Notes to Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1. Nature of Operations
Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. The Company’s operations are principally managed on a products basis and include
four
operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments. The Pharmaceutical segment is the only reportable segment.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. Sales of vaccines in most major European markets were marketed through the Company’s Sanofi Pasteur MSD (SPMSD) joint venture until its termination on December 31, 2016. Beginning in 2017, Merck will record vaccine sales in the European markets that were previously part of the joint venture.
The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AstraZeneca LP until the termination of that relationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products (see Note 3).
2. Summary of Accounting Policies
Principles of Consolidation —
The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. Intercompany balances and transactions are eliminated. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or, in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. For those consolidated subsidiaries where Merck ownership is less than 100%, the outside shareholders’ interests are shown as
Noncontrolling interests
in equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, such as interests in entities owned equally by the Company and a third party that are under shared control, are carried on the equity basis.
Acquisitions —
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the acquisition date fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accordingly, the Company may be required to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in the Company’s consolidated financial statements after the date of the acquisition. If the Company determines the assets acquired do not meet the
definition of a business under the acquisition method of accounting, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded.
Foreign Currency Translation —
The net assets of international subsidiaries where the local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries at changing rates are recorded in the foreign currency translation account, which is included in
Accumulated other comprehensive income (loss)
(
AOCI
) and reflected as a separate component of equity. For those subsidiaries that operate in highly inflationary economies and for those subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary foreign currency assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with the U.S. dollar effects of rate changes included in
Other (income) expense, net
.
Cash Equivalents —
Cash equivalents are comprised of certain highly liquid investments with original maturities of less than three months.
Inventories —
Inventories are valued at the lower of cost or market. The cost of a substantial majority of domestic pharmaceutical and vaccine inventories is determined using the last-in, first-out (LIFO) method for both financial reporting and tax purposes. The cost of all other inventories is determined using the first-in, first-out (FIFO) method. Inventories consist of currently marketed products, as well as certain inventories produced in preparation for product launches that are considered to have a high probability of regulatory approval. In evaluating the recoverability of inventories produced in preparation for product launches, the Company considers the likelihood that revenue will be obtained from the future sale of the related inventory together with the status of the product within the regulatory approval process.
Investments
— Investments in marketable debt and equity securities classified as available-for-sale are reported at fair value. Fair values of the Company’s investments are determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Changes in fair value that are considered temporary are reported net of tax in
Other Comprehensive Income
(
OCI
). For declines in the fair value of equity securities that are considered other-than-temporary, impairment losses are charged to
Other (income) expense, net
. The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost and, for equity securities, the Company’s ability and intent to hold the investments. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in
Other (income) expense, net
, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in
OCI
. Realized gains and losses for both debt and equity securities are included in
Other (income) expense, net
.
Revenue Recognition —
Revenues from sales of products are recognized when title and risk of loss passes to the customer, typically upon delivery. Recognition of revenue also requires reasonable assurance of collection of sales proceeds and completion of all performance obligations. Domestically, sales discounts are issued to customers as direct discounts at the point-of-sale, indirectly through an intermediary wholesaler, known as chargebacks, or indirectly in the form of rebates. Additionally, sales are generally made with a limited right of return under certain conditions. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. In addition, revenues are recorded net of time value of money discounts if collection of accounts receivable is expected to be in excess of one year. Accruals for chargebacks are reflected as a direct reduction to accounts receivable and accruals for rebates are recorded as current liabilities. The accrued balances relative to the provisions for chargebacks and rebates included in
Accounts receivable
and
Accrued and other current liabilities
were
$196 million
and
$2.7 billion
, respectively, at
December 31, 2016
and
$145 million
and
$2.7 billion
, respectively, at
December 31, 2015
.
The Company recognizes revenue from the sales of vaccines to the Federal government for placement into vaccine stockpiles in accordance with Securities and Exchange Commission (SEC) Interpretation
, Commission Guidance Regarding Accounting for Sales of Vaccines and BioTerror Countermeasures to the Federal Government for Placement into the Pediatric Vaccine Stockpile or the Strategic National Stockpile
.
Depreciation —
Depreciation is provided over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated tax methods are used. The estimated useful lives primarily range from
25
to
45
years for
Buildings
, and from
3
to
15
years for
Machinery, equipment and office furnishings
. Depreciation expense was
$1.6 billion
in
2016
,
$1.6 billion
in
2015
and
$2.5 billion
in
2014
.
Advertising and Promotion Costs —
Advertising and promotion costs are expensed as incurred. The Company recorded advertising and promotion expenses of
$2.1 billion
,
$2.1 billion
and
$2.3 billion
in
2016
,
2015
and
2014
, respectively.
Software Capitalization —
The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software including external direct costs of material and services, and payroll costs for employees directly involved with the software development. Capitalized software costs are included in
Property, plant and equipment
and amortized beginning when the software project is substantially complete and the asset is ready for its intended use. Capitalized software costs associated with projects that are being amortized over
6
to
10
years (including the Company’s on-going multi-year implementation of an enterprise-wide resource planning system) were
$452 million
and
$421 million
, net of accumulated amortization at
December 31, 2016
and
2015
, respectively. All other capitalized software costs are being amortized over periods ranging from
3
to
5
years. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred.
Goodwill —
Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.
Acquired Intangibles —
Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives ranging from
2
to
20
years (see Note 7). The Company periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.
Acquired In-Process Research and Development —
Acquired in-process research and development (IPR&D) that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.
Contingent Consideration —
Certain of the Company’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones, including product development milestones and royalty payments on future product sales. The fair value of contingent consideration liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes (either expense or income) recorded in earnings. Changes in any of the inputs may result in a significantly different fair value adjustment.
Research and Development —
Research and development is expensed as incurred. Upfront and milestone payments due to third parties in connection with research and development collaborations prior to regulatory approval are expensed as incurred. Payments due to third parties upon or subsequent to regulatory approval are capitalized and amortized over the shorter of the remaining license or product patent life. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expenses when the specific milestone has been achieved. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Research and development expenses include restructuring costs and IPR&D impairment charges in all periods. In addition, research and development expenses include expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration.
Share-Based Compensation —
The Company expenses all share-based payments to employees over the requisite service period based on the grant-date fair value of the awards.
Restructuring Costs —
The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. In accordance with existing benefit arrangements, employee termination costs are accrued when the restructuring actions are probable and estimable. When accruing these costs, the Company will recognize the amount within a range of costs that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company recognizes the minimum amount within the range. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.
Contingencies and Legal Defense Costs —
The Company records accruals for contingencies and legal defense costs expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Taxes on Income —
Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. The Company evaluates tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. The Company recognizes interest and penalties associated with uncertain tax positions as a component of
Taxes on income
in the Consolidated Statement of Income.
Use of Estimates —
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP) and, accordingly, include certain amounts that are based on management’s best estimates and judgments. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities, primarily IPR&D, other intangible assets and contingent consideration, as well as subsequent fair value measurements. Additionally, estimates are used in determining such items as provisions for sales discounts and returns, depreciable and amortizable lives, recoverability of inventories, including those produced in preparation for product launches, amounts recorded for contingencies, environmental liabilities and other reserves, pension and other postretirement benefit plan assumptions, share-based compensation assumptions, restructuring costs, impairments of long-lived assets (including intangible assets and
goodwill) and investments, and taxes on income. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Reclassifications —
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Recently Adopted Accounting Standards —
In the first quarter of 2016, the Company adopted accounting guidance issued by the Financial Accounting Standards Board (FASB) in April of 2015, which requires debt issuance costs to be presented as a direct deduction from the carrying amount of that debt on the balance sheet as opposed to being presented as a deferred charge. Approximately
$100 million
of debt issuance costs were reclassified in the first quarter of 2016 as a result of the adoption of the new standard. Prior period amounts have been recast to conform to the new presentation.
In the second quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB in March of 2016 intended to simplify the accounting and reporting for employee share-based payment transactions. Among other provisions, the new standard requires that excess tax benefits and deficiencies that arise upon vesting or exercise of share-based payments be recognized in the income statement (as opposed to previous guidance under which tax effects were recorded to
Other paid-in-capital
in certain instances). This aspect of the new guidance, which was required to be adopted prospectively, resulted in the recognition of
$79 million
of excess tax benefits in
Taxes on income
in 2016 arising from share-based payments. The new guidance also amended the presentation of certain share-based payment items in the statement of cash flows. Cash flows related to excess income tax benefits are now classified as an operating activity (formerly included as a financing activity). The Company elected to adopt this aspect of the new guidance prospectively. The standard also clarified that cash payments made to taxing authorities on the employees’ behalf for shares withheld should be presented as a financing activity. This aspect of the guidance was adopted retrospectively; accordingly, the Company reclassified
$117 million
and
$129 million
of such payments from operating activities to financing activities in the Consolidated Statement of Cash Flows for the years ended December 31, 2015 and 2014, respectively, to conform to the current presentation. The Company has elected to continue to estimate the impact of forfeitures when determining the amount of compensation cost to be recognized each period rather than account for them as they occur.
In the fourth quarter of 2016, the Company elected to early adopt an accounting standards update issued by the FASB on January 5, 2017 intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), the assets would not represent a business. To be considered a business, the assets in the transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Entities are permitted to apply the updated guidance to transactions occurring before the guidance was issued as long as the applicable financial statements have not been issued. Accordingly, the Company elected to adopt this guidance prospectively as of October 1, 2016.
Recently Issued Accounting Standards —
In May 2014, the FASB issued amended accounting guidance on revenue recognition that will be applied to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for interim and annual periods beginning in 2018. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of adopting the guidance being recognized at the date of initial application (modified retrospective method). The Company will adopt the new standard on January 1, 2018 and currently plans to use the modified retrospective method. The majority of the Company’s business is ship and bill and, on that primary revenue stream, Merck does not expect significant differences. However, the Company’s analysis is preliminary and subject to change. Merck has not completed its assessment of multiple element arrangements and certain discount and trade promotion programs.
In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments. The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also simplifies the impairment testing of equity investments without readily determinable fair values and changes certain disclosure requirements. This guidance is effective for interim and annual periods beginning in 2018. Early adoption is not permitted. The Company is currently assessing the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued new accounting guidance for the accounting and reporting of leases. The new guidance requires that lessees recognize a right-of-use asset and a lease liability recorded on the balance sheet for each of its leases (other than leases that meet the definition of a short-term lease). Leases will be classified as either operating or finance. Operating leases will result in straight-line expense in the income statement (similar to current operating leases) while finance leases will result in more expense being recognized in the earlier years of the lease term (similar to current capital leases). The new guidance will be effective for interim and annual periods beginning in 2019. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued amended guidance on the accounting for credit losses on financial instruments within its scope. The guidance introduces an expected loss model for estimating credit losses, replacing the incurred loss model. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses (and subsequent recoveries). The new guidance is effective for interim and annual periods beginning in 2020, with earlier application permitted in 2019. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and payments in the statement of cash flows intended to reduce diversity in practice. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The guidance is to be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In October 2016, the FASB issued guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under existing guidance, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The new guidance will require the recognition of the income tax consequences of an intra-entity transfer of an asset (with the exception of inventory) when the intra-entity transfer occurs. The guidance is effective for interim and annual periods beginning in 2018. Early adoption is permitted. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings in the beginning of the period of adoption. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued guidance requiring that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning in 2018 and should be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the effect of the standard on its Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance that provides for the elimination of Step 2 from the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying amount exceeds the reporting unit’s fair value with certain limitations. The new guidance is effective for interim and annual periods in 2021. The Company does not anticipate the adoption of the new guidance will have a material effect on its consolidated financial statements.
3. Acquisitions, Divestitures, Research Collaborations and License Agreements
The Company continues to acquire businesses and establish external alliances such as research collaborations and licensing agreements to complement its internal research capabilities. These arrangements often include upfront payments, as well as expense reimbursements or payments to the third party, and milestone, royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. The Company also reviews its marketed products and pipeline to examine candidates which may provide more value through out-licensing and, as part of its portfolio assessment process, may also divest certain assets. Pro forma financial information for acquired businesses is not presented if the historical financial results of the acquired entity are not significant when compared with the Company’s financial results.
2016 Transactions
In July 2016, Merck acquired Afferent Pharmaceuticals (Afferent), a privately held pharmaceutical company focused on the development of therapeutic candidates targeting the P2X3 receptor for the treatment of common, poorly-managed, neurogenic conditions. Afferent’s lead investigational candidate, MK-7264 (formerly AF-219), is a selective, non-narcotic, orally-administered P2X3 antagonist being evaluated in a Phase 2b clinical trial for the treatment of refractory, chronic cough as well as in a Phase 2 clinical trial in idiopathic pulmonary fibrosis with cough. Total consideration transferred of
$510 million
included cash paid for outstanding Afferent shares of
$487 million
, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Afferent. In addition, former Afferent shareholders are eligible to receive a total of up to an additional
$750 million
contingent upon the attainment of certain clinical development and commercial milestones for multiple indications and candidates, including MK-7264. This transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The Company determined the fair value of the contingent consideration was
$223 million
at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment using an appropriate discount rate dependent on the nature and timing of the milestone payment. Merck recognized an intangible asset for in-process research and development (IPR&D) of
$832 million
, net deferred tax liabilities of
$258 million
, and other net assets of
$29 million
(primarily consisting of cash acquired). The excess of the consideration transferred over the fair value of net assets acquired of
$130 million
was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach, through which fair value is estimated based upon the asset’s probability-adjusted future net cash flows, which reflects the stage of development of the project and the associated probability of successful completion. The net cash flows were then discounted to present value using a discount rate of
11.5%
. Actual cash flows are likely to be different than those assumed.
