|
Nonvested at December 31, 2009 |
|
|
7,453.4 |
|
|
$ |
35.52 |
|
|
|
1,847.5 |
|
|
$ |
36.69 |
|
|
At December 31, 2009, there was $340.4 million of total pretax unrecognized compensation
expense related to nonvested stock options, RSU and PSU awards for MSD employees which will be
recognized over a weighted average period of 1.5 years.
73
15. Pension and Other Postretirement Benefit Plans
MSD has defined benefit pension plans covering eligible employees in the United States and in
certain of its international subsidiaries. Pension benefits in the United States are based on a
formula that considers final average pay and years of credited service. In addition, MSD provides
medical, dental and life insurance benefits, principally to its eligible U.S. retirees and similar
benefits to their dependents, through its other postretirement benefit plans. MSD uses December 31
as the year-end measurement date for all of its pension plans and other postretirement benefit
plans.
The net cost for pension and other postretirement benefit plans consisted of the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
Pension Benefits |
|
Benefits |
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
|
Service cost |
|
$ |
358.1 |
|
|
$ |
344.1 |
|
|
$ |
377.2 |
|
|
$ |
71.1 |
|
|
$ |
73.2 |
|
|
$ |
90.8 |
|
Interest cost |
|
|
405.0 |
|
|
|
414.2 |
|
|
|
379.9 |
|
|
|
102.9 |
|
|
|
113.8 |
|
|
|
107.7 |
|
Expected return on plan assets |
|
|
(614.5 |
) |
|
|
(559.4 |
) |
|
|
(491.4 |
) |
|
|
(96.7 |
) |
|
|
(129.0 |
) |
|
|
(130.5 |
) |
Net amortization |
|
|
122.8 |
|
|
|
70.4 |
|
|
|
149.4 |
|
|
|
18.9 |
|
|
|
(22.6 |
) |
|
|
(16.8 |
) |
Termination benefits |
|
|
30.3 |
|
|
|
62.3 |
|
|
|
25.6 |
|
|
|
8.2 |
|
|
|
11.2 |
|
|
|
7.7 |
|
Curtailments |
|
|
(6.2 |
) |
|
|
5.7 |
|
|
|
1.1 |
|
|
|
(9.9 |
) |
|
|
(15.9 |
) |
|
|
(16.8 |
) |
Settlements |
|
|
2.9 |
|
|
|
8.6 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension and other postretirement cost |
|
$ |
298.4 |
|
|
$ |
345.9 |
|
|
$ |
447.2 |
|
|
$ |
94.5 |
|
|
$ |
30.7 |
|
|
$ |
42.1 |
|
|
Net pension and other postretirement benefit cost totaled $392.9 million in 2009, $376.6
million in 2008 and $489.3 million in 2007.
The net pension cost attributable to U.S. plans included in the above table was $205.1 million
in 2009, $226.4 million in 2008 and $302.2 million in 2007.
In connection with restructuring actions (see Note 4), termination charges were recorded in
2009, 2008 and 2007 on pension and other postretirement benefit plans related to expanded
eligibility for certain employees exiting MSD. Also, in connection with these restructuring
activities, net curtailment gains were recorded in 2009 and curtailment losses were recorded in
2008 and 2007 on pension plans and net curtailment gains were recorded in 2009, 2008 and 2007 on
other postretirement benefit plans.
In addition, settlement losses were recorded in 2009, 2008 and 2007 on certain domestic and
international pension plans.
74
Summarized information about the changes in plan assets and benefit obligation, the
funded status and the amounts recorded at December 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Postretirement Benefits |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Fair value of plan assets at January 1 |
|
$ |
5,887.6 |
|
|
$ |
7,385.4 |
|
|
$ |
1,088.4 |
|
|
$ |
1,577.6 |
|
Actual return on plan assets |
|
|
1,352.1 |
|
|
|
(1,959.4 |
) |
|
|
303.9 |
|
|
|
(512.0 |
) |
MSD contributions |
|
|
496.1 |
|
|
|
1,190.8 |
|
|
|
91.2 |
|
|
|
99.5 |
|
Effects of exchange rate changes |
|
|
105.6 |
|
|
|
(90.3 |
) |
|
|
|
|
|
|
|
|
Benefits paid |
|
|
(470.8 |
) |
|
|
(643.2 |
) |
|
|
(72.6 |
) |
|
|
(76.7 |
) |
Other |
|
|
21.5 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31 |
|
$ |
7,392.1 |
|
|
$ |
5,887.6 |
|
|
$ |
1,410.9 |
|
|
$ |
1,088.4 |
|
|
Benefit obligation at January 1 |
|
$ |
7,140.1 |
|
|
$ |
7,049.4 |
|
|
$ |
1,747.3 |
|
|
$ |
1,936.8 |
|
Service cost |
|
|
358.1 |
|
|
|
344.1 |
|
|
|
71.1 |
|
|
|
73.2 |
|
Interest cost |
|
|
405.0 |
|
|
|
414.2 |
|
|
|
102.9 |
|
|
|
113.8 |
|
Actuarial losses (gains) |
|
|
602.8 |
|
|
|
325.8 |
|
|
|
148.2 |
|
|
|
(129.8 |
) |
Benefits paid |
|
|
(470.8 |
) |
|
|
(643.2 |
) |
|
|
(72.6 |
) |
|
|
(76.7 |
) |
Effects of exchange rate changes |
|
|
133.5 |
|
|
|
(158.0 |
) |
|
|
5.4 |
|
|
|
(6.6 |
) |
Plan amendments |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
(180.6 |
) |
Curtailments |
|
|
(32.6 |
) |
|
|
(249.6 |
) |
|
|
12.9 |
|
|
|
6.0 |
|
Termination benefits |
|
|
30.3 |
|
|
|
62.3 |
|
|
|
8.2 |
|
|
|
11.2 |
|
Other |
|
|
9.0 |
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31 |
|
$ |
8,177.2 |
|
|
$ |
7,140.1 |
|
|
$ |
2,023.4 |
|
|
$ |
1,747.3 |
|
|
Funded status at December 31 |
|
$ |
(785.1 |
) |
|
$ |
(1,252.5 |
) |
|
$ |
(612.5 |
) |
|
$ |
(658.9 |
) |
|
Recognized as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
394.6 |
|
|
$ |
142.4 |
|
|
$ |
220.1 |
|
|
$ |
147.7 |
|
Accrued and other current liabilities |
|
|
(117.0 |
) |
|
|
(46.8 |
) |
|
|
(8.3 |
) |
|
|
(3.4 |
) |
Deferred income taxes and noncurrent liabilities |
|
|
(1,062.7 |
) |
|
|
(1,348.1 |
) |
|
|
(824.3 |
) |
|
|
(803.2 |
) |
|
The fair value of U.S. pension plan assets included in the preceding table was $4.6 billion in
2009 and $3.5 billion in 2008. The pension projected benefit obligation of U.S. plans included in
this table was $5.2 billion in 2009 and $4.6 billion in 2008. Approximately 36% of MSDs pension
projected benefit obligation relates to international defined benefit plans, of which each
individual plan is not significant relative to the total benefit obligation.
At December 31, 2009 and 2008, the accumulated benefit obligation was $6.3 billion and $5.7
billion, respectively, for all pension plans. At December 31, 2009 and 2008, the accumulated
benefit obligation for U.S. pension plans was $4.0 billion and $3.4 billion, respectively.
For pension plans with benefit obligations in excess of plan assets at December 31, 2009 and
2008, the fair value of plan assets was $1.5 billion and $4.8 billion, respectively, and the
benefit obligation was $2.7 billion and $6.2 billion, respectively. For those plans with
accumulated benefit obligations in excess of plan assets at December 31, 2009 and 2008, the fair
value of plan assets was $483.1 million and $414.5 million, respectively, and the accumulated
benefit obligation was $1.1 billion and $880.0 million, respectively.
As discussed in Note 2, as of December 31, 2009, MSD adopted new authoritative guidance issued
by the FASB which revised the disclosure requirements for plan assets of defined pension and other
postretirement plans. This amended guidance requires disclosure of how investment allocation
decisions are made, the major categories of plan assets, the inputs and valuation techniques used
to measure the fair value of plan assets, the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan assets for the period, and significant
concentrations of risk within plan assets.
Entities are required to use a fair value hierarchy which maximizes the use of observable
inputs and minimizes the use of unobservable inputs when measuring fair value. There are three
levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities. The plans
Level 1 assets primarily include registered investment companies (mutual funds) and equity
securities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
75
liabilities. The plans Level 2 assets primarily include investments in common/collective
trusts and certain fixed income investments such as government and agency securities and
corporate obligations.
Level 3 Unobservable inputs that are supported by little or no market activity and that
are financial instruments whose values are determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the determination of fair
value requires significant judgment or estimation. The plans Level 3 assets primarily include
investments in insurance contracts which are valued using methodologies that management
understands. The plans Level 3 investments in insurance contracts are generally valued using a
crediting rate that approximates market returns and invest in underlying securities whose market
values are unobservable and determined using pricing models, discounted cash flow methodologies,
or similar techniques. At December 31, 2009, $262.0 million, or approximately 3.4%, of the
pension investments were categorized as Level 3 assets.