Also in July 2016, Merck, through its wholly owned subsidiary Healthcare Services & Solutions, LLC, acquired a majority ownership interest in The StayWell Company LLC (StayWell), a portfolio company of Vestar Capital Partners (Vestar). StayWell is a health engagement company that helps its clients engage and educate people to improve health and business results. Under the terms of the transaction, Merck paid
$150 million
for a majority ownership interest. Additionally, Merck provided StayWell with a
$150 million
intercompany loan to pay down preexisting third-party debt. Merck has an option to buy, and Vestar has an option to require Merck to buy, some or all of Vestar’s remaining ownership interest at fair value beginning
three
years from the acquisition date. This transaction was accounted for as an acquisition of a business. Merck recognized intangible assets of
$238 million
, deferred tax liabilities of
$84 million
, other net liabilities of
$5 million
and noncontrolling interest of
$124 million
. The excess of the consideration transferred over the fair value of net assets acquired of
$275 million
was recorded as goodwill and is largely attributable to anticipated synergies expected to arise after the acquisition. The goodwill was allocated to the Healthcare Services segment and is not deductible for tax purposes. The intangible assets recognized primarily relate to customer relationships, which are being amortized over a
10
-year useful life, and medical information and solutions content, which are being amortized over a
five
-year useful life.
Additionally, in July 2016, Merck announced it had executed an agreement to acquire a controlling interest in Vallée S.A. (Vallée), a leading privately held producer of animal health products in Brazil. Vallée has an extensive portfolio of products spanning parasiticides, anti-infectives and vaccines that include products for livestock, horses, and companion animals. Under the terms of the agreement, Merck will acquire approximately
93%
of the shares of Vallée for approximately
$400 million
, based on exchange rates at the time of the announcement. This agreement is subject to regulatory review and certain closing conditions.
In June 2016, Merck and Moderna Therapeutics (Moderna) entered into a strategic collaboration and license agreement to develop and commercialize novel messenger RNA (mRNA)-based personalized cancer vaccines. The development program will entail multiple studies in several types of cancer and include the evaluation of mRNA-based personalized cancer vaccines in combination with Merck’s
Keytruda
. Pursuant to the terms of the agreement, Merck made an upfront cash payment to Moderna of
$200 million
, which was recorded in
Research and development
expenses. Following human proof of concept studies, Merck has the right to elect to make an additional payment to Moderna. If Merck exercises this right, the two companies will then equally share cost and profits under a worldwide collaboration for the development of personalized cancer vaccines. Moderna will have the right to elect to co-promote the personalized cancer vaccines in the United States. The agreement entails exclusivity around combinations with
Keytruda
. Moderna and Merck will each have the ability to combine mRNA-based personalized cancer vaccines with other (non-PD-1) agents.
In January 2016, Merck acquired IOmet Pharma Ltd (IOmet), a privately held UK-based drug discovery company focused on the development of innovative medicines for the treatment of cancer, with a particular emphasis on the fields of cancer immunotherapy and cancer metabolism. The acquisition provides Merck with IOmet’s preclinical pipeline of IDO (indoleamine-2,3-dioxygenase 1), TDO (tryptophan-2,3-dioxygenase), and dual-acting IDO/TDO inhibitors. The transaction was accounted for as an acquisition of a business. Total purchase consideration in the transaction included a cash payment of
$150 million
and future additional milestone payments of up to
$250 million
that are contingent upon certain clinical and regulatory milestones being achieved. The Company determined the fair value of the contingent consideration was
$94 million
at the acquisition date utilizing a probability-weighted estimated cash flow stream adjusted for the expected timing of each payment utilizing a discount rate of
10.5%
. Merck recognized intangible assets for IPR&D of
$155 million
and net deferred tax assets of
$32 million
. The excess of the consideration transferred over the fair value of net assets acquired of
$57 million
was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair values of the identifiable intangible assets related to IPR&D were determined using an income approach. The assets’ probability-adjusted future net cash flows were then discounted to present value also using a discount rate of
10.5%
. Actual cash flows are likely to be different than those assumed.
2015 Transactions
In December 2015, the Company divested its remaining ophthalmics portfolio in international markets to Mundipharma Ophthalmology Products Limited. Merck received consideration of approximately
$170 million
and recognized a gain of
$147 million
recorded in
Other (income) expense, net
in 2015.
In July 2015, Merck acquired cCAM Biotherapeutics Ltd. (cCAM), a privately held biopharmaceutical company focused on the discovery and development of novel cancer immunotherapies. Total purchase consideration in the transaction included an upfront payment of
$96 million
in cash and future additional payments of up to
$510 million
associated with the attainment of certain clinical development, regulatory and commercial milestones. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of
$180 million
related to CM-24, a monoclonal antibody, as well as a liability for contingent consideration of
$105 million
, goodwill of
$14 million
and other net assets of
$7 million
. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue development of the pipeline program. Accordingly, the Company recorded an IPR&D impairment charge of
$180 million
related to CM-24 and reversed the related liability for contingent consideration, which had a fair value of
$116 million
at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in
Research and development
expenses in 2016.
Also in July 2015, Merck and Allergan plc (Allergan) entered into an agreement pursuant to which Allergan acquired the exclusive worldwide rights to MK-1602 and MK-8031, Merck’s investigational small molecule oral calcitonin gene-related peptide (CGRP) receptor antagonists, which are being developed for the treatment and prevention of migraine. Under the terms of the agreement, Allergan acquired these rights for upfront payments of
$250 million
, of which
$125 million
was paid in August 2015 upon closing of the transaction and the remaining
$125 million
was paid in April of 2016. The Company recorded a gain of
$250 million
within
Other (income) expense, net
in 2015 related to the transaction. Allergan is fully responsible for development of the CGRP programs, as well as manufacturing and commercialization upon approval and launch of the products. Under the agreement, Merck is entitled to receive potential development and commercial milestone payments and royalties at tiered double-digit rates based on commercialization
of the programs. During 2016, Merck recognized gains of
$100 million
within
Other (income) expense, net
resulting from payments by Allergan for the achievement of research and development milestones.
In February 2015, Merck and NGM Biopharmaceuticals, Inc. (NGM), a privately held biotechnology company, entered into a multi-year collaboration to research, discover, develop and commercialize novel biologic therapies across a wide range of therapeutic areas. Under the terms of the agreement, Merck made an upfront payment to NGM of
$94 million
, which was included in
Research and development
expenses, and purchased a
15%
equity stake in NGM for
$106 million
. Merck committed up to
$250 million
to fund all of NGM’s efforts under the initial
five
-year term of the collaboration, with the potential for additional funding if certain conditions are met. Prior to Merck initiating a Phase 3 study for a licensed program, NGM may elect to either receive milestone and royalty payments or, in certain cases, to co-fund development and participate in a global cost and revenue share arrangement of up to
50%
. The agreement also provides NGM with the option to participate in the co-promotion of any co-funded program in the United States. Merck has the option to extend the research agreement for
two
additional
two
-year terms.
In January 2015, Merck acquired Cubist Pharmaceuticals, Inc. (Cubist), a leader in the development of therapies to treat serious infections caused by a broad range of bacteria. Total consideration transferred of
$8.3 billion
included cash paid for outstanding Cubist shares of
$7.8 billion
, as well as share-based compensation payments to settle equity awards attributable to precombination service and cash paid for transaction costs on behalf of Cubist. Share-based compensation payments to settle non-vested equity awards attributable to postcombination service were recognized as transaction expense in 2015. In addition, the Company assumed all of the outstanding convertible debt of Cubist, which had a fair value of approximately
$1.9 billion
at the acquisition date. Merck redeemed this debt in February 2015. The transaction was accounted for as an acquisition of a business.
The estimated fair value of assets acquired and liabilities assumed from Cubist is as follows:
|
|
|
|
|
Estimated fair value at January 21, 2015
|
|
Cash and cash equivalents
|
$
|
733
|
|
Accounts receivable
|
123
|
|
Inventories
|
216
|
|
Other current assets
|
55
|
|
Property, plant and equipment
|
151
|
|
Identifiable intangible assets:
|
|
Products and product rights (11 year weighted-average useful life)
|
6,923
|
|
IPR&D
|
50
|
|
Other noncurrent assets
|
184
|
|
Current liabilities
(1)
|
(233
|
)
|
Deferred income tax liabilities
|
(2,519
|
)
|
Long-term debt
|
(1,900
|
)
|
Other noncurrent liabilities
(1)
|
(122
|
)
|
Total identifiable net assets
|
3,661
|
|
Goodwill
(2)
|
4,670
|
|
Consideration transferred
|
$
|
8,331
|
|
|
|
(1)
|
Included in current liabilities and other noncurrent liabilities is contingent consideration of
$73 million
and
$50 million
, respectively.
|
|
|
(2)
|
The goodwill recognized is largely attributable to anticipated synergies expected to arise after the acquisition and was allocated to the Pharmaceutical segment. The goodwill is not deductible for tax purposes.
|
The estimated fair values of identifiable intangible assets related to currently marketed products were determined using an income approach through which fair value is estimated based on market participant expectations of each asset’s discounted projected net cash flows. The Company’s estimates of projected net cash flows considered historical and projected pricing, margins and expense levels; the performance of competing products where applicable; relevant industry and therapeutic area growth drivers and factors; current and expected trends in technology and product life cycles; the extent and timing of potential new product introductions by the Company’s competitors; and the life of
each asset’s underlying patent. The net cash flows were then probability-adjusted where appropriate to consider the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future net cash flows of each product were then discounted to present value utilizing a discount rate of
8%
. Actual cash flows are likely to be different than those assumed.
The Company recorded the fair value of incomplete research project surotomycin (MK-4261) which, at the time of acquisition, had not reached technological feasibility and had no alternative future use. During the second quarter of 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and an IPR&D impairment charge (see Note 7).
In connection with the Cubist acquisition, liabilities were recorded for potential future consideration that is contingent upon the achievement of future sales-based milestones. The fair value of contingent consideration liabilities was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and a risk-adjusted discount rate of
8%
used to present value the probability-weighted cash flows. Changes in the inputs could result in a different fair value measurement.
This transaction closed on January 21, 2015; accordingly, the results of operations of the acquired business have been included in the Company’s results of operations beginning after that date. During 2015, the Company incurred
$324 million
of transaction costs directly related to the acquisition of Cubist including share-based compensation costs, severance costs, and legal and advisory fees which are reflected in
Marketing and administrative
expenses.
The following unaudited supplemental pro forma data presents consolidated information as if the acquisition of Cubist had been completed on January 1, 2014:
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2015
|
|
2014
|
Sales
|
$
|
39,584
|
|
|
$
|
43,437
|
|
Net income attributable to Merck & Co., Inc.
|
4,640
|
|
|
10,887
|
|
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
|
1.65
|
|
|
3.76
|
|
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
|
1.63
|
|
|
3.72
|
|
The unaudited supplemental pro forma data reflects the historical information of Merck and Cubist adjusted to include additional amortization expense based on the fair value of assets acquired, additional interest expense that would have been incurred on borrowings used to fund the acquisition, transaction costs associated with the acquisition, and the related tax effects of these adjustments. The pro forma data should not be considered indicative of the results that would have occurred if the acquisition had been consummated on January 1, 2014, nor are they indicative of future results.
2014 Transactions
In December 2014, Merck acquired OncoEthix, a privately held biotechnology company specializing in oncology drug development. Total purchase consideration in the transaction included an upfront cash payment of
$110 million
and future additional milestone payments of up to
$265 million
that were contingent upon certain clinical and regulatory milestones being achieved. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of
$143 million
related to MK-8628 (formerly OTX015), an investigational, novel oral BET (bromodomain) inhibitor, as well as a liability for contingent consideration of
$43 million
and other net assets of
$10 million
. During 2016, as a result of unfavorable efficacy data, the Company determined that it would discontinue the development of MK-8628. Accordingly, the Company recorded an IPR&D impairment charge of
$143 million
related to MK-8628 and reversed the related liability for contingent consideration, which had a fair value of
$40 million
at the time of program discontinuation. Both the IPR&D impairment charge and the income related to the reduction in the liability for contingent consideration were recorded in
Research and development
expenses in 2016.
On October 1, 2014, the Company completed the sale of its Merck Consumer Care (MCC) business to Bayer AG (Bayer) for
$14.2 billion
(
$14.0 billion
net of cash divested), less customary closing adjustments as well as certain contingent amounts held back that were payable upon the manufacturing site transfer in Canada and regulatory approval
in Korea. Under the terms of the agreement, Bayer acquired Merck’s existing over-the-counter business, including the global trademark and prescription rights for Claritin and Afrin. The Company recognized a pretax gain from the sale of MCC of
$11.2 billion
recorded in
Other (income) expense, net
in 2014.