If the inputs used to measure the financial assets fall within more than one level described
above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The fair values of pension plan assets at December 31, 2009 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
In Active |
|
Other |
|
Significant |
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
|
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
80.3 |
|
|
$ |
141.4 |
|
|
$ |
|
|
|
$ |
221.7 |
|
Securities lending collaterial in short-term investments |
|
|
|
|
|
|
280.5 |
|
|
|
|
|
|
|
280.5 |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap |
|
|
196.8 |
|
|
|
1,419.5 |
|
|
|
|
|
|
|
1,616.3 |
|
U.S. small/mid cap |
|
|
545.2 |
|
|
|
637.3 |
|
|
|
|
|
|
|
1,182.5 |
|
Non-U.S. developed markets |
|
|
982.1 |
|
|
|
693.3 |
|
|
|
|
|
|
|
1,675.4 |
|
Emerging markets |
|
|
54.7 |
|
|
|
404.8 |
|
|
|
|
|
|
|
459.5 |
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency obligations |
|
|
60.8 |
|
|
|
1,124.1 |
|
|
|
|
|
|
|
1,184.9 |
|
Corporate obligations |
|
|
71.2 |
|
|
|
497.6 |
|
|
|
0.1 |
|
|
|
568.9 |
|
Mortgage and asset backed securities |
|
|
|
|
|
|
133.4 |
|
|
|
|
|
|
|
133.4 |
|
Other fixed income obligations |
|
|
|
|
|
|
12.7 |
|
|
|
|
|
|
|
12.7 |
|
Other types of investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts |
|
|
|
|
|
|
67.7 |
|
|
|
214.3 |
|
|
|
282.0 |
|
Other |
|
|
|
|
|
|
2.0 |
|
|
|
47.6 |
|
|
|
49.6 |
|
|
|
|
$ |
1,991.1 |
|
|
$ |
5,414.3 |
|
|
$ |
262.0 |
|
|
$ |
7,667.4 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for the return of collateral for securities loaned |
|
$ |
|
|
|
$ |
280.5 |
|
|
$ |
|
|
|
$ |
280.5 |
|
|
The table below provides a summary of the changes in fair value, including net transfers in
and/or out, of all financial assets measured at fair value using significant unobservable inputs
(Level 3) during 2009 for pension plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Return on Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Relating to |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Assets Still |
|
|
|
|
|
|
|
|
|
Ending |
|
|
Balance at |
|
Held at |
|
Relating to |
|
Purchases, |
|
Balance at |
|
|
January 1, |
|
December 31, |
|
Assets Sold |
|
Sales, |
|
December 31, |
|
|
2009 |
|
2009 |
|
During 2009 |
|
Settlements, Net |
|
2009 |
|
Insurance Contracts |
|
$ |
182.0 |
|
|
$ |
15.5 |
|
|
$ |
|
|
|
$ |
16.8 |
|
|
$ |
214.3 |
|
Other |
|
|
52.7 |
|
|
|
(4.7 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
47.7 |
|
|
Total |
|
$ |
234.7 |
|
|
$ |
10.8 |
|
|
$ |
|
|
|
$ |
16.5 |
|
|
$ |
262.0 |
|
|
76
The fair values of other postretirement benefit plan assets at December 31, 2009 by asset
category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
In Active |
|
Other |
|
Significant |
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
|
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1.6 |
|
|
$ |
38.1 |
|
|
$ |
|
|
|
$ |
39.7 |
|
Securites lending collateral in short-term investments |
|
|
|
|
|
|
65.0 |
|
|
|
|
|
|
|
65.0 |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap |
|
|
|
|
|
|
424.9 |
|
|
|
|
|
|
|
424.9 |
|
U.S. small/mid cap |
|
|
70.7 |
|
|
|
270.7 |
|
|
|
|
|
|
|
341.4 |
|
Non-U.S. developed markets |
|
|
176.7 |
|
|
|
83.5 |
|
|
|
|
|
|
|
260.2 |
|
Emerging markets |
|
|
31.2 |
|
|
|
75.8 |
|
|
|
|
|
|
|
107.0 |
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations |
|
|
|
|
|
|
137.0 |
|
|
|
|
|
|
|
137.0 |
|
Government and agency obligations |
|
|
|
|
|
|
65.9 |
|
|
|
|
|
|
|
65.9 |
|
Mortgage and asset backed securities |
|
|
|
|
|
|
26.7 |
|
|
|
|
|
|
|
26.7 |
|
Other fixed income obligations |
|
|
|
|
|
|
6.0 |
|
|
|
|
|
|
|
6.0 |
|
|
Total investments |
|
$ |
280.2 |
|
|
$ |
1,193.6 |
|
|
$ |
|
|
|
$ |
1,473.8 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for the return of collateral for securities loaned |
|
$ |
|
|
|
$ |
65.0 |
|
|
$ |
|
|
|
$ |
65.0 |
|
|
Total pension and other postretirement benefit plan assets excluded from the fair value
hierarchy include short-term payables and receivables related to the purchase and sale of
investments, respectively.
MSD has established investment guidelines for its U.S. pension and other postretirement plans
to create an asset allocation that is expected to deliver a rate of return sufficient to meet the
long-term obligation of each plan, given acceptable level of risk. The target investment portfolio
of U.S. pension and other postretirement benefit plans is allocated 45% to 60% in U.S. equities,
20% to 30% in international equities, 15% to 25% in fixed-income investments, and up to 8% in cash
and other investments. The portfolios equity weighting is consistent with the long-term nature of
the plans benefit obligations. The expected annual standard deviation of returns of the target
portfolio, which approximates 13%, reflects both the equity allocation and the diversification
benefits among the asset classes in which the portfolio invests. For non-U.S. pension plans, the
targeted investment portfolio varies based on the duration of pension liabilities and local
government rules and regulations. Although a significant percentage of plan assets are invested in
U.S. equities, concentration risk is mitigated through the use of strategies that are diversified
within management guidelines.
Contributions to the pension plans and other postretirement benefit plans during 2010 are
expected to be approximately $270 million and $50 million, respectively.
Expected benefit payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Pension |
|
Postretirement |
|
|
Benefits |
|
Benefits |
|
2010 |
|
$ |
359.8 |
|
|
$ |
90.6 |
|
2011 |
|
|
360.9 |
|
|
|
97.1 |
|
2012 |
|
|
388.8 |
|
|
|
102.6 |
|
2013 |
|
|
411.1 |
|
|
|
109.3 |
|
2014 |
|
|
428.7 |
|
|
|
115.9 |
|
2015 2019 |
|
$ |
2,833.5 |
|
|
$ |
690.7 |
|
|
Expected benefit payments are based on the same assumptions used to measure the benefit
obligations and include estimated future employee service.
77
Net loss amounts reflect experience differentials primarily relating to differences between
expected and actual returns on plan assets as well as the effects of changes in actuarial
assumptions. Net loss amounts in excess of certain thresholds are amortized into net pension and
other postretirement benefit cost over the average remaining service life of employees. The
following amounts were reflected as components of Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
Pension Plans |
|
Benefit Plans |
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
|
Net gain (loss) arising during the period |
|
$ |
158.0 |
|
|
$ |
(2,586.0 |
) |
|
$ |
269.1 |
|
|
$ |
58.4 |
|
|
$ |
(509.3 |
) |
|
$ |
(16.5 |
) |
Prior service (cost) credit arising during the period |
|
|
(0.5 |
) |
|
|
10.6 |
|
|
|
21.4 |
|
|
|
(23.5 |
) |
|
|
157.7 |
|
|
|
(21.2 |
) |
|
|
|
$ |
157.5 |
|
|
$ |
(2,575.4 |
) |
|
$ |
290.5 |
|
|
$ |
34.9 |
|
|
$ |
(351.6 |
) |
|
$ |
(37.7 |
) |
|
Net loss amortization included in benefit cost |
|
|
127.5 |
|
|
$ |
50.8 |
|
|
$ |
139.3 |
|
|
|
67.7 |
|
|
$ |
26.1 |
|
|
$ |
26.6 |
|
Prior service cost (credit) amortization
included in benefit cost |
|
|
8.7 |
|
|
|
7.6 |
|
|
|
12.1 |
|
|
|
(48.8 |
) |
|
|
(48.7 |
) |
|
|
(43.4 |
) |
|
|
|
$ |
136.2 |
|
|
$ |
58.4 |
|
|
$ |
151.4 |
|
|
$ |
18.9 |
|
|
$ |
(22.6 |
) |
|
$ |
(16.8 |
) |
|
The estimated net loss and prior service cost (credit) amounts that will be amortized from
AOCI into net pension and postretirement benefit cost during 2010 are $171.3 million and $8.7
million, respectively, for pension plans and are $56.9 million and $(47.2) million, respectively,
for other postretirement benefit plans.