Also on October 1, 2014, the Company entered into a worldwide clinical development collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Bayer’s Adempas (riociguat), which is approved to treat pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. The two companies will equally share costs and profits from the collaboration and implement a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer’s vericiguat, which is in Phase 3 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development at Bayer. Merck in turn made available its early-stage sGC compounds under similar terms. In return for these broad collaboration rights, Merck made an upfront payment to Bayer of
$1.0 billion
with the potential for additional milestone payments of up to
$1.1 billion
upon the achievement of agreed-upon sales goals. Under the agreement, Bayer will lead commercialization of Adempas in the Americas, while Merck will lead commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. The Company determined that Merck’s payment to access Bayer’s compounds constituted an acquisition of an asset. Of the $1.0 billion consideration paid by Merck,
$915 million
of fair value related to Adempas and was capitalized as an intangible asset subject to amortization over its estimated useful life of
12 years
, and the remaining
$85 million
of fair value related to the vericiguat compound in clinical development and was expensed within
Research and development
expenses. The fair values of Adempas and vericiguat were determined using an income approach. The probability-adjusted future net cash flows were then discounted to present value using a discount rate of
10.0%
for Adempas and
10.5%
for vericiguat. During the second quarter of 2016, the Company determined it was probable that, in 2017, Adempas sales would exceed the threshold triggering a
$350 million
milestone payment from Merck to Bayer. Accordingly, in the second quarter of 2016, the Company recorded a
$350 million
liability and a corresponding intangible asset and also recognized
$50 million
of cumulative amortization expense within
Materials and production
costs. The remaining intangible asset at June 30, 2016 of
$300 million
is being amortized over its then-remaining estimated useful life of
10.5
years as supported by projected future cash flows, subject to impairment testing. The remaining potential future milestone payments of
$775 million
have not yet been accrued as they are not deemed by the Company to be probable at this time.
In August 2014, Merck completed the acquisition of Idenix Pharmaceuticals, Inc. (Idenix) for approximately
$3.9 billion
in cash (
$3.7 billion
net of cash acquired). Idenix was a biopharmaceutical company engaged in the discovery and development of medicines for the treatment of human viral diseases, whose primary focus was on the development of next-generation oral antiviral therapeutics to treat hepatitis C virus (HCV) infection. The transaction was accounted for as an acquisition of a business. Merck recognized an intangible asset for IPR&D of
$3.2 billion
related to MK-3682 (formerly IDX21437), uprifosbuvir, as well as net deferred tax liabilities of
$951 million
and other net liabilities of
$12 million
. Uprifosbuvir is a nucleotide prodrug in clinical development being evaluated for the treatment of HCV infection. The excess of the consideration transferred over the fair value of net assets acquired of
$1.5 billion
was recorded as goodwill that was allocated to the Pharmaceutical segment and is not deductible for tax purposes. The fair value of the identifiable intangible asset related to IPR&D was determined using an income approach. The asset’s probability-adjusted future net cash flows were then discounted to present value using a discount rate of
11.5%
. During 2016, the Company recorded a $
2.9 billion
IPR&D impairment charge related to uprifosbuvir that resulted from recent changes to the product profile taken together with changes to the Company’s expectations for pricing and the market opportunity (see Note 7).
In May 2014, Merck entered into an agreement to sell certain ophthalmic products to Santen Pharmaceutical Co., Ltd. (Santen) in Japan and markets in Europe and Asia Pacific. The agreement provided for upfront payments from Santen and additional payments based on defined sales milestones. Santen will also purchase supply of ophthalmology products covered by the agreement for a
two
- to
five
-year period. The transaction closed in most markets on July 1, 2014 and in the remaining markets on October 1, 2014. The Company received
$565 million
of upfront payments from Santen, net of certain adjustments, and recognized gains of
$480 million
on the transactions in 2014 included in
Other (income) expense, net
.
In March 2014, Merck sold its Sirna Therapeutics, Inc. (Sirna) subsidiary to Alnylam Pharmaceuticals, Inc. (Alnylam) for consideration of
$25 million
and
2,520,044
shares of Alnylam common stock. Merck is eligible to receive future payments associated with the achievement of certain regulatory and commercial milestones, as well as royalties on future sales. Merck recorded a gain of
$204 million
in
Other (income) expense, net
in 2014 related to this transaction. The excess of Merck’s tax basis in its investment in Sirna over the value received resulted in an approximate
$300 million
tax benefit recorded in 2014.
In January 2014, Merck sold the U.S. marketing rights to
Saphris
, an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults to Forest Laboratories, Inc. (Forest). Under the terms of the agreement, Forest made upfront payments of
$232 million
, which were recorded in
Sales
in 2014, and will make additional payments to Merck based on defined sales milestones. In addition, as part of this transaction, Merck agreed to supply product to Forest (subsequently acquired by Allergan) until patent expiry.
Remicade/Simponi
In 1998, a subsidiary of Schering-Plough entered into a licensing agreement with Centocor Ortho Biotech Inc. (Centocor), a Johnson & Johnson (J&J) company, to market
Remicade,
which is prescribed for the treatment of inflammatory diseases. In 2005, Schering-Plough’s subsidiary exercised an option under its contract with Centocor for license rights to develop and commercialize
Simponi
, a fully human monoclonal antibody. The Company has marketing rights to both products throughout Europe, Russia and Turkey.
Remicade
lost market exclusivity in major European markets in February 2015 and the Company no longer has market exclusivity in any of its marketing territories
. The Company continues to have market exclusivity for
Simponi
in all of its marketing territories.
All profits derived from Merck’s distribution of the two products in these countries are equally divided between Merck and J&J.
4. Restructuring
The Company incurs substantial costs for restructuring program activities related to Merck’s productivity and cost reduction initiatives, as well as in connection with the integration of certain acquired businesses. In 2010 and 2013, the Company commenced actions under global restructuring programs designed to streamline its cost structure. The actions under these programs include the elimination of positions in sales, administrative and headquarters organizations, as well as the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities. The Company also continues to reduce its global real estate footprint and improve the efficiency of its manufacturing and supply network. The non-facility related restructuring actions under these programs are substantially complete; the remaining activities primarily relate to ongoing facility rationalizations.
The Company recorded total pretax costs of
$1.1 billion
in
2016
,
$1.1 billion
in
2015
and
$2.0 billion
in
2014
related to restructuring program activities. Since inception of the programs through
December 31, 2016
, Merck has recorded total pretax accumulated costs of approximately
$12.6 billion
and eliminated approximately
40,900
positions comprised of employee separations, as well as the elimination of contractors and vacant positions. The Company expects to substantially complete the remaining actions under these programs by the end of 2017 and incur approximately
$700 million
of additional pretax costs. The Company estimates that approximately
two-thirds
of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense. Approximately
one-third
of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
For segment reporting, restructuring charges are unallocated expenses.
The following table summarizes the charges related to restructuring program activities by type of cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation
Costs
|
|
Accelerated
Depreciation
|
|
Other
|
|
Total
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
Materials and production
|
$
|
—
|
|
|
$
|
77
|
|
|
$
|
104
|
|
|
$
|
181
|
|
Marketing and administrative
|
—
|
|
|
8
|
|
|
87
|
|
|
95
|
|
Research and development
|
—
|
|
|
142
|
|
|
—
|
|
|
142
|
|
Restructuring costs
|
216
|
|
|
—
|
|
|
435
|
|
|
651
|
|
|
$
|
216
|
|
|
$
|
227
|
|
|
$
|
626
|
|
|
$
|
1,069
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
Materials and production
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
283
|
|
|
$
|
361
|
|
Marketing and administrative
|
—
|
|
|
59
|
|
|
19
|
|
|
78
|
|
Research and development
|
—
|
|
|
37
|
|
|
15
|
|
|
52
|
|
Restructuring costs
|
208
|
|
|
—
|
|
|
411
|
|
|
619
|
|
|
$
|
208
|
|
|
$
|
174
|
|
|
$
|
728
|
|
|
$
|
1,110
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
Materials and production
|
$
|
—
|
|
|
$
|
429
|
|
|
$
|
53
|
|
|
$
|
482
|
|
Marketing and administrative
|
—
|
|
|
198
|
|
|
2
|
|
|
200
|
|
Research and development
|
—
|
|
|
273
|
|
|
10
|
|
|
283
|
|
Restructuring costs
|
674
|
|
|
—
|
|
|
339
|
|
|
1,013
|
|
|
$
|
674
|
|
|
$
|
900
|
|
|
$
|
404
|
|
|
$
|
1,978
|
|
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. Positions eliminated under restructuring program activities were approximately
2,625
in
2016
,
3,770
in
2015
and
6,085
in
2014
. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were sufficient to recover the respective book values, Merck recorded accelerated depreciation of the site assets. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in
2016
,
2015
and
2014
includes
$409 million
,
$550 million
and
$240 million
, respectively, of asset abandonment, shut-down and other related costs. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 13) and share-based compensation. Other activity also reflects net pretax losses resulting from sales of facilities and related assets of
$151 million
in
2016
,
$117 million
in
2015
and
$133 million
in
2014
.
The following table summarizes the charges and spending relating to restructuring program activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation
Costs
|
|
Accelerated
Depreciation
|
|
Other
|
|
Total
|
Restructuring reserves January 1, 2015
|
$
|
1,031
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
1,051
|
|
Expenses
|
208
|
|
|
174
|
|
|
728
|
|
|
1,110
|
|
(Payments) receipts, net
|
(647
|
)
|
|
—
|
|
|
(435
|
)
|
|
(1,082
|
)
|
Non-cash activity
|
—
|
|
|
(174
|
)
|
|
(260
|
)
|
|
(434
|
)
|
Restructuring reserves December 31, 2015
|
592
|
|
|
—
|
|
|
53
|
|
|
645
|
|
Expenses
|
216
|
|
|
227
|
|
|
626
|
|
|
1,069
|
|
(Payments) receipts, net
|
(413
|
)
|
|
—
|
|
|
(347
|
)
|
|
(760
|
)
|
Non-cash activity
|
—
|
|
|
(227
|
)
|
|
(186
|
)
|
|
(413
|
)
|
Restructuring reserves December 31, 2016
(1)
|
$
|
395
|
|
|
$
|
—
|
|
|
$
|
146
|
|
|
$
|
541
|
|
|
|
(1)
|
The remaining cash outlays are expected to be substantially completed by the end of 2017.
|
5. Financial Instruments
Derivative Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate movements and interest rate movements on its earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments.
A significant portion of the Company’s revenues and earnings in foreign affiliates is exposed to changes in foreign exchange rates. The objectives and accounting related to the Company’s foreign currency risk management program, as well as its interest rate risk management activities are discussed below.
Foreign Currency Risk Management
The Company has established revenue hedging, balance sheet risk management and net investment hedging programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.
The objective of the revenue hedging program is to reduce the variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. To achieve this objective, the Company will hedge a portion of its forecasted foreign currency denominated third-party and intercompany distributor entity sales (forecasted sales) that are expected to occur over its planning cycle, typically no more than
two
years into the future. The Company will layer in hedges over time, increasing the portion of forecasted sales hedged as it gets closer to the expected date of the forecasted foreign currency denominated sales. The portion of forecasted sales hedged is based on assessments of cost-benefit profiles that consider natural offsetting exposures, revenue and exchange rate volatilities and correlations, and the cost of hedging instruments. The Company manages its anticipated transaction exposure principally with purchased local currency put options, forward contracts, and purchased collar options.
The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the Consolidated Balance Sheet. Changes in the fair value of derivative contracts are recorded each period in either current earnings or
OCI
, depending on whether the derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. For derivatives that are designated as cash flow hedges, the effective portion of the unrealized gains or losses on these contracts is recorded in
AOCI
and reclassified into
Sales
when the hedged anticipated revenue is recognized. The hedge relationship is highly effective and hedge ineffectiveness has been
de minimis
. For those derivatives which are not designated as cash flow hedges, but serve as economic hedges of forecasted sales, unrealized gains or losses are recorded in
Sales
each period. The cash flows from both designated and non-designated contracts are reported as operating activities in the Consolidated Statement of Cash Flows. The Company does not enter into derivatives for trading or speculative purposes.
The Company manages operating activities and net asset positions at the local level in order to mitigate the effect of exchange on monetary assets and liabilities. The Company also uses a balance sheet risk management program to mitigate the exposure of net monetary assets that are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Merck principally utilizes forward exchange contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro and Japanese yen. For exposures in developing country currencies, the Company will enter into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in
Other (income) expense, net
. The forward contracts are not designated as hedges and are marked to market through
Other (income) expense, net
. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year.
The Company may also use forward exchange contracts to hedge its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The Company hedges a portion of the net investment in certain of its foreign operations and measures ineffectiveness based upon changes in spot foreign exchange rates that are recorded in
Other (income) expense, net
. The effective portion of the unrealized gains or losses on these contracts is recorded in foreign currency translation adjustment within
OCI
, and remains in
AOCI
until either the sale or complete or substantially complete liquidation of the subsidiary. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign currency debt. The Company’s senior unsecured euro-denominated notes have been designated as, and are effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustment within
OCI
. Included in the cumulative translation adjustment are pretax gains of
$193 million
in
2016
,
$304 million
in
2015
and
$294 million
in
2014
from the euro-denominated notes.
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk.
In May 2016,
four
interest rate swaps with notional amounts of
$250 million
each matured. These swaps effectively converted the Company’s
$1.0 billion
,
0.70%
fixed-rate notes due 2016 to variable rate debt. At
December 31, 2016
, the Company was a party to
26
pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
2016
|
Debt Instrument
|
Par Value of Debt
|
|
Number of Interest Rate Swaps Held
|
|
Total Swap Notional Amount
|
1.30% notes due 2018
|
1,000
|
|
|
4
|
|
|
1,000
|
|
5.00% notes due 2019
|
1,250
|
|
|
3
|
|
|
550
|
|
1.85% notes due 2020
|
1,250
|
|
|
5
|
|
|
1,250
|
|
3.875% notes due 2021
|
1,150
|
|
|
5
|
|
|
1,150
|
|
2.40% notes due 2022
|
1,000
|
|
|
4
|
|
|
1,000
|
|
2.35% notes due 2022
|
1,250
|
|
|
5
|
|
|
1,250
|
|
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 LIBOR swap rate are recorded in interest expense and offset by the fair value changes in the swap contracts. The cash flows from these contracts are reported as operating activities in the Consolidated Statement of Cash Flows.
Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
Fair Value of
Derivative
|
|
U.S. Dollar
Notional
|
|
Fair Value of
Derivative
|
|
U.S. Dollar
Notional
|
|
Balance Sheet Caption
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
Other assets
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
2,700
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
2,700
|
|
Interest rate swap contracts
|
Accrued and other current liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1,000
|
|
Interest rate swap contracts
|
Other noncurrent liabilities
|
|
—
|
|
|
29
|
|
|
3,500
|
|
|
—
|
|
|
23
|
|
|
3,500
|
|
Foreign exchange contracts
|
Other current assets
|
|
616
|
|
|
—
|
|
|
6,063
|
|
|
579
|
|
|
—
|
|
|
4,171
|
|
Foreign exchange contracts
|
Other assets
|
|
129
|
|
|
—
|
|
|
2,075
|
|
|
386
|
|
|
—
|
|
|
4,136
|
|
Foreign exchange contracts
|
Accrued and other current liabilities
|
|
—
|
|
|
1
|
|
|
48
|
|
|
—
|
|
|
1
|
|
|
77
|
|
Foreign exchange contracts
|
Other noncurrent liabilities
|
|
—
|
|
|
1
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
765
|
|
|
$
|
31
|
|
|
$
|
14,398
|
|
|
$
|
1,007
|
|
|
$
|
25
|
|
|
$
|
15,584
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
8,210
|
|
|
$
|
212
|
|
|
$
|
—
|
|
|
$
|
8,783
|
|
Foreign exchange contracts
|
Other assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
179
|
|
Foreign exchange contracts
|
Accrued and other current liabilities
|
|
—
|
|
|
103
|
|
|
2,931
|
|
|
—
|
|
|
37
|
|
|
2,508
|
|
Foreign exchange contracts
|
Other noncurrent liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
6
|
|
|
|
|
$
|
230
|
|
|
$
|
103
|
|
|
$
|
11,141
|
|
|
$
|
230
|
|
|
$
|
38
|
|
|
$
|
11,476
|
|
|
|
|
$
|
995
|
|
|
$
|
134
|
|
|
$
|
25,539
|
|
|
$
|
1,237
|
|
|
$
|
63
|
|
|
$
|
27,060
|
|
As noted above, the Company records its derivatives on a gross basis in the Consolidated Balance Sheet. The Company has master netting agreements with several of its financial institution counterparties (see
Concentrations of Credit Risk
below). The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
Gross amounts recognized in the consolidated balance sheet
|
$
|
995
|
|
|
$
|
134
|
|
|
$
|
1,237
|
|
|
$
|
63
|
|
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet
|
(131
|
)
|
|
(131
|
)
|
|
(59
|
)
|
|
(59
|
)
|
Cash collateral (received) posted
|
(529
|
)
|
|
—
|
|
|
(862
|
)
|
|
—
|
|
Net amounts
|
$
|
335
|
|
|
$
|
3
|
|
|
$
|
316
|
|
|
$
|
4
|
|
The table below provides information on the location and pretax gain or loss amounts for derivatives that are: (i) designated in a fair value hedging relationship, (ii) designated in a foreign currency cash flow hedging relationship, (iii) designated in a foreign currency net investment hedging relationship and (iv) not designated in a hedging relationship:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Derivatives designated in a fair value hedging relationship
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
|
|
|
Amount of loss (gain) recognized in
Other (income) expense, net
on derivatives
(1)
|
$
|
28
|
|
|
$
|
(14
|
)
|
|
$
|
(17
|
)
|
Amount of (gain) loss recognized in
Other (income) expense, net
on hedged item
(1)
|
(29
|
)
|
|
7
|
|
|
14
|
|
Derivatives designated in foreign currency cash flow hedging relationships
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
Amount of gain reclassified from
AOCI
to
Sales
|
(311
|
)
|
|
(724
|
)
|
|
(143
|
)
|
Amount of gain recognized in
OCI
on derivatives
|
(210
|
)
|
|
(526
|
)
|
|
(775
|
)
|
Derivatives designated in foreign currency net investment hedging relationships
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
Amount of gain recognized in
Other (income) expense, net
on derivatives
(2)
|
(1
|
)
|
|
(4
|
)
|
|
(6
|
)
|
Amount of loss (gain) recognized in
OCI
on derivatives
|
2
|
|
|
(10
|
)
|
|
(192
|
)
|
Derivatives not designated in a hedging relationship
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
Amount of loss (gain) recognized in
Other (income) expense, net
on derivatives
(3)
|
132
|
|
|
(461
|
)
|
|
(516
|
)
|
Amount of (gain) loss recognized in
Sales
|
—
|
|
|
(1
|
)
|
|
15
|
|
|
|
(1)
|
There was
$1 million
,
$7 million
and
$3 million
of ineffectiveness on the hedge during
2016
,
2015
and
2014
, respectively.
|
|
|
(2)
|
There was no ineffectiveness on the hedge. Represents the amount excluded from hedge effectiveness testing.
|
|
|
(3)
|
These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.
|
At
December 31, 2016
, the Company estimates
$462 million
of pretax net unrealized gains on derivatives maturing within the next 12 months that hedge foreign currency denominated sales over that same period will be reclassified from
AOCI
to
Sales
. The amount ultimately reclassified to
Sales
may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity.
Investments in Debt and Equity Securities
Information on investments in debt and equity securities at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Gains
|
|
Losses
|
|
Gains
|
|
Losses
|
Corporate notes and bonds
|
$
|
10,577
|
|
|
$
|
10,601
|
|
|
$
|
15
|
|
|
$
|
(39
|
)
|
|
$
|
10,259
|
|
|
$
|
10,299
|
|
|
$
|
7
|
|
|
$
|
(47
|
)
|
Commercial paper
|
4,330
|
|
|
4,330
|
|
|
—
|
|
|
—
|
|
|
2,977
|
|
|
2,977
|
|
|
—
|
|
|
—
|
|
U.S. government and agency securities
|
2,232
|
|
|
2,244
|
|
|
1
|
|
|
(13
|
)
|
|
1,761
|
|
|
1,767
|
|
|
—
|
|
|
(6
|
)
|
Asset-backed securities
|
1,376
|
|
|
1,380
|
|
|
1
|
|
|
(5
|
)
|
|
1,284
|
|
|
1,290
|
|
|
—
|
|
|
(6
|
)
|
Mortgage-backed securities
|
796
|
|
|
801
|
|
|
1
|
|
|
(6
|
)
|
|
694
|
|
|
697
|
|
|
1
|
|
|
(4
|
)
|
Foreign government bonds
|
519
|
|
|
521
|
|
|
—
|
|
|
(2
|
)
|
|
607
|
|
|
586
|
|
|
22
|
|
|
(1
|
)
|
Equity securities
|
349
|
|
|
281
|
|
|
71
|
|
|
(3
|
)
|
|
534
|
|
|
409
|
|
|
125
|
|
|
—
|
|
|
$
|
20,179
|
|
|
$
|
20,158
|
|
|
$
|
89
|
|
|
$
|
(68
|
)
|
|
$
|
18,116
|
|
|
$
|
18,025
|
|
|
$
|
155
|
|
|
$
|
(64
|
)
|
Available-for-sale debt securities included in
Short-term investments
totaled
$7.8 billion
at
December 31, 2016
. Of the remaining debt securities,
$10.2 billion
mature within five years. At
December 31, 2016
and
2015
, there were no debt securities pledged as collateral.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
— Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
— Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or liabilities for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis at December 31 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Fair Value Measurements Using
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
2016
|
|
2015
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
$
|
—
|
|
|
$
|
10,389
|
|
|
$
|
—
|
|
|
$
|
10,389
|
|
|
$
|
—
|
|
|
$
|
10,259
|
|
|
$
|
—
|
|
|
$
|
10,259
|
|
Commercial paper
|
—
|
|
|
4,330
|
|
|
—
|
|
|
4,330
|
|
|
—
|
|
|
2,977
|
|
|
—
|
|
|
2,977
|
|
U.S. government and agency securities
|
29
|
|
|
1,890
|
|
|
—
|
|
|
1,919
|
|
|
—
|
|
|
1,761
|
|
|
—
|
|
|
1,761
|
|
Asset-backed securities
(1)
|
—
|
|
|
1,257
|
|
|
—
|
|
|
1,257
|
|
|
—
|
|
|
1,284
|
|
|
—
|
|
|
1,284
|
|
Mortgage-backed securities
(1)
|
—
|
|
|
628
|
|
|
—
|
|
|
628
|
|
|
—
|
|
|
694
|
|
|
—
|
|
|
694
|
|
Foreign government bonds
|
—
|
|
|
518
|
|
|
—
|
|
|
518
|
|
|
—
|
|
|
607
|
|
|
—
|
|
|
607
|
|
Equity securities
|
201
|
|
|
—
|
|
|
—
|
|
|
201
|
|
|
360
|
|
|
—
|
|
|
—
|
|
|
360
|
|
|
230
|
|
|
19,012
|
|
|
—
|
|
|
19,242
|
|
|
360
|
|
|
17,582
|
|
|
—
|
|
|
17,942
|
|
Other assets
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
—
|
|
|
313
|
|
|
—
|
|
|
313
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate notes and bonds
|
—
|
|
|
188
|
|
|
—
|
|
|
188
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage-backed securities
(1)
|
—
|
|
|
168
|
|
|
—
|
|
|
168
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Asset-backed securities
(1)
|
—
|
|
|
119
|
|
|
—
|
|
|
119
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign government bonds
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities
|
148
|
|
|
—
|
|
|
—
|
|
|
148
|
|
|
155
|
|
|
19
|
|
|
—
|
|
|
174
|
|
|
148
|
|
|
789
|
|
|
—
|
|
|
937
|
|
|
155
|
|
|
19
|
|
|
—
|
|
|
174
|
|
Derivative assets
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased currency options
|
—
|
|
|
644
|
|
|
—
|
|
|
644
|
|
|
—
|
|
|
1,041
|
|
|
—
|
|
|
1,041
|
|
Forward exchange contracts
|
—
|
|
|
331
|
|
|
—
|
|
|
331
|
|
|
—
|
|
|
154
|
|
|
—
|
|
|
154
|
|
Interest rate swaps
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
995
|
|
|
—
|
|
|
995
|
|
|
—
|
|
|
1,237
|
|
|
—
|
|
|
1,237
|
|
Total assets
|
$
|
378
|
|
|
$
|
20,796
|
|
|
$
|
—
|
|
|
$
|
21,174
|
|
|
$
|
515
|
|
|
$
|
18,838
|
|
|
$
|
—
|
|
|
$
|
19,353
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
891
|
|
|
$
|
891
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
590
|
|
|
$
|
590
|
|
Derivative liabilities
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts
|
—
|
|
|
93
|
|
|
—
|
|
|
93
|
|
|
—
|
|
|
38
|
|
|
—
|
|
|
38
|
|
Interest rate swaps
|
—
|
|
|
29
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
24
|
|
Written currency options
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
134
|
|
|
—
|
|
|
134
|
|
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
134
|
|
|
$
|
891
|
|
|
$
|
1,025
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
590
|
|
|
$
|
653
|
|
|
|
(1)
|
Primarily all of the asset-backed securities are highly-rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily
5
years or less. Mortgage-backed securities represent AAA-rated securities issued or unconditionally guaranteed as to payment of principal and interest by U.S. government agencies.
|
|
|
(2)
|
The increase in investments included in
Other assets
reflects certain assets previously restricted for retiree benefits that became available to fund certain other health and welfare benefits during 2016 (see Note 13).
|
|
|
(3)
|
The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.
|
There were no transfers between Level 1 and Level 2 during
2016
. As of
December 31, 2016
,
Cash and cash equivalents
of
$6.5 billion
included
$5.4 billion
of cash equivalents (considered Level 2 in the fair value hierarchy).
Contingent Consideration
Summarized information about the changes in liabilities for contingent consideration is as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Fair value January 1
|
$
|
590
|
|
|
$
|
428
|
|
Changes in fair value
(1)
|
(407
|
)
|
|
(16
|
)
|
Additions
|
733
|
|
|
228
|
|
Payments
|
(25
|
)
|
|
(50
|
)
|
Fair value December 31
|
$
|
891
|
|
|
$
|
590
|
|
(1)
Recorded in
Research and development
expenses and
Materials and production
costs.
The changes in fair value in 2016 were largely attributable to the reversal of liabilities related to programs obtained in connection with the acquisitions of cCAM, OncoEthix and SmartCells (see Note 7). The additions to contingent consideration in 2016 relate to the termination of the SPMSD joint venture (see Note 8) and the acquisitions of IOmet and Afferent (see Note 3). The additions to contingent consideration in 2015 relate to the acquisitions of Cubist and cCAM (see Note 3). The payments of contingent consideration in 2016 relate to the first commercial sale of
Zerbaxa
in the European Union and in 2015 relate to the first commercial sale of
Zerbaxa
in the United States.
Other Fair Value Measurements
Some of the Company’s financial instruments, such as cash and cash equivalents, receivables and payables, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
The estimated fair value of loans payable and long-term debt (including current portion) at
December 31, 2016
, was
$25.7 billion
compared with a carrying value of
$24.8 billion
and at
December 31, 2015
, was
$27.0 billion
compared with a carrying value of
$26.4 billion
. Fair value was estimated using recent observable market prices and would be considered Level 2 in the fair value hierarchy.
Concentrations of Credit Risk
On an ongoing basis, the Company monitors concentrations of credit risk associated with corporate and government issuers of securities and financial institutions with which it conducts business. Credit exposure limits are established to limit a concentration with any single issuer or institution. Cash and investments are placed in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.