MSD reassesses its benefit plan assumptions on a regular basis. For both the pension and other
postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to
reflect the prevailing market note of a portfolio of high-quality fixed-income debt instruments
that would provide the future cash flows needed to pay the benefits included in the benefit
obligation as they come due. The weighted average assumptions used in determining pension plan and
U.S. pension and other postretirement benefit plan information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
Pension Plans |
|
Benefit Plans |
December 31 |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
|
Net cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
5.90 |
% |
|
|
5.35 |
% |
|
|
6.20 |
% |
|
|
6.50 |
% |
|
|
6.00 |
% |
Expected rate of return
on plan assets |
|
|
7.65 |
% |
|
|
7.65 |
% |
|
|
7.65 |
% |
|
|
8.75 |
% |
|
|
8.75 |
% |
|
|
8.75 |
% |
Salary growth rate |
|
|
4.25 |
% |
|
|
4.30 |
% |
|
|
4.20 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
Benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
5.90 |
% |
|
|
5.90 |
% |
|
|
6.20 |
% |
|
|
6.50 |
% |
Salary growth rate |
|
|
4.25 |
% |
|
|
4.25 |
% |
|
|
4.30 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
The expected rate of return for both the pension and other postretirement benefit plans
represents the average rate of return to be earned on plan assets over the period the benefits
included in the benefit obligation are to be paid and is determined on a country basis. In
developing the expected rate of return within each country, long-term historical returns data is
considered as well as actual returns on the plan assets and other capital markets experience. Using
this reference information, the long-term return expectations for each asset category and a
weighted average expected return for each countrys target portfolio is developed, according to the
allocation among those investment categories. The expected portfolio performance reflects the
contribution of active management as appropriate. For 2010, MSDs expected rate of return of 8.75%
will remain unchanged from 2009 for its U.S. pension and other postretirement benefit plans.
The health care cost trend rate assumptions for other postretirement benefit plans are as
follows:
|
|
|
|
|
|
|
|
|
December 31 |
|
2009 |
|
2008 |
|
Health care cost trend rate assumed for next year |
|
|
8.6 |
% |
|
|
9.0 |
% |
Rate to which the cost trend rate is assumed to decline |
|
|
5.0 |
% |
|
|
5.0 |
% |
Year that the trend rate reaches the ultimate trend rate |
|
|
2018 |
|
|
|
2016 |
|
|
A one percentage point change in the health care cost trend rate would have had the following
effects:
|
|
|
|
|
|
|
|
|
|
|
One Percentage |
|
|
Point |
|
|
Increase |
|
Decrease |
|
Effect on total service and interest cost components |
|
$ |
31.2 |
|
|
$ |
(24.7 |
) |
Effect on benefit obligation |
|
$ |
292.7 |
|
|
$ |
(239.2 |
) |
|
78
MSD also maintains defined contribution savings plans in the United States. MSD matches a
percentage of each employees contributions consistent with the provisions of the plan for which
the employee is eligible. Total employer contributions to these plans in 2009, 2008, and 2007 were
$98.2 million, $104.0 million, and $110.0 million, respectively.
16. Other (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Interest
income(1) |
|
$ |
(357.1 |
) |
|
$ |
(631.4 |
) |
|
$ |
(741.1 |
) |
Interest
expense(1) |
|
|
429.6 |
|
|
|
251.3 |
|
|
|
384.3 |
|
Exchange (gains) losses |
|
|
(10.2 |
) |
|
|
147.4 |
|
|
|
(54.3 |
) |
Other, net |
|
|
(3,338.1 |
) |
|
|
(2,085.4 |
) |
|
|
335.9 |
|
|
|
|
$ |
(3,275.8 |
) |
|
$ |
(2,318.1 |
) |
|
$ |
(75.2 |
) |
|
|
|
|
(1) |
|
Interest income in 2009 includes interest income from affiliates
of $148.7 million and Interest expense in 2009 includes interest expense from
affiliates of $28.3 million. |
The decline in interest income in 2009 as compared with 2008 is primarily the result of lower
interest rates and a change in the investment portfolio mix toward cash and shorter-dated
securities in anticipation of the Merger. The increase in interest expense in 2009 is largely due
to $174 million of commitment fees and incremental interest expense related to the financing of the
Merger. Included in other, net in 2009 was a $3.2 billion gain on the sale of MSDs interest in
Merial (see Note 10), $231 million of investment portfolio recognized net gains, and an $80 million
charge related to the settlement of the Vioxx third-party payor litigation in the United States.
Included in other, net in 2008 was an aggregate gain on distribution from AZLP of $2.2 billion (see
Note 10), a gain of $249 million related to the sale of the remaining worldwide rights to
Aggrastat, a $300 million expense for a contribution to the Merck Company Foundation, $117 million
of investment portfolio recognized net losses and a $58 million charge related to the resolution of
an investigation into whether MSD violated state consumer protection laws with respect to the sales
and marketing of Vioxx.
The fluctuation in exchange losses (gains) in 2008 from 2007 is primarily due to the higher
cost of foreign currency contracts due to lower U.S. interest rates and unfavorable impacts of
period-to-period changes in foreign currency exchange rates on net long or net short foreign
currency positions, considering both net monetary assets and related foreign currency contracts.
The change in other, net for 2008 primarily reflects an aggregate gain in 2008 from AZLP of $2.2
billion, the impact of a $671 million charge in 2007 related to the resolution of certain civil
governmental investigations, and a 2008 gain of $249 million related to the sale of the remaining
worldwide rights to Aggrastat, partially offset by a $300 million expense for a contribution to the
Merck Company Foundation, higher investment portfolio recognized net losses of $153 million and a
$58 million charge related to the resolution of an investigation into whether MSD violated consumer
protection laws with respect to the sales and marketing of Vioxx.
Interest paid was $276.9 million in 2009, $247.0 million in 2008 and $406.4 million in 2007,
respectively, which excludes commitment fees.
17. Taxes on Income
Effective with the closing of the Merger, MSDs Parent Company will begin to file taxes on a
consolidated basis with MSD for U.S. federal and certain state tax purposes. The income tax
provision and payable balances have been computed on a separate company basis for the purpose of
these financial statements.
A reconciliation between the effective tax rate and the U.S. statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
Tax |
|
|
|
|
|
Tax |
|
|
|
|
|
Tax |
|
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
U.S. statutory rate applied to income before taxes |
|
$ |
3,787.9 |
|
|
|
35.0 |
% |
|
$ |
3,476.1 |
|
|
|
35.0 |
% |
|
$ |
1,222.3 |
|
|
|
35.0 |
% |
Differential arising from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign earnings |
|
|
(1,082.3 |
) |
|
|
(10.0 |
) |
|
|
(1,269.9 |
) |
|
|
(12.9 |
) |
|
|
(1,196.0 |
) |
|
|
(34.3 |
) |
State tax settlements |
|
|
(108.0 |
) |
|
|
(1.0 |
) |
|
|
(191.6 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
Foreign tax credit utilization |
|
|
|
|
|
|
|
|
|
|
(192.0 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
State taxes |
|
|
202.6 |
|
|
|
1.9 |
|
|
|
310.9 |
|
|
|
3.2 |
|
|
|
11.6 |
|
|
|
0.3 |
|
Restructuring |
|
|
114.0 |
|
|
|
1.1 |
|
|
|
114.7 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
Gain on equity investments |
|
|
95.6 |
|
|
|
0.9 |
|
|
|
29.0 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
In-process research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113.8 |
|
|
|
3.3 |
|
Other (1) |
|
|
(262.3 |
) |
|
|
(2.5 |
) |
|
|
(277.8 |
) |
|
|
(2.7 |
) |
|
|
(56.4 |
) |
|
|
(1.6 |
) |
|
|
|
$ |
2,747.5 |
|
|
|
25.4 |
% |
|
$ |
1,999.4 |
|
|
|
20.1 |
% |
|
$ |
95.3 |
|
|
|
2.7 |
% |
|
|
|
|
(1) |
|
Other includes the tax effect of contingency reserves, research credits, export
incentives and miscellaneous items. |
79
The 2007 tax rate reconciliation percentage of (34.3)% for foreign earnings reflects the
change in mix of foreign and domestic earnings primarily resulting from the $4.85 billion U.S.
Vioxx Settlement Agreement charge.
Income (loss) before taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Domestic |
|
$ |
6,681.8 |
|
|
$ |
5,210.1 |
|
|
$ |
(2,525.8 |
) |
Foreign |
|
|
4,140.8 |
|
|
|
4,721.6 |
|
|
|
6,017.9 |
|
|
|
|
$ |
10,822.6 |
|
|
$ |
9,931.7 |
|
|
$ |
3,492.1 |
|
|
Taxes on income consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Current provision |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
174.9 |
|
|
$ |
1,053.6 |
|
|
$ |
988.1 |
|
Foreign |
|
|
394.9 |
|
|
|
292.4 |
|
|
|
687.0 |
|
State |
|
|
9.2 |
|
|
|
123.3 |
|
|
|
202.2 |
|
|
|
|
|
579.0 |
|
|
|
1,469.3 |
|
|
|
1,877.3 |
|
Deferred provision |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
2,057.1 |
|
|
|
419.0 |
|
|
|
(1,671.5 |
) |
Foreign |
|
|
(83.7 |
) |
|
|
55.8 |
|
|
|
157.2 |
|
State |
|
|
195.1 |
|
|
|
55.3 |
|
|
|
(267.7 |
) |
|
|
|
|
2,168.5 |
|
|
|
530.1 |
|
|
|
(1,782.0 |
) |
|
|
|
$ |
2,747.5 |
|
|
$ |
1,999.4 |
|
|
$ |
95.3 |
|
|
Deferred income taxes at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
Other intangibles |
|
$ |
18.8 |
|
|
$ |
73.4 |
|
|
$ |
|
|
|
$ |
124.9 |
|
Inventory related |
|
|
235.5 |
|
|
|
|
|
|
|
248.6 |
|
|
|
|
|
Accelerated depreciation |
|
|
35.9 |
|
|
|
1,057.8 |
|
|
|
|
|
|
|
1,045.1 |
|
Unremitted foreign earnings |
|
|
|
|
|
|
42.6 |
|
|
|
|
|
|
|
16.7 |
|
Equity investments |
|
|
|
|
|
|
178.5 |
|
|
|
|
|
|
|
75.1 |
|
Pensions and other postretirement benefits |
|
|
566.6 |
|
|
|
101.0 |
|
|
|
796.5 |
|
|
|
129.9 |
|
Compensation related |
|
|
411.6 |
|
|
|
|
|
|
|
347.5 |
|
|
|
|
|
Vioxx Litigation reserve |
|
|
42.0 |
|
|
|
|
|
|
|
1,755.1 |
|
|
|
|
|
Unrecognized tax benefits |
|
|
740.5 |
|
|
|
|
|
|
|
984.1 |
|
|
|
|
|
Net operating losses and other tax credit carryforwards |
|
|
233.0 |
|
|
|
|
|
|
|
224.7 |
|
|
|
|
|
Other |
|
|
1,081.1 |
|
|
|
53.9 |
|
|
|
1,012.9 |
|
|
|
95.9 |
|
|
Subtotal |
|
|
3,365.0 |
|
|
|
1,507.2 |
|
|
|
5,369.4 |
|
|
|
1,487.6 |
|
Valuation allowance |
|
|
(141.9 |
) |
|
|
|
|
|
|
(94.2 |
) |
|
|
|
|
|
Total deferred taxes |
|
$ |
3,223.1 |
|
|
$ |
1,507.2 |
|
|
$ |
5,275.2 |
|
|
$ |
1,487.6 |
|
|
Net deferred income taxes |
|
$ |
1,715.9 |
|
|
|
|
|
|
$ |
3,787.6 |
|
|
|
|
|
|
Recognized as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes and other current assets |
|
$ |
786.1 |
|
|
|
|
|
|
$ |
2,436.9 |
|
|
|
|
|
Other assets |
|
|
1,243.2 |
|
|
|
|
|
|
|
1,666.7 |
|
|
|
|
|
Income taxes payable |
|
|
|
|
|
$ |
7.3 |
|
|
|
|
|
|
$ |
3.8 |
|
Deferred income taxes and noncurrent liabilities |
|
|
|
|
|
|
306.1 |
|
|
|
|
|
|
|
312.2 |
|
|
MSD has net operating loss (NOL) carryforwards in several foreign jurisdictions. The
valuation allowance in 2009 and 2008 primarily relates to various foreign entity NOL carryforwards
resulting primarily from losses generated by restructuring actions.
Income taxes paid in 2009, 2008 and 2007 were $820.5 million, $1.8 billion and $3.5 billion,
respectively. Stock option exercises reduced income taxes paid by $138.4 million in 2007. Stock
option exercises did not have a significant impact on taxes paid in 2009 or 2008.
80
On January 1, 2007, new authoritative guidance issued by the FASB for the accounting and
reporting of uncertain tax positions was adopted. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
Balance as of January 1 |
|
$ |
3,665.0 |
|
|
$ |
3,689.5 |
|
|
$ |
5,008.4 |
|
Additions related to current year positions |
|
|
310.0 |
|
|
|
269.4 |
|
|
|
284.5 |
|
Additions related to prior year positions |
|
|
48.9 |
|
|
|
64.2 |
|
|
|
187.8 |
|
Reductions for tax positions of prior years |
|
|
(547.4 |
) |
|
|
(310.5 |
) |
|
|
(87.0 |
) |
Settlements (1) |
|
|
(321.8 |
) |
|
|
(38.8 |
) |
|
|
(1,703.5 |
) |
Lapse of statute of limitations |
|
|
(2.6 |
) |
|
|
(8.8 |
) |
|
|
(0.7 |
) |
|
Balance as of December 31 |
|
$ |
3,152.1 |
|
|
$ |
3,665.0 |
|
|
$ |
3,689.5 |
|
|
|
|
|
(1) |
|
Reflects the settlement with the Internal Revenue
Service in 2007 discussed below. |
If MSD were to recognize the unrecognized tax benefits of $3.2 billion at December 31,
2009, the income tax provision would reflect a favorable net impact of $2.6 billion.
The amount of unrecognized tax benefits will change in the next 12 months due primarily to the
anticipated closure of various tax examinations. MSD estimates that the change could result in a
reduction in unrecognized tax benefits of approximately $240 million.
Interest and penalties associated with uncertain tax positions amounted to a (benefit) expense
of $(184) million in 2009, $101 million in 2008 and $270 million in 2007. Liabilities for accrued
interest and penalties were $1.1 billion and $1.7 billion as of December 31, 2009 and 2008,
respectively.
As previously disclosed, the Internal Revenue Service (IRS) has completed its examination of
MSDs tax returns for the years 1993 to 2001. As a result of the examination, MSD made an aggregate
payment of $2.79 billion in February 2007. This payment was offset by (i) a tax refund of $165
million received in 2007 for amounts previously paid for these matters and (ii) a federal tax
benefit of approximately $360 million related to interest included in the payment, resulting in a
net cash cost to MSD of approximately $2.3 billion in 2007. The impact for years subsequent to 2001
for items reviewed as part of the examination was included in the payment although those years
remain open in all other respects. The closing of the IRS examination did not have a material
impact on MSDs results of operations in 2007 as these amounts had been previously accrued for.
MSD reported the results of the IRS adjustments for the years 1993 through 2001 to various
state tax authorities. This resulted in additional tax, as well as interest and penalty payments of
$20 million and $9 million, respectively, in 2008 and $57 million and $67 million, respectively, in
2007, and an equivalent reduction in the balances of unrecognized tax benefits, accrued interest
and penalties.
As previously disclosed, in October 2006, the Canada Revenue Agency (CRA) issued MSD a
notice of reassessment containing adjustments related to certain intercompany pricing matters. In
February 2009, MSD and the CRA negotiated a settlement agreement in regard to these matters. In
accordance with the settlement, MSD paid an additional tax of approximately $300 million (U.S.
dollars) and interest of approximately $360 million (U.S. dollars) with no additional amounts or
penalties due on this assessment. The settlement was accounted for in the first quarter of 2009.
MSD had previously established reserves for these matters. A significant portion of the taxes paid
is expected to be creditable for U.S. tax purposes. The resolution of these matters did not have a
material effect on MSDs financial position or liquidity, other than with respect to the associated
collateral as discussed below.
In addition, in July 2007 and November 2008, the CRA proposed additional adjustments for 1999
and 2000, respectively, relating to other intercompany pricing matters. The adjustments would
increase Canadian tax due by approximately $312 million (U.S. dollars) plus $314 million (U.S.
dollars) of interest through December 31, 2009. It is possible that the CRA will propose similar
adjustments for later years. MSD disagrees with the positions taken by the CRA and believes they
are without merit. MSD intends to contest the assessments through the CRA appeals process and the
courts if necessary. Management believes that resolution of these matters will not have a material
effect on MSDs financial position or liquidity.
In connection with the appeals process for the matters discussed above, during 2007, MSD
pledged collateral to two financial institutions, one of which provided a guarantee to the CRA and
the other to the Quebec Ministry of Revenue representing a portion of the tax and interest
assessed. As a result of the settlement noted above, guarantees required to appeal the disputes
were reduced or eliminated and approximately $960 million of associated collateral was released.
Certain of the cash and investments continue to be collateralized for guarantees required to appeal
other Canadian tax disputes. The
81
collateral is included in Deferred income taxes and other current assets and Other assets in
the Consolidated Balance Sheet and totaled approximately $290 million and $1.2 billion at December
31, 2009 and 2008, respectively.
The IRS is examining MSDs 2002 to 2005 federal income tax returns. In addition, various state
and foreign tax examinations are in progress. For most of its other significant tax jurisdictions
(both U.S. state and foreign), MSDs income tax returns are open for examination for the period
1999 through 2009.
At December 31, 2009, foreign earnings of $25.7 billion have been retained indefinitely by
subsidiary companies for reinvestment, therefore no provision has been made for income taxes that
would be payable upon the distribution of such earnings. In addition, MSD has subsidiaries
operating in Puerto Rico and Singapore under tax incentive grants that begin to expire in 2013.