The majority of the Company’s accounts receivable arise from product sales in the United States and Europe and are primarily due from drug wholesalers and retailers, hospitals, government agencies, managed health care providers and pharmacy benefit managers. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company also continues to monitor economic conditions, including the volatility associated with international sovereign economies, and associated impacts on the financial markets and its business, taking into consideration global economic conditions and the ongoing sovereign debt issues in certain European countries. As of
December 31, 2016
, the Company’s total net accounts receivable outstanding for more than one year were approximately
$140 million
. The Company does not expect to have write-offs or adjustments to accounts receivable which would have a material adverse effect on its financial position, liquidity or results of operations.
The Company’s customers with the largest accounts receivable balances are: McKesson Corporation, AmerisourceBergen Corporation, Cardinal Health, Inc., Zuellig Pharma Ltd. (Asia Pacific), and AAH Pharmaceuticals Ltd (UK) which represented, in aggregate, approximately
40%
of total accounts receivable at
December 31, 2016
. The Company monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. Bad debts have been minimal. The Company does not normally require collateral or other security to support credit sales.
Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements. The master agreements with several of the Company’s financial institution counterparties also include credit support annexes. These annexes contain provisions that require collateral to be exchanged depending on the value of the derivative assets and liabilities, the Company’s credit rating, and the credit rating of the counterparty. As
of
December 31, 2016
and
2015
, the Company had received cash collateral of
$529 million
and
$862 million
, respectively, from various counterparties and the obligation to return such collateral is recorded in
Accrued and other current liabilities
. The Company had not advanced any cash collateral to counterparties as of
December 31, 2016
or
2015
.
6. Inventories
Inventories at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Finished goods
|
$
|
1,304
|
|
|
$
|
1,343
|
|
Raw materials and work in process
|
4,222
|
|
|
4,374
|
|
Supplies
|
155
|
|
|
168
|
|
Total (approximates current cost)
|
5,681
|
|
|
5,885
|
|
Increase to LIFO costs
|
302
|
|
|
384
|
|
|
$
|
5,983
|
|
|
$
|
6,269
|
|
Recognized as:
|
|
|
|
Inventories
|
$
|
4,866
|
|
|
$
|
4,700
|
|
Other assets
|
1,117
|
|
|
1,569
|
|
Inventories valued under the LIFO method comprised approximately
$2.3 billion
and
$2.4 billion
of inventories at
December 31, 2016
and
2015
, respectively. Amounts recognized as
Other assets
are comprised almost entirely of raw materials and work in process inventories. At
December 31, 2016
and
2015
, these amounts included
$1.0 billion
and
$1.5 billion
, respectively, of inventories not expected to be sold within one year. In addition, these amounts included
$80 million
and
$63 million
at
December 31, 2016
and
2015
, respectively, of inventories produced in preparation for product launches.
7. Goodwill and Other Intangibles
The following table summarizes goodwill activity by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical
|
|
|
All Other
|
|
|
Total
|
|
Balance January 1, 2015
|
$
|
11,108
|
|
|
$
|
1,884
|
|
|
$
|
12,992
|
|
Acquisitions
|
4,684
|
|
|
29
|
|
|
4,713
|
|
Divestitures
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
Impairments
|
—
|
|
|
(47
|
)
|
|
(47
|
)
|
Other
(1)
|
88
|
|
|
(5
|
)
|
|
83
|
|
Balance December 31, 2015
(2)
|
15,862
|
|
|
1,861
|
|
|
17,723
|
|
Acquisitions
|
207
|
|
|
275
|
|
|
482
|
|
Impairments
|
—
|
|
|
(47
|
)
|
|
(47
|
)
|
Other
(1)
|
6
|
|
|
(2
|
)
|
|
4
|
|
Balance December 31, 2016
(2)
|
$
|
16,075
|
|
|
$
|
2,087
|
|
|
$
|
18,162
|
|
(1)
Other includes cumulative translation adjustments on goodwill balances and certain other adjustments.
(2)
Accumulated goodwill impairment losses at
December 31, 2016
and
2015
were
$187 million
and
$140 million
, respectively.
In 2016, the additions to goodwill in the Pharmaceutical segment resulted primarily from the acquisitions of Afferent and IOmet (see Note 3), as well as from the termination of the SPMSD joint venture, which was treated as a step-acquisition for accounting purposes (see Note 8). The addition to goodwill within other non-reportable segments in 2016 relates to the acquisition of StayWell, which is part of the Healthcare Services segment (see Note 3). In 2015, the additions to goodwill in the Pharmaceutical segment resulted primarily from the acquisition of Cubist and the reductions resulted from the divestiture of the Company’s remaining ophthalmics business in international markets (see Note 3). The impairments of goodwill within other non-reportable segments in 2016 and 2015 relate to certain businesses within the Healthcare Services segment.
Other intangibles at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Products and product rights
|
$
|
46,269
|
|
|
$
|
31,919
|
|
|
$
|
14,350
|
|
|
$
|
45,949
|
|
|
$
|
28,514
|
|
|
$
|
17,435
|
|
IPR&D
|
1,653
|
|
|
—
|
|
|
1,653
|
|
|
4,226
|
|
|
—
|
|
|
4,226
|
|
Tradenames
|
215
|
|
|
89
|
|
|
126
|
|
|
198
|
|
|
79
|
|
|
119
|
|
Other
|
1,947
|
|
|
771
|
|
|
1,176
|
|
|
1,418
|
|
|
596
|
|
|
822
|
|
|
$
|
50,084
|
|
|
$
|
32,779
|
|
|
$
|
17,305
|
|
|
$
|
51,791
|
|
|
$
|
29,189
|
|
|
$
|
22,602
|
|
Acquired intangibles include products and product rights, tradenames and patents, which are recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives. The increase in intangible assets for products and product rights in 2016 primarily relates to the recognition of intangible assets in connection with the termination of the SPMSD joint venture (see Note 8). Some of the Company’s more significant acquired intangibles related to marketed products (included in product and product rights above) at
December 31, 2016
include
Zerbaxa
,
$3.3 billion
;
Zetia
,
$1.5 billion
;
Sivextro
,
$955 million
;
Vytorin
,
$938 million
;
Implanon/Nexplanon
$587 million
;
Dificid
,
$561 million
;
Gardasil/Gardasil
9,
$468 million
; NuvaRing
,
$319 million
; and
Nasonex
,
$308 million
. The Company recognized an intangible asset related to Adempas as a result of the formation of a collaboration with Bayer in 2014 (see Note 3) that had a carrying value of
$872 million
at
December 31, 2016
reflected in “Other” in the table above.
During
2016
,
2015
and
2014
, the Company recorded impairment charges related to marketed products and other intangibles of
$347 million
,
$45 million
and
$1.1 billion
, respectively, within
Material and production
costs. In 2016, the Company lowered its cash flow projections for
Zontivity,
a product for the reduction of thrombotic cardiovascular events in patients with a history of myocardial infarction or with peripheral arterial disease, following several business decisions that reduced sales expectations for
Zontivity
in the United States and Europe. The Company utilized market participant assumptions and considered several different scenarios to determine the fair value of the intangible asset related to
Zontivity
that, when compared with its related carrying value, resulted in an impairment charge of
$252 million
. Also during 2016, the Company wrote-off
$95 million
that had been capitalized in connection with in-licensed products
Grastek
and
Ragwitek
, allergy immunotherapy tablets that, for business reasons, the Company has determined it will return to the licensor. The charges in 2015 primarily relate to the impairment of customer relationship and tradename intangibles for certain businesses within in the Healthcare Services segment. Of the amount recorded in 2014,
$793 million
related to
PegIntron,
$244 million
related to
Victrelis
and
$35 million
related to
Rebetol
, all of which are products for the treatment of chronic HCV infection. During 2014, developments in the competitive HCV treatment market led to market share losses that were greater than the Company had predicted causing changes in cash flow projections for
PegIntron
,
Victrelis
and
Rebetol
that indicated the intangible asset values were not recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair values of the intangible assets related to
PegIntron
,
Victrelis
and
Rebetol
that, when compared with their related carrying values, resulted in the impairment charges noted above.
IPR&D that the Company acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. Amounts capitalized as IPR&D are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a separate determination as to the then useful life of the asset and begin amortization. During
2016
,
2015
and
2014
,
$8 million
,
$280 million
and
$654 million
, respectively, of IPR&D was reclassified to products and product rights upon receipt of marketing approval in a major market.
During 2016, the Company recorded
$3.6 billion
of IPR&D impairment charges within
Research and development
expenses. Of this amount,
$2.9 billion
relates to the clinical development program for uprifosbuvir, a nucleotide prodrug in clinical development being evaluated for the treatment of HCV. The Company determined that recent changes to the product profile, as well as changes to Merck’s expectations for pricing and the market opportunity, taken together constituted a triggering event that required the Company to evaluate the uprifosbuvir intangible asset for impairment. Utilizing market participant assumptions, and considering different scenarios, the Company concluded
that its best estimate of the current fair value of the intangible asset related to uprifosbuvir was
$240 million
, resulting in the recognition of the pretax impairment charge noted above. The IPR&D impairment charges in 2016 also include charges of
$180 million
and
$143 million
related to the discontinuation of programs obtained in connection with the acquisitions of cCAM and OncoEthix, respectively, resulting from unfavorable efficacy data. An additional
$72 million
relates to programs obtained in connection with the SmartCells acquisition following a decision to terminate the lead compound due to a lack of efficacy and to pursue a back-up compound which reduced projected future cash flows. The IPR&D impairment charges in 2016 also include
$112 million
related to an in-licensed program for house dust mite allergies that, for business reasons, will be returned to the licensor. The remaining IPR&D impairment charges for 2016 primarily relate to deprioritized pipeline programs that were deemed to have no alternative use during the period, including a
$79 million
impairment charge for an investigational candidate for contraception. The discontinuation or delay of certain of these clinical development programs resulted in a reduction of the related liabilities for contingent consideration (see Note 3).
During 2015, the Company recorded
$63 million
of IPR&D impairment charges, of which
$50 million
related to the surotomycin clinical development program. During 2015, the Company received unfavorable efficacy data from a clinical trial for surotomycin. The evaluation of this data, combined with an assessment of the commercial opportunity for surotomycin, resulted in the discontinuation of the program and the IPR&D impairment charge noted above.
During 2014, the Company recorded
$49 million
of IPR&D impairment charges primarily as a result of changes in cash flow assumptions for certain compounds obtained in connection with the Company’s joint venture with Supera Farma Laboratorios S.A. (Supera), as well as for the discontinuation of certain Animal Health programs.
All of the IPR&D projects that remain in development are subject to the inherent risks and uncertainties in drug development and it is possible that the Company will not be able to successfully develop and complete the IPR&D programs and profitably commercialize the underlying product candidates.
The Company may recognize additional non-cash impairment charges in the future related to other marketed products or pipeline programs and such charges could be material.
Aggregate amortization expense primarily recorded within
Materials and production
costs was
$3.8 billion
in
2016
,
$4.8 billion
in
2015
and
$4.2 billion
in
2014
. The estimated aggregate amortization expense for each of the next five years is as follows:
2017
,
$3.2 billion
;
2018
,
$2.8 billion
;
2019
,
$1.4 billion
;
2020
,
$1.2 billion
;
2021
,
$1.1 billion
.
8. Joint Ventures and Other Equity Method Affiliates
Equity income from affiliates reflects the performance of the Company’s joint ventures and other equity method affiliates including SPMSD (until termination on December 31, 2016), certain investment funds, as well as AZLP (until the termination of the Company’s relationship with AZLP on June 30, 2014). Equity income from affiliates was
$86 million
in
2016
,
$205 million
in
2015
and
$257 million
in
2014
and is included in
Other (income) expense, net
(see Note 14).
Investments in affiliates accounted for using the equity method totaled
$715 million
at
December 31, 2016
and
$702 million
at
December 31, 2015
. These amounts are reported in
Other assets
. Amounts due from the above joint ventures included in
Other current assets
were
$1 million
at
December 31, 2016
and
$34 million
at
December 31, 2015
.
Sanofi Pasteur MSD
In 1994, Merck and Pasteur Mérieux Connaught (now Sanofi Pasteur S.A.) established an equally-owned joint venture (SPMSD) to market vaccines in Europe and to collaborate in the development of combination vaccines for distribution in Europe. Joint venture vaccine sales were
$1.0 billion
for
2016
,
$923 million
for
2015
and
$1.1 billion
for
2014
.
On December 31, 2016, Merck and Sanofi Pasteur (Sanofi) terminated SPMSD and ended their joint vaccines operations in Europe. Under the terms of the termination, Merck acquired Sanofi’s
50%
interest in SPMSD in exchange for consideration of
$657 million
comprised of cash, as well as future royalties of
11.5%
on net sales of all Merck products through December 31, 2024, which the Company determined had a fair value of
$416 million
on the date of
termination. The Company accounted for this transaction as a step acquisition, which required that Merck remeasure its ownership interest (previously accounted for as an equity method investment) to fair value at the acquisition date. Merck in turn sold to Sanofi its intellectual property rights held by SPMSD in exchange for consideration of
$596 million
comprised of cash and future royalties of
11.5%
on net sales of all Sanofi products through December 31, 2024, which the Company determined had a fair value of
$302 million
on the date of termination. Excluded from this arrangement are potential future sales of
Vaxelis
(a jointly developed investigational pediatric hexavalent combination vaccine that was approved by the European Commission in February 2016). The European marketing rights for
Vaxelis
were transferred to a separate equally-owned joint venture between Sanofi and Merck (MCM).