At
December 31, 2009, Income tax payable includes amounts due to MSDs Parent Company.
18. Comprehensive Income
The components of Other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
Pretax |
|
Tax |
|
After Tax |
|
Net unrealized loss on derivatives |
|
$ |
(316.1 |
) |
|
$ |
125.0 |
|
|
$ |
(191.1 |
) |
Net loss realization |
|
|
60.5 |
|
|
|
(23.9 |
) |
|
|
36.6 |
|
|
Derivatives |
|
|
(255.6 |
) |
|
|
101.1 |
|
|
|
(154.5 |
) |
|
Net unrealized gain on investments |
|
|
205.9 |
|
|
|
(31.2 |
) |
|
|
174.7 |
|
Net gain realization |
|
|
(230.5 |
) |
|
|
23.6 |
|
|
|
(206.9 |
) |
|
Investments |
|
|
(24.6 |
) |
|
|
(7.6 |
) |
|
|
(32.2 |
) |
|
Benefit plan net (loss) gain and prior service cost (credit), net of amortization |
|
|
347.5 |
|
|
|
(149.5 |
) |
|
|
198.0 |
|
|
Cumulative translation adjustment (1) |
|
|
(23.0 |
) |
|
|
|
|
|
|
(23.0 |
) |
|
|
|
$ |
44.3 |
|
|
$ |
(56.0 |
) |
|
$ |
(11.7 |
) |
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives |
|
$ |
291.0 |
|
|
$ |
(116.0 |
) |
|
$ |
175.0 |
|
Net gain realization |
|
|
(38.8 |
) |
|
|
15.4 |
|
|
|
(23.4 |
) |
|
Derivatives |
|
|
252.2 |
|
|
|
(100.6 |
) |
|
|
151.6 |
|
|
Net unrealized loss on investments |
|
|
(212.9 |
) |
|
|
79.2 |
|
|
|
(133.7 |
) |
Net loss realization |
|
|
116.9 |
|
|
|
(63.7 |
) |
|
|
53.2 |
|
|
Investments |
|
|
(96.0 |
) |
|
|
15.5 |
|
|
|
(80.5 |
) |
|
Benefit plan net (loss) gain and prior service cost (credit), net of amortization |
|
|
(2,891.2 |
) |
|
|
1,129.5 |
|
|
|
(1,761.7 |
) |
|
Cumulative translation adjustment (1) |
|
|
(37.2 |
) |
|
|
|
|
|
|
(37.2 |
) |
|
|
|
$ |
(2,772.2 |
) |
|
$ |
1,044.4 |
|
|
$ |
(1,727.8 |
) |
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivatives |
|
$ |
(50.5 |
) |
|
$ |
20.7 |
|
|
$ |
(29.8 |
) |
Net loss realization |
|
|
43.0 |
|
|
|
(17.6 |
) |
|
|
25.4 |
|
|
Derivatives |
|
|
(7.5 |
) |
|
|
3.1 |
|
|
|
(4.4 |
) |
|
Net unrealized gain on investments |
|
|
106.2 |
|
|
|
(24.5 |
) |
|
|
81.7 |
|
Net gain realization |
|
|
(36.1 |
) |
|
|
12.4 |
|
|
|
(23.7 |
) |
|
Investments |
|
|
70.1 |
|
|
|
(12.1 |
) |
|
|
58.0 |
|
|
Benefit plan net gain (loss) and prior service cost (credit), net of amortization |
|
|
387.4 |
|
|
|
(147.1 |
) |
|
|
240.3 |
|
|
Cumulative translation adjustment (1) |
|
|
34.4 |
|
|
|
9.9 |
|
|
|
44.3 |
|
|
|
|
$ |
484.4 |
|
|
$ |
(146.2 |
) |
|
$ |
338.2 |
|
|
|
|
|
(1) |
|
Represents cumulative translation adjustments related to equity investees. |
82
The components of Accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
December 31 |
|
2009 |
|
2008 |
|
Net unrealized (loss) gain on derivatives |
|
$ |
(42.6 |
) |
|
$ |
111.9 |
|
Net unrealized gain on investments |
|
|
30.9 |
|
|
|
63.1 |
|
Pension plan net loss |
|
|
(2,278.8 |
) |
|
|
(2,440.7 |
) |
Other postretirement benefit plan net loss |
|
|
(521.4 |
) |
|
|
(596.5 |
) |
Pension plan prior service cost |
|
|
(20.7 |
) |
|
|
(26.4 |
) |
Other postretirement benefit plan prior service cost |
|
|
264.3 |
|
|
|
309.0 |
|
Cumulative translation adjustment |
|
|
2.7 |
|
|
|
25.7 |
|
|
|
|
$ |
(2,565.6 |
) |
|
$ |
(2,553.9 |
) |
|
19. Related Party Transactions
As of
December 31, 2009, current Receivables from affiliates were $1.0 billion, primarily reflecting a
loan receivable from another subsidiary of MSDs Parent Company of $722 million that is due in
October 2010, as well as interest receivables on both the current and non-current Receivables from
affiliates. Non-current Receivables from affiliates were $7.1 billion and primarily
represented loans receivable from other subsidiaries of MSDs Parent Company with due dates greater
than one year. Receivables from MSDs Parent Company were $8.8 billion and are reflected as a reduction of
shareholders equity. Receivables from affiliates and MSDs Parent Company are largely attributable
to the Merger. Payables to affiliates, arising primarily from a cash pooling arrangement between
MSD and MSDs Parent Company, were $859.5 million as of December 31, 2009.
Subsequent to
the Merger, share-based compensation of approximately $84.0 million was incurred by MSDs Parent
Company on behalf of MSD and allocated to MSD. MSDs Parent Company did not incur any other
significant expenses on behalf of MSD. Also subsequent to the Merger, salaries and benefits for executive
officers of MSDs Parent Company of approximately $5 million were incurred at MSD and appropriately
allocated to MSDs Parent Company. MSD and MSDs Parent Company share certain employees,
systems and facilities and MSD provides certain services to MSDs Parent Company. MSD incurs the
majority of these expenses and allocations are made between MSDs Parent Company and MSD for certain
of these expenses, which in the opinion of management are reasonable allocations. Certain expenses benefit
both MSD and MSDs Parent Company and for those expenses, no allocation of expense has been made to MSDs
Parent Company. For the two month period subsequent to the Merger, these costs are not material to MSD or
to MSDs Parent Company.
20. Segment Reporting
MSDs Parent Company operations are principally managed on a products basis and are comprised
of one reportable segment, which is the Pharmaceutical segment. The Pharmaceutical segment includes
human health pharmaceutical and vaccine products marketed either directly or through joint
ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, sold
by prescription, for the treatment of human disorders. These human health pharmaceutical products
are sold primarily to drug wholesalers and retailers, hospitals, government agencies and managed
health care providers such as health maintenance organizations, pharmacy benefit managers and other
institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines,
primarily administered at physician offices. These human health vaccines are sold primarily to
physicians, wholesalers, physician distributors and government entities. A large component of
pediatric and adolescent vaccines is sold to the U.S. Centers for Disease Control and Prevention
Vaccines for Children program, which is funded by the U.S. government. Segment composition reflects
certain managerial changes that have been implemented. Segment disclosures for prior periods have
been recast on a comparable basis with 2009. MSDs Parent Company also has an all other category
which includes other non-reportable segments, including animal health and consumer health care, as
well as revenue from MSDs relationship with AZLP. The accounting policies for the segments
described above are the same as those described in Note 2.
Revenues and profits for MSDs operations within MSDs Parent Company segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical |
|
All
Other(1) |
|
Total |
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
22,192.4 |
|
|
$ |
1,470.6 |
|
|
$ |
23,663.0 |
|
Segment profits |
|
|
14,594.6 |
|
|
|
1,616.0 |
|
|
|
16,210.6 |
|
Included in segment profits: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates |
|
|
1,579.8 |
|
|
|
751.7 |
|
|
|
2,331.5 |
|
Depreciation and amortization |
|
|
(92.6 |
) |
|
|
|
|
|
|
(92.6 |
) |
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
22,081.3 |
|
|
$ |
1,694.1 |
|
|
$ |
23,775.4 |
|
Segment profits |
|
|
14,110.3 |
|
|
|
1,691.0 |
|
|
|
15,801.3 |
|
Included in segment profits: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates |
|
|
1,655.8 |
|
|
|
668.4 |
|
|
|
2,324.2 |
|
Depreciation and amortization |
|
|
(101.4 |
) |
|
|
|
|
|
|
(101.4 |
) |
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues |
|
$ |
22,282.8 |
|
|
$ |
1,848.1 |
|
|
$ |
24,130.9 |
|
Segment profits |
|
|
14,558.7 |
|
|
|
2,027.6 |
|
|
|
16,586.3 |
|
Included in segment profits: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates |
|
|
1,895.9 |
|
|
|
820.0 |
|
|
|
2,715.9 |
|
|
Depreciation and amortization |
|
|
(137.1 |
) |
|
|
|
|
|
|
(137.1 |
) |
|
|
|
|
(1) |
|
All other for MSD primarily includes revenue and equity income from MSDs
relationship with AZLP and equity income from Merial until its disposition on September 17,
2009. |
83
Segment profits are comprised of segment revenues less certain elements of materials and
production costs and operating expenses, including components of equity income (loss) from
affiliates and depreciation and amortization expenses. For internal management reporting presented
to the chief operating decision maker, production costs are not allocated, other than standard
costs, research and development expenses and general and administrative expenses, as well as the
cost of financing these activities. Separate divisions maintain responsibility for monitoring and
managing these costs, including depreciation related to fixed assets utilized by these divisions
and, therefore, they are not included in segment profits.