The net impact of the termination of the SPMSD joint venture is as follows:
|
|
|
|
|
Products and product rights (8 year useful life)
|
$
|
936
|
|
Accounts receivable
|
133
|
|
Income taxes payable
|
(221
|
)
|
Deferred income tax liabilities
|
(175
|
)
|
Other, net
|
34
|
|
Goodwill
(1)
|
20
|
|
Net assets acquired
|
727
|
|
Consideration payable to Sanofi, net
|
(378
|
)
|
Derecognition of Merck’s previously held equity investment in SPMSD
|
(183
|
)
|
Increase in net assets
|
166
|
|
Merck’s share of restructuring costs related to the termination
|
(77
|
)
|
Net gain on termination of SPMSD joint venture
(2)
|
$
|
89
|
|
(1)
The goodwill was allocated to the Pharmaceutical segment and is not deductible for tax purposes.
(2)
Recorded in
Other (income) expense, net
.
The estimated fair values of identifiable intangible assets related to products and product rights were determined using an income approach through which fair value is estimated based on market participant expectations of each asset’s projected net cash flows. The projected net cash flows were then discounted to present value utilizing a discount rate of
11.5%
. Actual cash flows are likely to be different than those assumed. Of the amount recorded for products and product rights,
$468 million
relates to
Gardasil/Gardasil
9.
The fair value of liabilities for contingent consideration related to Merck’s future royalty payments to Sanofi of
$416 million
(reflected in the consideration payable to Sanofi, net, in the table above) was determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and a risk-adjusted discount rate of
8%
used to present value the cash flows. Changes in the inputs could result in a different fair value measurement.
Based on an existing accounting policy election, Merck has not recorded the
$302 million
estimated fair value of contingent future royalties to be received from Sanofi on the sale of Sanofi products, but rather will recognize such amounts in future periods as sales occur and the royalties are earned.
The Company incurred
$24 million
of transaction costs related to the termination of SPMSD included in
Marketing and administrative
expenses in 2016.
Pro forma financial information for this transaction has not been presented as the results are not significant when compared with the Company’s financial results.
AstraZeneca LP
In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and market Astra products under a royalty-bearing license. In 1993, Merck’s total sales of Astra products reached a level that triggered the first step in the establishment of a joint venture business carried on by Astra Merck Inc. (AMI), in which Merck and Astra each owned a
50%
share. This joint venture, formed in 1994, developed and marketed most of Astra’s new prescription medicines in the United States. In 1998, Merck and Astra completed a restructuring of the ownership and operations of the joint venture whereby Merck acquired Astra’s interest in AMI, renamed KBI Inc. (KBI), and contributed KBI’s
operating assets to a new U.S. limited partnership, Astra Pharmaceuticals L.P. (the Partnership), in exchange for a
1%
limited partner interest. Astra contributed the net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a
99%
general partner interest. The Partnership, renamed AstraZeneca LP (AZLP) upon Astra’s 1999 merger with Zeneca Group Plc, became the exclusive distributor of the products for which KBI retained rights. In connection with the 1998 restructuring of AMI, Merck assumed
$2.4 billion
par value preferred stock with a dividend rate of
5%
per annum, which was carried by KBI and included in
Noncontrolling interests
.
Merck earned revenue based on sales of KBI products and such revenue was
$463 million
in 2014 primarily relating to sales of Nexium, as well as Prilosec. In addition, Merck earned certain Partnership returns from AZLP of
$192 million
in 2014, which were recorded in equity income from affiliates.
On June 30, 2014, AstraZeneca exercised its option to purchase Merck’s interest in KBI for
$419 million
in cash. Of this amount,
$327 million
reflected an estimate of the fair value of Merck’s interest in Nexium and Prilosec. This portion of the exercise price, which is subject to a true-up in 2018 based on actual sales from closing in 2014 to June 2018, was deferred and recognized as income of
$5 million
,
$182 million
and
$140 million
, during 2016, 2015 and 2014, respectively, in
Other (income) expense, net
as the contingency was eliminated as sales occurred. Once the deferred income amount was fully amortized, in the first quarter of 2016, the Company began recognizing income and a corresponding receivable for amounts that will be due to Merck from AstraZeneca based on the sales performance of Nexium and Prilosec subject to the true-up in June 2018. The Company recognized
$93 million
of such income in 2016 included in
Other (income) expense, net
.
The remaining exercise price of
$91 million
primarily represents a multiple of
ten
times Merck’s average
1%
annual profit allocation in the partnership for the
three
years prior to exercise. Merck recognized the
$91 million
as a gain in 2014 within
Other (income) expense, net
. As a result of AstraZeneca’s option exercise, the Company’s remaining interest in AZLP was redeemed. Accordingly, the Company also recognized a non-cash gain of approximately
$650 million
in 2014 within
Other (income) expense, net
resulting from the retirement of the
$2.4 billion
of KBI preferred stock, the elimination of the Company’s
$1.4 billion
investment in AZLP and a
$340 million
reduction of goodwill. This transaction resulted in a net tax benefit of
$517 million
in 2014 primarily reflecting the reversal of deferred taxes on the AZLP investment balance.
As a result of AstraZeneca exercising its option, as of July 1, 2014, the Company no longer records equity income from AZLP and supply sales to AZLP have terminated.
Summarized financial information for AZLP is as follows:
|
|
|
|
|
Year Ended December 31
|
2014
(1)
|
Sales
|
$
|
2,205
|
|
Materials and production costs
|
1,044
|
|
Other expense, net
|
604
|
|
Income before taxes
(2)
|
557
|
|
(1)
Includes results through the June 30, 2014 termination date.
(2)
Merck’s partnership returns from AZLP were generally contractually determined as noted above and were not based on a percentage of income from AZLP, other than with respect to Merck’s
1%
limited partnership interest.
9. Loans Payable, Long-Term Debt and Other Commitments
Loans payable at
December 31, 2016
included
$300 million
of notes due in
2017
and
$267 million
of long-dated notes that are subject to repayment at the option of the holder. Loans payable at
December 31, 2015
included
$2.3 billion
of notes due in
2016
,
$10 million
of short-term foreign borrowings and
$225 million
of long-dated notes that are subject to repayment at the option of the holders. The weighted-average interest rate of commercial paper borrowings was
0.40%
and
0.07%
for the years ended
December 31, 2016
and
2015
, respectively.
Long-term debt at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
2.75% notes due 2025
|
$
|
2,487
|
|
|
$
|
2,485
|
|
3.70% notes due 2045
|
1,972
|
|
|
1,971
|
|
2.80% notes due 2023
|
1,743
|
|
|
1,742
|
|
5.00% notes due 2019
|
1,273
|
|
|
1,283
|
|
1.85% notes due 2020
|
1,238
|
|
|
1,239
|
|
4.15% notes due 2043
|
1,236
|
|
|
1,236
|
|
2.35% notes due 2022
|
1,228
|
|
|
1,233
|
|
3.875% notes due 2021
|
1,152
|
|
|
1,158
|
|
1.125% euro-denominated notes due 2021
|
1,035
|
|
|
1,091
|
|
1.875% euro-denominated notes due 2026
|
1,028
|
|
|
1,084
|
|
2.40% notes due 2022
|
1,003
|
|
|
1,011
|
|
Floating-rate borrowing due 2018
|
999
|
|
|
998
|
|
1.10% notes due 2018
|
999
|
|
|
998
|
|
1.30% notes due 2018
|
985
|
|
|
985
|
|
6.50% notes due 2033
|
806
|
|
|
809
|
|
Floating-rate notes due 2020
|
698
|
|
|
698
|
|
6.55% notes due 2037
|
594
|
|
|
596
|
|
0.50% euro-denominated notes due 2024
|
516
|
|
|
—
|
|
1.375% euro-denominated notes due 2036
|
512
|
|
|
—
|
|
2.50% euro-denominated notes due 2034
|
511
|
|
|
538
|
|
3.60% notes due 2042
|
489
|
|
|
489
|
|
5.85% notes due 2039
|
415
|
|
|
415
|
|
5.75% notes due 2036
|
369
|
|
|
369
|
|
5.95% debentures due 2028
|
355
|
|
|
354
|
|
6.40% debentures due 2028
|
325
|
|
|
325
|
|
6.30% debentures due 2026
|
152
|
|
|
152
|
|
Floating-rate notes due 2017
|
—
|
|
|
300
|
|
Other
|
154
|
|
|
270
|
|
|
$
|
24,274
|
|
|
$
|
23,829
|
|
Other (as presented in the table above) included
$147 million
and
$223 million
at
December 31, 2016
and
2015
, respectively, of borrowings at variable rates that resulted in effective interest rates of
0.89%
and
zero
for
2016
and
2015
, respectively. Other also included foreign borrowings of
$43 million
at December 31, 2015 at varying rates up to
4.75%
.
With the exception of the
6.30%
debentures due 2026, the notes listed in the table above are redeemable in whole or in part, at Merck’s option at any time, at varying redemption prices.
In November 2016, the Company issued
€1.0 billion
principal amount of senior unsecured notes consisting of
€500 million
principal amount of
0.50%
notes due 2024 and
€500 million
principal amount of
1.375%
notes due 2036. The Company intends to use the net proceeds of the offering of
$1.1 billion
for general corporate purposes, including without limitation, the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities.
In October 2014, the Company issued
€2.5 billion
principal amount of senior unsecured notes. The net proceeds of the offering of
$3.1 billion
were used in part to repay debt that was validly tendered in connection with tender offers launched by the Company for certain outstanding notes and debentures. The Company paid
$2.5 billion
in aggregate consideration (applicable purchase price together with accrued interest) to redeem
$1.8 billion
principal
amount of debt. In November 2014, Merck redeemed an additional
$2.0 billion
principal amount of senior unsecured notes. The Company recorded a pretax loss of
$628 million
in 2014 in connection with these transactions.
Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp. (MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.
Certain of the Company’s borrowings require that Merck comply with financial covenants including a requirement that the Total Debt to Capitalization Ratio (as defined in the applicable agreements) not exceed
60%
. At
December 31, 2016
, the Company was in compliance with these covenants.
The aggregate maturities of long-term debt for each of the next five years are as follows:
2017
,
$301 million
;
2018
,
$3.0 billion
;
2019
,
$1.3 billion
;
2020
,
$1.9 billion
;
2021
,
$2.2 billion
.
In June 2016, the Company terminated its existing credit facility and entered into a new
$6.0 billion
,
five
-year credit facility that matures in June 2021. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.
Rental expense under operating leases, net of sublease income, was
$292 million
in
2016
,
$303 million
in
2015
and
$350 million
in
2014
. The minimum aggregate rental commitments under noncancellable leases are as follows:
2017
,
$200 million
;
2018
,
$141 million
;
2019
,
$122 million
;
2020
,
$88 million
;
2021
,
$63 million
and thereafter,
$140 million
. The Company has no significant capital leases.
10. Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including environmental matters. In the opinion of the Company, it is unlikely that the resolution of these matters will be material to the Company’s financial position, results of operations or cash flows.
Given the nature of the litigation discussed below and the complexities involved in these matters, the Company is unable to reasonably estimate a possible loss or range of possible loss for such matters until the Company knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.
The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. For product liability claims, a portion of the overall accrual is actuarially determined and considers such factors as past experience, number of claims reported and estimates of claims incurred but not yet reported. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.
The Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities effective August 1, 2004.
Vioxx
Litigation
Product Liability Lawsuits
As previously disclosed, Merck was a defendant in a number of putative class action lawsuits alleging economic injury as a result of the purchase of
Vioxx
, all but
one
of which have been settled. Under the settlement, Merck agreed to pay up to
$23 million
to resolve all properly documented claims submitted by class members, approved attorneys’ fees and expenses, and approved settlement notice costs and certain other administrative expenses. The claims
review process has been completed with the Company paying approximately
$700,000
. The amount of attorneys’ fees to be paid is yet to be determined.
Merck is also a defendant in a lawsuit (together with the above-referenced lawsuits, the
Vioxx
Product Liability Lawsuits) brought by the Attorney General of Utah. The lawsuit is pending in Utah state court. Utah alleges that Merck misrepresented the safety of
Vioxx
and seeks damages and penalties under the Utah False Claims Act. No trial date has been set. Merck recently reached agreements with the Attorneys General in Alaska and Montana to settle their state consumer protection act cases against the Company for
$15.25 million
and
$16.7 million
, respectively. As a result, Alaska’s action was dismissed with prejudice on September 30, 2016, and Montana’s action was dismissed with prejudice on October 6, 2016.
Shareholder Lawsuits
As previously disclosed, in addition to the
Vioxx
Product Liability Lawsuits, various putative class actions and individual lawsuits were filed against Merck and certain former employees alleging that the defendants violated federal securities laws by making alleged material misstatements and omissions with respect to the cardiovascular safety of
Vioxx
(
Vioxx
Securities Lawsuits). The
Vioxx
Securities Lawsuits were coordinated in a multidistrict litigation in the U.S. District Court for the District of New Jersey before Judge Stanley R. Chesler. As previously disclosed, Merck reached a resolution of the
Vioxx
securities class action for which a reserve was recorded in 2015 and under which Merck created a settlement fund in 2016 of
$830 million
(the Settlement Class Fund) and agreed to pay an additional amount for approved attorneys’ fees and expenses up to
$232 million
(the Fee/Expense Fund). On June 28, 2016, the court approved the settlement and awarded attorneys’ fees and expenses in the amount of
$222 million
; the remaining amount of the Fee/Expense Fund will be added to the Settlement Class Fund. The Company paid the total settlement amount into escrow in April 2016. After available funds under certain insurance policies, Merck’s net cash payment for the settlement and fees was approximately
$680 million
. The settlement covers all claims relating to
Vioxx
by settlement class members who purchased Merck securities between May 21, 1999, and October 29, 2004. The settlement is not an admission of wrongdoing and, as part of the settlement agreement, defendants continue to deny the allegations.