A reconciliation of total segment revenues to consolidated Sales is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Segment revenues |
|
$ |
23,663.0 |
|
|
$ |
23,775.4 |
|
|
$ |
24,130.9 |
|
Other |
|
|
(19.8 |
) |
|
|
74.9 |
|
|
|
66.8 |
|
|
|
|
$ |
23,643.2 |
|
|
$ |
23,850.3 |
|
|
$ |
24,197.7 |
|
|
84
Sales of MSDs products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Bone, Respiratory, Immunology and Dermatology |
|
|
|
|
|
|
|
|
|
|
|
|
Singulair |
|
$ |
4,659.7 |
|
|
$ |
4,336.9 |
|
|
$ |
4,266.3 |
|
Fosamax |
|
|
1,099.8 |
|
|
|
1,552.7 |
|
|
|
3,049.0 |
|
Propecia |
|
|
440.3 |
|
|
|
429.1 |
|
|
|
405.4 |
|
Arcoxia |
|
|
357.5 |
|
|
|
377.3 |
|
|
|
329.1 |
|
Cardiovascular |
|
|
|
|
|
|
|
|
|
|
|
|
Vytorin(1) |
|
|
82.2 |
|
|
|
84.2 |
|
|
|
84.3 |
|
Zetia(1) |
|
|
5.2 |
|
|
|
6.4 |
|
|
|
6.5 |
|
Diabetes and Obesity |
|
|
|
|
|
|
|
|
|
|
|
|
Januvia |
|
|
1,922.1 |
|
|
|
1,397.1 |
|
|
|
667.5 |
|
Janumet |
|
|
658.4 |
|
|
|
351.1 |
|
|
|
86.4 |
|
Infectious Disease |
|
|
|
|
|
|
|
|
|
|
|
|
Isentress |
|
|
751.8 |
|
|
|
361.1 |
|
|
|
41.3 |
|
Primaxin |
|
|
688.9 |
|
|
|
760.4 |
|
|
|
763.5 |
|
Cancidas |
|
|
616.7 |
|
|
|
596.4 |
|
|
|
536.9 |
|
Invanz |
|
|
292.9 |
|
|
|
265.0 |
|
|
|
190.2 |
|
Crixivan/Stocrin |
|
|
206.1 |
|
|
|
275.1 |
|
|
|
310.2 |
|
Mature Brands |
|
|
|
|
|
|
|
|
|
|
|
|
Cozaar/Hyzaar |
|
|
3,560.7 |
|
|
|
3,557.7 |
|
|
|
3,350.1 |
|
Zocor |
|
|
558.4 |
|
|
|
660.1 |
|
|
|
876.5 |
|
Vasotec/Vaseretic |
|
|
310.8 |
|
|
|
356.7 |
|
|
|
494.6 |
|
Proscar |
|
|
290.9 |
|
|
|
323.5 |
|
|
|
411.0 |
|
Neurosciences and Ophthalmology |
|
|
|
|
|
|
|
|
|
|
|
|
Maxalt |
|
|
574.5 |
|
|
|
529.2 |
|
|
|
467.3 |
|
Cosopt/Trusopt |
|
|
503.5 |
|
|
|
781.2 |
|
|
|
786.8 |
|
Oncology |
|
|
|
|
|
|
|
|
|
|
|
|
Emend |
|
|
313.1 |
|
|
|
259.7 |
|
|
|
201.7 |
|
Vaccines(2) |
|
|
|
|
|
|
|
|
|
|
|
|
ProQuad/M-M-R II/Varivax |
|
|
1,368.5 |
|
|
|
1,268.5 |
|
|
|
1,347.1 |
|
Gardasil |
|
|
1,118.4 |
|
|
|
1,402.8 |
|
|
|
1,480.6 |
|
RotaTeq |
|
|
521.9 |
|
|
|
664.5 |
|
|
|
524.7 |
|
Pneumovax |
|
|
345.6 |
|
|
|
249.3 |
|
|
|
233.2 |
|
Zostavax |
|
|
277.4 |
|
|
|
312.4 |
|
|
|
236.0 |
|
Other pharmaceutical(3) |
|
|
667.1 |
|
|
|
922.9 |
|
|
|
1,136.6 |
|
Other (4) |
|
|
1,450.8 |
|
|
|
1,769.0 |
|
|
|
1,914.9 |
|
|
|
|
$ |
23,643.2 |
|
|
$ |
23,850.3 |
|
|
$ |
24,197.7 |
|
|
|
|
|
(1) |
|
Sales of Zetia and Vytorin reflect MSDs sales of these products in Latin America which was not part of the MSP Partnership. |
|
(2) |
|
These amounts do not reflect sales of vaccines sold in most major European markets through MSDs joint venture, Sanofi
Pasteur MSD, the results of which are reflected in Equity income from affiliates. These amounts do, however, reflect supply
sales to Sanofi Pasteur MSD. |
|
(3) |
|
Other pharmaceutical primarily includes sales of other human pharmaceutical products, including products within the
franchises not listed separately. |
|
(4) |
|
Reflects revenue from MSDs relationship with AZLP primarily relating to sales of Nexium, as well as Prilosec. Revenue from
AZLP was $1.4 billion, $1.6 billion and $1.7 billion in 2009, 2008 and 2007, respectively. |
Consolidated revenues by geographic area where derived are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
United States |
|
$ |
13,151.1 |
|
|
$ |
13,370.5 |
|
|
$ |
14,690.9 |
|
Europe, Middle East and Africa |
|
|
5,534.1 |
|
|
|
5,773.8 |
|
|
|
5,159.0 |
|
Japan |
|
|
2,215.9 |
|
|
|
1,823.5 |
|
|
|
1,533.2 |
|
Other |
|
|
2,742.1 |
|
|
|
2,882.5 |
|
|
|
2,814.6 |
|
|
|
|
$ |
23,643.2 |
|
|
$ |
23,850.3 |
|
|
$ |
24,197.7 |
|
|
85
A reconciliation of total segment profits to consolidated Income before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2009 |
|
2008 |
|
2007 |
|
Segment profits |
|
$ |
16,210.6 |
|
|
$ |
15,801.3 |
|
|
$ |
16,586.3 |
|
Other profits |
|
|
(174.2 |
) |
|
|
(92.3 |
) |
|
|
(56.2 |
) |
Adjustments |
|
|
372.0 |
|
|
|
424.7 |
|
|
|
367.7 |
|
Unallocated: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
357.1 |
|
|
|
631.4 |
|
|
|
741.1 |
|
Interest expense |
|
|
(429.6 |
) |
|
|
(251.3 |
) |
|
|
(384.3 |
) |
Equity income from affiliates |
|
|
171.5 |
|
|
|
236.5 |
|
|
|
260.6 |
|
Depreciation and amortization |
|
|
(1,569.6 |
) |
|
|
(1,529.8 |
) |
|
|
(1,851.0 |
) |
Research and development |
|
|
(5,139.2 |
) |
|
|
(4,805.3 |
) |
|
|
(4,882.8 |
) |
Gain on Merial divestiture |
|
|
3,162.5 |
|
|
|
|
|
|
|
|
|
Gain on distribution from AstraZeneca LP |
|
|
|
|
|
|
2,222.7 |
|
|
|
|
|
U.S. Vioxx Settlement Agreement charge |
|
|
|
|
|
|
|
|
|
|
(4,850.0 |
) |
Other expenses, net |
|
|
(2,138.5 |
) |
|
|
(2,706.2 |
) |
|
|
(2,439.3 |
) |
|
|
|
$ |
10,822.6 |
|
|
$ |
9,931.7 |
|
|
$ |
3,492.1 |
|
|
Other profits are primarily comprised of miscellaneous corporate profits as well as operating
profits related to divested products or businesses and other supply sales. Adjustments represent
the elimination of the effect of double counting certain items of income and expense. Equity income
from affiliates includes taxes paid at the joint venture level and a portion of equity income that
is not reported in segment profits. Other expenses, net, include expenses from corporate and
manufacturing cost centers and other miscellaneous income (expense), net.