In addition, Merck reached a resolution of the above referenced individual securities lawsuits filed by foreign and domestic institutional investors, which were also consolidated with the
Vioxx
Securities Lawsuits.
Insurance
As a result of the previously disclosed insurance arbitration, the Company’s insurers paid insurance proceeds of approximately
$380 million
in connection with the settlement of the class action. The Company also has Directors and Officers insurance coverage applicable to the
Vioxx
Securities Lawsuits with remaining stated upper limits of approximately
$145 million
, which the Company has not received. There are disputes with the insurers about the availability of the Company’s Directors and Officers insurance coverage for these claims. The amounts actually recovered under the Directors and Officers policies discussed in this paragraph may be less than the stated upper limits.
International Lawsuits
As previously disclosed, in addition to the lawsuits discussed above, Merck has been named as a defendant in litigation relating to
Vioxx
in Brazil and Europe (collectively, the
Vioxx
International Lawsuits). The litigation in these jurisdictions is generally in procedural stages and Merck expects that the litigation may continue for a number of years.
Reserves
The Company has an immaterial reserve with respect to certain
Vioxx
Product Liability Lawsuits. The Company has established no other liability reserves for, and believes that it has meritorious defenses to, the remaining
Vioxx
Product Liability Lawsuits and
Vioxx
International Lawsuits and will defend against them.
Other Product Liability Litigation
Fosamax
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving
Fosamax
(
Fosamax
Litigation). As of
December 31, 2016
, approximately
4,230
cases are filed and pending against
Merck in either federal or state court. In approximately
20
of these actions, plaintiffs allege, among other things, that they have suffered osteonecrosis of the jaw (ONJ), generally subsequent to invasive dental procedures, such as tooth extraction or dental implants and/or delayed healing, in association with the use of
Fosamax
. In addition, plaintiffs in approximately
4,210
of these actions generally allege that they sustained femur fractures and/or other bone injuries (Femur Fractures) in association with the use of
Fosamax
.
Cases Alleging ONJ and/or Other Jaw Related Injuries
In August 2006, the Judicial Panel on Multidistrict Litigation (JPML) ordered that certain
Fosamax
product liability cases pending in federal courts nationwide should be transferred and consolidated into one multidistrict litigation (
Fosamax
ONJ MDL) for coordinated pre-trial proceedings.
In December 2013, Merck reached an agreement in principle with the Plaintiffs’ Steering Committee (PSC) in the
Fosamax
ONJ MDL to resolve pending ONJ cases not on appeal in the
Fosamax
ONJ MDL and in the state courts for an aggregate amount of
$27.7 million
. Merck and the PSC subsequently formalized the terms of this agreement in a Master Settlement Agreement (ONJ Master Settlement Agreement) that was executed in April 2014 and included over
1,200
plaintiffs. In July 2014, Merck elected to proceed with the ONJ Master Settlement Agreement at a reduced funding level of
$27.3 million
since the participation level was approximately
95%
. Merck has fully funded the ONJ Master Settlement Agreement and the escrow agent under the agreement has been making settlement payments to qualifying plaintiffs. The ONJ Master Settlement Agreement has no effect on the cases alleging Femur Fractures discussed below.
Discovery is currently ongoing in some of the approximately
20
remaining ONJ cases that are pending in various federal and state courts and the Company intends to defend against these lawsuits.
Cases Alleging Femur Fractures
In March 2011, Merck submitted a Motion to Transfer to the JPML seeking to have all federal cases alleging Femur Fractures consolidated into one multidistrict litigation for coordinated pre-trial proceedings. The Motion to Transfer was granted in May 2011, and all federal cases involving allegations of Femur Fracture have been or will be transferred to a multidistrict litigation in the District of New Jersey (Femur Fracture MDL). In the only bellwether case tried to date in the Femur Fracture MDL,
Glynn v. Merck
, the jury returned a verdict in Merck’s favor. In addition, in June 2013, the Femur Fracture MDL court granted Merck’s motion for judgment as a matter of law in the
Glynn
case and held that the plaintiff’s failure to warn claim was preempted by federal law.
In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court’s preemption decision in the
Glynn
case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately
650
cases on preemption grounds. Plaintiffs in approximately
515
of those cases are appealing that decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). The Femur Fracture MDL court has since dismissed without prejudice another approximately
540
cases pending plaintiffs’ appeal of the preemption ruling to the Third Circuit. On June 30, 2016, the Third Circuit heard oral argument on plaintiffs’ appeal of the preemption ruling and the parties are awaiting the decision.
In addition, in June 2014, the Femur Fracture MDL court granted Merck summary judgment in the
Gaynor
v. Merck
case and found that Merck’s updates in January 2011 to the
Fosamax
label regarding atypical femur fractures were adequate as a matter of law and that Merck adequately communicated those changes. The plaintiffs in
Gaynor
have appealed the court’s decision to the Third Circuit. In August 2014, Merck filed a motion requesting that the court enter a further order requiring all plaintiffs in the Femur Fracture MDL who claim that the 2011
Fosamax
label is inadequate and the proximate cause of their alleged injuries to show cause why their cases should not be dismissed based on the court’s preemption decision and its ruling in the
Gaynor
case. In November 2014, the court granted Merck’s motion and entered the requested show cause order.
As of
December 31, 2016
,
seven
cases were pending in the Femur Fracture MDL, excluding the
515
cases dismissed with prejudice on preemption grounds that are pending appeal and the
540
cases dismissed without prejudice that are also pending the aforementioned appeal.
As of
December 31, 2016
, approximately
2,860
cases alleging Femur Fractures have been filed in New Jersey state court and are pending before Judge Jessica Mayer in Middlesex County. The parties selected an initial group of
30
cases to be reviewed through fact discovery. Two additional groups of
50
cases each to be reviewed through fact discovery were selected in November 2013 and March 2014, respectively. A further group of
25
cases to be reviewed through fact discovery was selected by Merck in July 2015, and Merck has continued to select additional cases to be reviewed through fact discovery during 2016.
As of
December 31, 2016
, approximately
280
cases alleging Femur Fractures have been filed and are pending in California state court. A petition was filed seeking to coordinate all Femur Fracture cases filed in California state court before a single judge in Orange County, California. The petition was granted and Judge Thierry Colaw is currently presiding over the coordinated proceedings. In March 2014, the court directed that a group of
10
discovery pool cases be reviewed through fact discovery and subsequently scheduled the
Galper v. Merck
case, which plaintiffs selected, as the first trial. The
Galper
trial began in February 2015 and the jury returned a verdict in Merck’s favor in April 2015, and plaintiff has appealed that verdict to the California appellate court. Oral argument on plaintiff’s appeal in
Galper
was held on November 17, 2016 and the parties are awaiting a decision. The next Femur Fracture trial in California that was scheduled to begin in April 2016 was stayed at plaintiffs’ request and a new trial date has not been set.
Additionally, there are
five
Femur Fracture cases pending in other state courts.
Discovery is ongoing in the Femur Fracture MDL and in state courts where Femur Fracture cases are pending and the Company intends to defend against these lawsuits.
Januvia/Janumet
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving
Januvia
and/or
Janumet
. As of
December 31, 2016
, approximately
1,195
product user claims have been served on Merck alleging generally that use of
Januvia
and/or
Janumet
caused the development of pancreatic cancer and other injuries. These complaints were filed in several different state and federal courts.
Most of the claims were filed in a consolidated multidistrict litigation proceeding in the U.S. District Court for the Southern District of California called “In re Incretin-Based Therapies Products Liability Litigation” (MDL). The MDL includes federal lawsuits alleging pancreatic cancer due to use of the following medicines:
Januvia, Janumet
, Byetta and Victoza, the latter two of which are products manufactured by other pharmaceutical companies. The majority of claims not filed in the MDL were filed in the Superior Court of California, County of Los Angeles (California State Court). As of December 31, 2016,
eight
product users have claims pending against Merck in state courts other than the California State Court.
In November 2015, the MDL and California State Court - in separate opinions - granted summary judgment to defendants on grounds of preemption. Of the approximately
1,195
served product user claims, these rulings resulted in the dismissal of approximately
1,100
product user claims.
Plaintiffs are appealing the MDL and California State Court preemption rulings.
In addition to the claims noted above, the Company has agreed, as of
December 31, 2016
, to toll the statute of limitations for approximately
50
additional claims. The Company intends to continue defending against these lawsuits.
Propecia/Proscar
As previously disclosed, Merck is a defendant in product liability lawsuits in the United States involving
Propecia
and/or
Proscar
. As of
December 31, 2016
, approximately
1,330
lawsuits have been filed by plaintiffs who allege that they have experienced persistent sexual side effects following cessation of treatment with
Propecia
and/or
Proscar
. Approximately
50
of the plaintiffs also allege that
Propecia
or
Proscar
has caused or can cause prostate cancer, testicular cancer or male breast cancer. The lawsuits have been filed in various federal courts and in state court in New Jersey. The federal lawsuits have been consolidated for pretrial purposes in a federal multidistrict litigation before Judge Brian Cogan of the Eastern District of New York. The matters pending in state court in New Jersey have been consolidated before Judge Jessica Mayer in Middlesex County. In addition, there is
one
matter pending in state court in California,
one
matter pending in state court in New York, and
one
matter pending in state court in Ohio. The Company intends to defend against these lawsuits.
Governmental Proceedings
As previously disclosed, the Company has received a civil investigative demand from the U.S. Attorney’s Office for the Southern District of New York that requests information relating to the Company’s contracts with, services from and payments to pharmacy benefit managers with respect to
Maxalt
and Levitra from January 1, 2006 to the present. The Company is cooperating with the investigation.
As previously disclosed, the Company has received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services on behalf of the U.S. Attorney’s Office for the District of Maryland and the Civil Division of the U.S. Department of Justice (DOJ) that requests information relating to the Company’s marketing of
Singulair
and
Dulera
Inhalation Aerosol and certain of its other marketing activities from January 1, 2006 to the present. The Company is cooperating with the investigation.
As previously disclosed, the Company had received a civil investigative demand from the U.S. Attorney’s Office, Eastern District of Pennsylvania that requested information relating to the Company’s contracting and pricing of
Dulera
Inhalation Aerosol with certain pharmacy benefit managers and Medicare Part D plans. The Company cooperated with the investigation and, in August 2016, the Company learned that the underlying
qui tam
complaint had been unsealed and voluntarily dismissed with prejudice as to the relator and without prejudice as to the government. The DOJ informed the Company that the matter is inactive and that there is no current investigation.
As previously disclosed, the Company has received letters from the DOJ and the SEC that seek information about activities in a number of countries and reference the Foreign Corrupt Practices Act. The Company has cooperated with the agencies in their requests and believes that this inquiry is part of a broader review of pharmaceutical industry practices in foreign countries. As previously disclosed, the Company has been advised by the DOJ that, based on the information that it has received, it has closed its inquiry into this matter as it relates to the Company. The Company has also recently been advised by the SEC that it has closed its inquiry into this matter as it relates to the Company.
As previously disclosed, the Company’s subsidiaries in China have received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies. Some of these inquiries may be related to matters involving other multinational pharmaceutical companies, as well as Chinese entities doing business with such companies. The Company’s policy is to cooperate with these authorities and to provide responses as appropriate.
From time to time, the Company receives inquiries and is the subject of preliminary investigation activities from Competition Authorities in various markets outside the United States. Certain of these inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to the Company, monetary fines and/or remedial undertakings may be required.
Commercial and Other Litigation
K-DUR Antitrust Litigation
As previously disclosed, in June 1997 and January 1998, Schering-Plough Corporation (Schering-Plough) settled patent litigation with Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle), respectively, relating to generic versions of Schering-Plough’s long-acting potassium chloride product supplement used by cardiac patients, for which Lederle and Upsher-Smith had filed Abbreviated New Drug Applications (ANDAs). Following the commencement of an administrative proceeding by the U.S. Federal Trade Commission in 2001 alleging anti-competitive effects from those settlements (which was resolved in Schering-Plough’s favor), putative class and non-class action suits were filed on behalf of direct and indirect purchasers of K-DUR against Schering-Plough, Upsher-Smith and Lederle and were consolidated in a multidistrict litigation in the U.S. District Court for the District of New Jersey. These suits claimed violations of federal and state antitrust laws, as well as other state statutory and common law causes of action, and sought unspecified damages. In April 2008, the indirect purchasers voluntarily dismissed their case. In February 2016, the District Court denied the Company’s motion for summary judgment relating to all of the direct purchasers’ claims concerning the settlement with Upsher-Smith and granted the Company’s motion for summary judgment relating to all of the direct purchasers’ claims concerning the settlement with Lederle. In anticipation of trial, the parties filed motions to exclude certain expert opinions and other evidence, and defendants filed a motion for summary judgment.
In February 2017, Merck and Upsher-Smith reached a settlement in principle with the class of direct purchasers and the opt-outs to the class. Merck will contribute approximately
$80 million
in the aggregate towards the overall settlement. Formal settlement agreements with the class and the opt-outs have yet to be executed and the settlement with the class is subject to approval by the District Court.