Property, plant and equipment, net by geographic area where located is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
2009 |
|
2008 |
|
2007 |
|
United States |
|
$ |
9,021.3 |
|
|
$ |
9,023.2 |
|
|
$ |
9,249.1 |
|
Europe, Middle East and Africa |
|
|
1,595.8 |
|
|
|
1,649.0 |
|
|
|
1,625.0 |
|
Japan |
|
|
183.2 |
|
|
|
362.0 |
|
|
|
459.0 |
|
Other |
|
|
852.5 |
|
|
|
965.4 |
|
|
|
1,012.9 |
|
|
|
|
$ |
11,652.8 |
|
|
$ |
11,999.6 |
|
|
$ |
12,346.0 |
|
|
Assets are not disaggregated on a products and services basis for internal management
reporting and, therefore, such information is not presented.
86
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Merck Sharp & Dohme Corp.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, equity and of cash flows present fairly, in all material respects, the
financial position of Merck Sharp & Dohme Corp. (the Company) and its subsidiaries at December
31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management
is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Managements Report under Item 9A. Our responsibility is to express
opinions on these financial statements and on the Companys internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting
was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 17 to the consolidated financial statements, the Company changed the manner in
which it accounts for unrecognized tax benefits in 2007.
As discussed in Note 5 to the consolidated financial statements, the Company changed the manner in
which it accounts for business combinations in 2009.
As discussed in Note 13 to the consolidated financial statements, the Company changed the manner in
which it accounts for noncontrolling interests in 2009.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 29, 2010
87
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Management of MSD, with the participation of its Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of MSDs disclosure controls and procedures. Based on their
evaluation, as of the end of the period covered by this Form 10-K, MSDs Chief Executive Officer
and Chief Financial Officer have concluded that MSDs disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Act)) are effective.
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Act. Management conducted an
evaluation of the effectiveness of internal control over financial reporting based on the framework
in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this evaluation, management concluded that internal
control over financial reporting was effective as of December 31, 2009. The effectiveness of MSDs
internal control over financial reporting as of December 31, 2009, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which appears herein.
In November 2009, MSD and Schering-Plough Corporation completed the Merger. During the 2009
period leading up to the Merger, there were no changes to MSDs internal controls over financial
reporting that were reasonably likely to have a material effect. For the post-Merger period,
management maintained the operational integrity of MSDs legacy controls over financial reporting.
To support business integration plans, a process for evaluating and addressing necessary changes to
the control environment over financial reporting was adopted. As MSD has previously disclosed, it
is in the process of a multi-year implementation of an enterprise wide resource planning system.
MSD intends to implement this system in the United States in 2010 and further implementation plans
are under revision to address MSDs requirements. In 2009, MSD entities implemented a worldwide
employee data management system. The implementation of this system included modifications to the
design and operation of controls validating components of employee master data.
Managements Report
Managements Responsibility for Financial Statements
Responsibility for the integrity and objectivity of MSDs financial statements rests with
management. The financial statements report on managements stewardship of MSD assets. These
statements are prepared in conformity with generally accepted accounting principles and,
accordingly, include amounts that are based on managements best estimates and judgments.
Nonfinancial information included in the Annual Report on Form 10-K has also been prepared by
management and is consistent with the financial statements.
To assure that financial information is reliable and assets are safeguarded, management
maintains an effective system of internal controls and procedures, important elements of which
include: careful selection, training and development of operating and financial managers; an
organization that provides appropriate division of responsibility; and communications aimed at
assuring that MSD policies and procedures are understood throughout the organization. A staff of
internal auditors regularly monitors the adequacy and application of internal controls on a
worldwide basis.
To ensure that personnel continue to understand the system of internal controls and
procedures, and policies concerning good and prudent business practices, MSD periodically conducts
the Managements Stewardship Program for key management and financial personnel. This program
reinforces the importance and understanding of internal controls by reviewing key corporate
policies, procedures and systems. In addition, MSD has compliance programs, including an ethical
business practices program to reinforce MSDs long-standing commitment to high ethical standards in
the conduct of its business.
The financial statements and other financial information included in the Annual Report on Form
10-K fairly present, in all material respects, MSDs financial condition, results of operations and
cash flows.
88
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. MSDs internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles in the United States
of America. Management conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that internal control over financial reporting was effective as of December
31, 2009.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of MSDs internal control over financial reporting as of December 31, 2009,
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as stated in their report which appears herein.
|
|
|
|
|
|
Richard T. Clark
|
|
Peter N. Kellogg |
Chairman, President
|
|
Executive Vice President |
and Chief Executive Officer
|
|
and Chief Financial Officer |
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive officers and Corporate Governance
Omitted in accordance with General Instruction I of Form 10-K.
Item 11. Executive Compensation
Omitted in accordance with General Instruction I of Form 10-K.
Item 12.
Omitted in accordance with General Instruction I of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted in accordance with General Instruction I of Form 10-K.
89
Item 14. Principal Accountant Fees and Services.
Fees for Services Provided by Independent Registered Public Accounting Firm
Fees for all services provided by PricewaterhouseCoopers LLP (PwC), MSDs independent
auditors, for fiscal years 2009 and 2008 are as follows:
Audit Fees
Fees for services for fiscal years 2009 and 2008 related to the annual financial statement
audits, the audits of effectiveness of internal control over financial reporting, reviews of
quarterly financial statements filed in the reports on Form 10-Q, and statutory audits,
approximated $14.2 million and $14.7 million, respectively.
Audit-Related Fees
Fees for audit-related services for fiscal years 2009 and 2008, primarily related to employee
benefit plan audits, other audit-related reviews, agreed-upon procedures and SAP pre-implementation
review procedures, approximated $2.3 million and $2.1 million, respectively.
Tax Fees
Fees for tax services for fiscal years 2009 and 2008 approximated $0.8 million and $0.8
million, respectively.
All Other Fees
Fees for other services for fiscal years 2009 and 2008 approximated $1.6 million and $1.0
million, respectively.
None of the services provided by PwC for fiscal years 2009 and 2008 were approved by the Audit
Committee pursuant to the waiver of pre-approval provisions set forth in the applicable rules of
the Securities and Exchange Commission.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Form 10-K
1. Financial Statements
|
|
|
Consolidated statement of income for the years ended December 31, 2009, 2008 and 2007 |
|
|
|
|
Consolidated balance sheet as of December 31, 2009 and 2008 |
|
|
|
|
Consolidated statement of stockholders equity for the years ended December 31, 2009, 2008
and 2007 |
|
|
|
|
Consolidated statement of cash flows for the years ended December 31, 2009, 2008 and 2007 |
|
|
|
|
Notes to consolidated financial statements |
|
|
|
|
Report of PricewaterhouseCoopers LLP, independent registered public accounting firm |
90
Schering-Plough Cholesterol Partnership Combined Financial Statements
2. Financial Statement Schedules
|
|
Merck/Schering-Plough Cholesterol Partnership Combined Financial Statements |
Merck/Schering-Plough Cholesterol Partnership
Combined Statement of Net Sales and Contractual Expenses
Year Ended December 31, 2009
($ in millions, unaudited)
|
|
|
|
|
Net sales |
|
$ |
4,128 |
|
|
|
|
|
Cost of sales |
|
|
173 |
|
Selling, general and administrative |
|
|
798 |
|
Research and development |
|
|
203 |
|
|
|
|
|
|
|
|
1,174 |
|
|
|
|
|
Income from operations |
|
$ |
2,954 |
|
|
|
|
|
The accompanying notes are an integral part of this combined financial statement.
91
Merck/Schering-Plough Cholesterol Partnership
Combined Balance Sheet
December 31, 2009
($ in millions, unaudited)
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11 |
|
Accounts receivable, net |
|
|
337 |
|
Receivable from MSD, net |
|
|
64 |
|
Inventories |
|
|
84 |
|
Prepaid expenses and other assets |
|
|
10 |
|
|
|
|
|
Total assets |
|
$ |
506 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Partners Capital |
|
|
|
|
|
|
|
|
|
Rebates payable |
|
$ |
259 |
|
Payable to New Merck, net |
|
|
119 |
|
Accrued expenses and other liabilities |
|
|
54 |
|
|
|
|
|
Total liabilities |
|
|
432 |
|
Commitments and contingent liabilities (notes 3 and 5) |
|
|
|
|
Partners capital |
|
|
74 |
|
|
|
|
|
Total liabilities and Partners capital |
|
$ |
506 |
|
|
|
|
|
The accompanying notes are an integral part of this combined financial statement.
92
Merck/Schering-Plough Cholesterol Partnership
Combined Statement of Cash Flows
Year Ended December 31, 2009
($ in millions, unaudited)
|
|
|
|
|
Operating Activities: |
|
|
|
|
Income from operations |
|
$ |
2,954 |
|
Adjustments to reconcile income from operations to net
cash provided by operating activities: |
|
|
|
|
Accounts receivable, net |
|
|
(26 |
) |
Inventories |
|
|
(5 |
) |
Prepaid expenses and other assets |
|
|
4 |
|
Rebates payable |
|
|
(4 |
) |
Payable to Partners, net |
|
|
(126 |
) |
Accrued expenses and other liabilities |
|
|
10 |
|
Non-cash charges |
|
|
51 |
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,858 |
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
Contributions from Partners |
|
|
438 |
|
Distributions to Partners |
|
|
(3,489 |
) |
|
|
|
|
Net cash used for financing activities |
|
|
(3,051 |
) |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(193 |
) |
Cash and cash equivalents, beginning of period |
|
|
204 |
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
11 |
|
|
|
|
|
The accompanying notes are an integral part of this combined financial statement.
93
Merck/Schering-Plough Cholesterol Partnership
Combined Statement of Partners Capital (Deficit)
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Merck |
|
MSD |
|
Total |
|
|
|
Balance,
January 1, 2009 |
|
$ |
9 |
|
|
$ |
111 |
|
|
$ |
120 |
|
Contributions from Partners (unaudited) |
|
|
158 |
|
|
|
280 |
|
|
|
438 |
|
Income from operations (unaudited) |
|
|
1,478 |
|
|
|
1,476 |
|
|
|
2,954 |
|
Distributions to Partners (unaudited) |
|
|
(1,693 |
) |
|
|
(1,745 |
) |
|
|
(3,438 |
) |
|
|
|
Balance, December 31, 2009 (unaudited) |
|
$ |
(48 |
) |
|
$ |
122 |
|
|
$ |
74 |
|
|
|
|
The accompanying notes are an integral part of this combined financial statement.
94
Merck/Schering-Plough Cholesterol Partnership
Notes to Combined Financial Statements
(unaudited)
1. Description of Business and Basis of Presentation
Overview
On November 3, 2009, Merck & Co., Inc. (MSD) and Schering-Plough Corporation
(Schering-Plough) completed their previously-announced merger (the Merger). In the Merger,
Schering-Plough acquired all of the shares of MSD, which became a wholly-owned subsidiary of
Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the
surviving public company and was renamed Merck & Co., Inc. (New Merck).
Upon consummation of the Merger, New Merck obtained a controlling interest in the
Merck/Schering-Plough Cholesterol Partnership (the Partnership) and it is now owned 100% by New
Merck.
Description of Business
In May 2000, MSD and Schering-Plough (collectively the Partners) entered into agreements
(the Agreements) to jointly develop and market in the United States, Schering-Ploughs then
investigational cholesterol absorption inhibitor (CAI) ezetimibe (marketed today in the United
States as ZETIA and as EZETROL in most other countries) (the Cholesterol Collaboration) and a
fixed-combination tablet containing the active ingredients montelukast sodium and loratadine (the
Respiratory Collaboration). New Merck sells montelukast sodium, a leukotriene receptor
antagonist, as SINGULAIR and loratadine, an antihistamine, as CLARITIN, both of which are indicated
for the relief of symptoms of allergic rhinitis. The Respiratory Collaboration was terminated in
2008 in accordance with the applicable agreements, following the receipt of a not-approvable letter
from the U.S. Food and Drug Administration (FDA) for the fixed-combination tablet.
The Cholesterol Collaboration is formally referred to as the Merck/Schering-Plough Cholesterol
Partnership. In December 2001, the Cholesterol Collaboration Agreements were expanded to include
all countries of the world, except Japan. The Cholesterol Collaboration Agreements provide for
ezetimibe to be developed and marketed in the following forms:
|
|
|
Ezetimibe, a once daily CAI, non-statin cholesterol reducing medicine used alone or
co-administered with any statin drug, and |
|
|
|
Ezetimibe and simvastatin (MSDs existing ZOCOR statin cholesterol modifying medicine)
combined into one tablet (marketed today in the United States as VYTORIN and as INEGY in
most other countries). |
VYTORIN and ZETIA were approved by the FDA in July 2004 and October 2002, respectively.
Together, these products, whether marketed as VYTORIN, ZETIA or under other trademarks locally, are
referred to as the Cholesterol Products.
Under the Cholesterol Collaboration Agreements, New Merck established jointly-owned, limited
purpose legal entities based in Canada and the United States through which to carry out the
contractual activities of the Partnership in these countries. An additional jointly-owned, limited
purpose legal entity based in Singapore was established to own the rights to the intellectual
property and to fund and oversee research and development and manufacturing activities of the
Cholesterol Collaboration. In all other markets except Latin America, subsidiaries of New Merck
perform marketing activities for the Cholesterol Products under contract with the Partnership.
These legal entity and subsidiary operations are collectively referred to as the Combined
Companies. In Latin America, the Partnership sells directly to New Mercks Latin American
subsidiaries. Consequently, selling, promotion and distribution activities for the Cholesterol
Products within Latin America are not included in the results of the Combined Companies.
The Partnership is substantially reliant on the infrastructures of the Partners. There are a
limited number of employees of the legal entities of the Partnership and most activities are
performed by employees of the Partners under service agreements with the Partnership. Profits,
which are shared by the Partners under differing arrangements in countries around the world, are
generally defined as net sales minus (1) agreed upon manufacturing costs and expenses incurred by
the Partners and invoiced to the Partnership, (2) direct promotion expenses incurred by the
Partners and invoiced to the Partnership, (3) expenses for a limited specialty sales force in the
United States incurred by the Partners and invoiced to the Partnership, and certain amounts for
sales force physician detailing of the Cholesterol Products in the United States, Puerto
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Rico, Canada and Italy, (4) administration expenses based on a percentage of Cholesterol
Product net sales, which are invoiced by one of the Partners, and (5) other costs and expenses
incurred by the Partners that were not contemplated when the Cholesterol Collaboration Agreements
were entered into but that were subsequently agreed to by both Partners. Agreed upon research and
development expenses incurred by the Partners and invoiced to the Partnership are shared equally by
the Partners.
The Partnerships future results of operations, financial position, and cash flows may differ
materially from the historical results presented herein because of the risks and uncertainties
related to the Partnerships business. The Partnerships future operating results and cash flows
are dependent on the Cholesterol Products. Any events that adversely affect the market for those
products could have a significant impact on the Partnerships results of operations and cash flows.
These events could include loss of patent protection, increased costs associated with
manufacturing, increased competition from the introduction of new, more effective treatments,
exclusion from government reimbursement programs, discontinuation or removal from the market of a
product for safety or other reason, and the results of future clinical or outcomes studies (Note
5).
Basis of Presentation
The accompanying combined balance sheet and combined statements of net sales and contractual
expenses, cash flows and partners capital (deficit) include the Cholesterol and Respiratory
Collaboration activities of the Combined Companies. The Respiratory Collaboration activities
primarily pertained to clinical development work and pre-launch marketing activities. Spending on
respiratory-related activities ceased in 2008 following termination of the collaboration.
Net sales include the net sales of the Cholesterol Products sold by the Combined Companies.
Expenses include amounts that the Partners have contractually agreed to directly invoice to the
Partnership, or are shared through the contractual profit sharing arrangements between the
Partners, as described above.
The accompanying combined financial statements were prepared for the purpose of complying with
certain rules and regulations of the Securities and Exchange Commission and reflect the activities
of the Partnership based on the contractual agreements between the Partners. Such combined
financial statements include only the expenses agreed by the Partners to be shared or included in
the calculation of profits under the contractual agreements of the Partnership, and are not
intended to be a complete presentation of all of the costs and expenses that would be incurred by a
stand-alone pharmaceutical company for the discovery, development, manufacture, distribution and
marketing of pharmaceutical products.
The amounts presented in these combined financial statements exclude all purchase accounting
impacts resulting from the Merger.
Under the Cholesterol Collaboration Agreements, certain activities are charged to the
Partnership by the Partners based on contractually agreed upon allocations of Partner incurred
expenses as described below. In the opinion of management, any allocations of expenses described
below are made on a basis that reasonably reflects the actual level of support provided. All other
expenses are expenses of the Partners and are reflected in their separate consolidated financial
statements.
As described above, the profit sharing arrangements under the Cholesterol Collaboration
Agreements provide that only certain Partner-incurred costs and expenses be invoiced to the
Partnership by the Partners and therefore become part of the profit sharing calculation. The
following paragraphs list the typical categories of costs and expenses that are generally incurred
in the discovery, development, manufacture, distribution and marketing of the Cholesterol Products
and provide a description of how such costs and expenses are treated in the accompanying combined
statement of net sales and contractual expenses, and in determining profits under the contractual
agreements.
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Manufacturing costs and expenses All contractually agreed upon manufacturing plant
costs and expenses incurred by the Partners related to the manufacture of the Cholesterol
Products are included as Cost of sales in the accompanying combined statement of net sales
and contractual expenses, including direct production costs, certain production variances,
expenses for plant services and administration, warehousing, distribution, materials
management, technical services, quality control, and asset utilization. All other
manufacturing costs and expenses incurred by the Partners not agreed to be included in the
determination of profits under the contractual agreements are not invoiced to the
Partnership and, therefore, are excluded from the accompanying combined financial
statements. These costs and expenses include, but are not limited to, yield gains and
losses in excess of jointly agreed upon yield rates and excess/idle capacity of
manufacturing plant assets. |
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Direct promotion expenses Direct promotion represents direct and identifiable
out-of-pocket expenses incurred by the Partners on behalf of the Partnership including,
but not limited to, contractually agreed upon expenses related to |
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