Sales Force Litigation
As previously disclosed, in May 2013, Ms. Kelli Smith filed a complaint against the Company in the U.S. District Court for the District of New Jersey on behalf of herself and a putative class of female sales representatives and a putative sub-class of female sales representatives with children, claiming (a) discriminatory policies and practices in selection, promotion and advancement, (b) disparate pay, (c) differential treatment, (d) hostile work environment and (e) retaliation under federal and state discrimination laws. Plaintiffs sought and were granted leave to file an amended complaint. In January 2014, plaintiffs filed an amended complaint adding
four
additional named plaintiffs. In October 2014, the court denied the Company’s motion to dismiss or strike the class claims as premature. In September 2015, plaintiffs filed additional motions, including a motion for conditional certification under the Equal Pay Act; a motion to amend the pleadings seeking to add ERISA and constructive discharge claims and a Company subsidiary as a named defendant; and a motion for equitable relief. Merck filed papers in opposition to the motions. On April 27, 2016, the court granted plaintiff’s motion for conditional certification but denied plaintiffs’ motions to extend the liability period for their Equal Pay Act claims back to June 2009. As a result, the liability period will date back to April 2012, at the earliest. On April 29, 2016, the Magistrate Judge granted plaintiffs’ request to amend the complaint to add the following: (i) a Company subsidiary as a corporate defendant; (ii) an ERISA claim and (iii) an individual constructive discharge claim for
one
of the named plaintiffs. Approximately
700
individuals have opted-in to this action; the opt-in period has closed.
Qui Tam Litigation
As previously disclosed, on June 21, 2012, the U.S. District Court for the Eastern District of Pennsylvania unsealed a complaint that has been filed against the Company under the federal False Claims Act by
two
former employees alleging, among other things, that the Company defrauded the U.S. government by falsifying data in connection with a clinical study conducted on the mumps component of the Company’s
M-M-R
II vaccine. The complaint alleges the fraud took place between 1999 and 2001. The U.S. government had the right to participate in and take over the prosecution of this lawsuit, but notified the court that it declined to exercise that right. The
two
former employees are pursuing the lawsuit without the involvement of the U.S. government. In addition, as previously disclosed,
two
putative class action lawsuits on behalf of direct purchasers of the
M‑M‑R
II vaccine, which charge that the Company misrepresented the efficacy of the
M-M-R
II vaccine in violation of federal antitrust laws and various state consumer protection laws, are pending in the Eastern District of Pennsylvania. In September 2014, the court denied Merck’s motion to dismiss the False Claims Act suit and granted in part and denied in part its motion to dismiss the then-pending antitrust suit. As a result, both the False Claims Act suit and the antitrust suits have proceeded into discovery. The Company intends to defend against these lawsuits.
Merck KGaA Litigation
In January 2016, to protect its long-established brand rights in the United States, the Company filed a lawsuit against Merck KGaA, Darmstadt, Germany (KGaA), operating as the EMD Group in the United States, alleging it improperly uses the name “Merck” in the United States. KGaA has filed suit against the Company in France, the United Kingdom (UK), Germany, Switzerland, Mexico, and India alleging breach of the parties’ co-existence agreement, unfair competition and/or trademark infringement. In December 2015, the Paris Court of First Instance issued a judgment finding that certain activities by the Company directed towards France did not constitute trademark infringement and unfair competition while other activities were found to infringe. The Company and KGaA have both appealed the decision, and the appeal is scheduled to be heard in May 2017. In January 2016, the UK High Court issued a judgment finding that the Company had breached the co-existence agreement and infringed KGaA’s trademark rights as a result of certain activities directed towards the UK based on use of the word MERCK on promotional and information activity. As noted in the UK decision, this finding was not based on the Company’s use of the sign MERCK in connection with the sale of products or any material pharmaceutical business transacted in the UK. The Company and KGaA have both appealed this decision, and the appeal is scheduled to be heard in June 2017.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file ANDAs with the U.S. Food and Drug Administration (FDA) seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned by the Company. To protect its patent rights, the Company may file patent infringement lawsuits against such generic companies. Certain products of the Company (or products marketed via agreements with other companies) currently involved in such patent infringement litigation in the United States include:
Cancidas
,
Invanz
,
Nasonex
,
Noxafil
, and
NuvaRing
. Similar lawsuits defending the Company’s patent rights may exist in other countries. The Company intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products and, with respect to products acquired through acquisitions, potentially significant intangible asset impairment charges.
Cancidas
— In February 2014, a patent infringement lawsuit was filed in the United States against Xellia Pharmaceuticals ApS (Xellia) with respect to Xellia’s application to the FDA seeking pre-patent expiry approval to market a generic version of
Cancidas
. In June 2015, the district court found that Xellia infringed the Company’s patent and ordered that Xellia’s application not be approved until the patent expires in September 2017 (including pediatric exclusivity). Xellia appealed this decision, and the appeal was heard in March 2016. In May 2016, the parties reached a settlement whereby Xellia can launch its generic version in August 2017, or earlier under certain conditions. In August 2014, a patent infringement lawsuit was filed in the United States against Fresenius Kabi USA, LLC (Fresenius) in respect of Fresenius’s application to the FDA seeking pre-patent expiry approval to market a generic version of
Cancidas
. In December 2016, the parties reached a settlement whereby Fresenius can launch its generic version in August 2017, or earlier under certain conditions.
Invanz
— In July 2014, a patent infringement lawsuit was filed in the United States against Hospira in respect of Hospira’s application to the FDA seeking pre-patent expiry approval to market a generic version of
Invanz
. The trial in this matter was held in April 2016 and, in October 2016, the district court ruled that the patent is valid and infringed. In August 2015, a patent infringement lawsuit was filed in the United States against Savior Lifetec Corporation (Savior) in respect of Savior’s application to the FDA seeking pre-patent expiry approval to market a generic version of
Invanz
. The lawsuit automatically stays FDA approval of Savior’s application until November 2017 or until an adverse court decision, if any, whichever may occur earlier.
Nasonex
— In July 2014, a patent infringement lawsuit was filed in the United States against Teva Pharmaceuticals USA, Inc. (Teva Pharma) in respect of Teva Pharma’s application to the FDA seeking pre-patent expiry approval to market a generic version of
Nasonex
. The trial in this matter was held in June 2016. In November 2016, the district court ruled that the patent was valid but not infringed. The Company has appealed this decision. In March 2015, a patent infringement lawsuit was filed in the United States against Amneal Pharmaceuticals LLC (Amneal) in respect of Amneal’s application to the FDA seeking pre-patent expiry approval to market a generic version of
Nasonex
. The trial in this matter was held in June 2016. In January 2017, the district court ruled that the patent was valid but not infringed. The Company has appealed this decision.
A previous decision, issued in June 2013, held that the Merck patent in the Teva Pharma and Amneal lawsuits covering mometasone furoate monohydrate was valid, but that it was not infringed by Apotex Corp.’s proposed product. In April 2015, a patent infringement lawsuit was filed against Apotex Inc. and Apotex Corp. (Apotex) in respect of Apotex’s now-launched product that the Company believes differs from the generic version in the previous lawsuit.
Noxafil
— In August 2015, the Company filed a lawsuit against Actavis Laboratories Fl, Inc. (Actavis) in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of
Noxafil
. The lawsuit automatically stays FDA approval of Actavis’s application until December 2017 or until an adverse court decision, if any, whichever may occur earlier. The trial in this matter is currently scheduled to begin in July 2017. In March 2016, the Company filed a lawsuit against Roxane Laboratories, Inc. (Roxane) in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of
Noxafil
. The lawsuit automatically stays FDA approval of Roxane’s application until August 2018 or until an adverse court decision, if any, whichever may occur earlier. In February 2016, the Company filed a lawsuit against Par Sterile Products LLC, Par Pharmaceutical, Inc., Par Pharmaceutical Companies, Inc. and Par Pharmaceutical Holdings, Inc. (collectively, Par) in the United States in respect of that company’s application to the FDA seeking pre-
patent expiry approval to sell a generic version of
Noxafil
. In October 2016, the parties reached a settlement whereby Par can launch its generic version in January 2023, or earlier under certain conditions.
NuvaRing
— In December 2013, the Company filed a lawsuit against a subsidiary of Allergan plc in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of
NuvaRing
. The trial in this matter was held in January 2016. In August 2016, the district court ruled that the patent was invalid and the Company has appealed this decision. In September 2015, the Company filed a lawsuit against Teva Pharma in the United States in respect of that company’s application to the FDA seeking pre-patent expiry approval to sell a generic version of
NuvaRing
. Based on its ruling in the Allergan plc matter, the district court dismissed the Company’s lawsuit in December 2016. The Company has appealed this decision.
The Company had been involved in ongoing litigation in Canada with Apotex concerning the Company’s patents related to lovastatin, alendronate, and norfloxacin. All of the litigation has now been either settled or concluded. As a consequence of the conclusion of all of this litigation, in 2016, the Company recorded a net gain of
$117 million
included in
Other (income) expense, net
(see Note 14).
Anti-PD-1 Antibody Patent Oppositions and Litigation
As previously disclosed, Ono Pharmaceutical Co. (Ono) has a European patent (EP 1 537 878) (’878) that broadly claims the use of an anti-PD-1 antibody, such as the Company’s immunotherapy,
Keytruda
, for the treatment of cancer. Ono has previously licensed its commercial rights to an anti-PD-1 antibody to Bristol-Myers Squibb (BMS) in certain markets. BMS and Ono also own European Patent EP 2 161 336 (’336) that, as granted, broadly claimed anti-PD-1 antibodies that could include
Keytruda
.
As previously disclosed, the Company and BMS and Ono were engaged in worldwide litigation, including in the United States, over the validity and infringement of the ‘878 patent, the ‘336 patent and their equivalents.
In January 2017, the Company announced that it had entered into a settlement and license agreement with BMS and Ono resolving the worldwide patent infringement litigation related to the use of an anti-PD-1 antibody for the treatment of cancer, such as
Keytruda
. Under the settlement and license agreement, the Company made a one-time payment of
$625 million
(which was recorded as an expense in the Company’s 2016 financial results) to BMS and will pay royalties on the worldwide sales of
Keytruda
for a non-exclusive license to market
Keytruda
in any market in which it is approved. For global net sales of
Keytruda
, the Company will pay royalties as follows:
•
6.5%
of net sales occurring from January 1, 2017 through and including December 31, 2023; and
•
2.5%
of net sales occurring from January 1, 2024 through and including December 31, 2026.
The parties also agreed to dismiss all claims worldwide in the relevant legal proceedings.
In October 2015, PDL Biopharma (PDL) filed a lawsuit in the United States against the Company alleging that the manufacture of
Keytruda
infringed US Patent No. 5,693,761 (’761 patent), which expired in December 2014. This patent claims platform technology used in the creation and manufacture of recombinant antibodies and PDL is seeking damages for pre-expiry infringement of the ’761 patent.
In July 2016, the Company filed a declaratory judgment action in the United States against Genentech and City of Hope seeking a ruling that US Patent No. 7,923,221 (the Cabilly III patent), which claims platform technology used in the creation and manufacture of recombinant antibodies, is invalid and that
Keytruda
and bezlotoxumab do not infringe the Cabilly III patent. In July 2016, the Company also filed a petition in the USPTO for
Inter Partes
Review (IPR) of certain claims of US Patent No. 6,331,415 (the Cabilly II patent), which claims platform technology used in the creation and manufacture of recombinant antibodies and is also owned by Genentech and City of Hope, as being invalid. In December 2016, the USPTO denied the petition but allowed the Company to join an IPR filed previously by another party.
Gilead Patent Litigation and Opposition
In August 2013, Gilead Sciences, Inc. (Gilead) filed a lawsuit in the U.S. District Court for the Northern District of California seeking a declaration that two Company patents were invalid and not infringed by the sale of their two sofosbuvir containing products, Solvadi and Harvoni. The Company filed a counterclaim that the sale of these
products did infringe these two patents and sought a reasonable royalty for the past, present and future sales of these products. In March 2016, at the conclusion of a jury trial, the patents were found to be not invalid and infringed. The jury awarded the Company
$200 million
as a royalty for sales of these products up to December 2015. After the conclusion of the jury trial, the court held a bench trial on the equitable defenses raised by Gilead. In June 2016, the court found for Gilead and determined that Merck could not collect the jury award and that the patents were unenforceable with respect to Gilead. The Company has appealed the court’s decision. Gilead has also asked the court to overturn the jury’s decision on validity. The court held a hearing on Gilead’s motion in August 2016, and the court subsequently rejected Gilead’s request. The Company will pay
20%
, net of legal fees, of damages or royalties, if any, that it receives to Ionis Pharmaceuticals, Inc.
The Company, through its Idenix Pharmaceuticals, Inc. subsidiary, has pending litigation against Gilead in the United States, the UK, Norway, Canada, Germany, France, and Australia based on different patent estates that would also be infringed by Gilead’s sales of these two products. Gilead has opposed the European patent at the EPO. Trial in the United States was held in December 2016 and the jury returned a verdict for the Company, awarding damages of
$2.54 billion
. The Company is currently briefing post-trial motions, including on the issues of enhanced damages and future royalties. Gilead is briefing post-trial motions for judgment as a matter of law. In the UK, Australia and Canada, the Company was initially unsuccessful and those cases are currently under appeal. In Norway, the patent was held invalid and no further appeal was filed. The EPO opposition division revoked the European patent, and the Company has appealed this decision. The cases in France and Germany have been stayed pending the final decision of the EPO.
Other Litigation
There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial position, results of operations or cash flows either individually or in the aggregate.
Legal Defense Reserves
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the actual costs incurred by the Company; the development of the Company’s legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against the Company; the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The amount of legal defense reserves as of
December 31, 2016
and
December 31, 2015
of approximately
$185 million
and
$245 million
, respectively, represents the Company’s best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by the Company. The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
Environmental Matters
As previously disclosed, Merck’s facilities in Oss, the Netherlands, were inspected by the Province of Brabant (the Province) pursuant to the Dutch Hazards of Major Accidents Decree and the sites’ environmental permits. The Province issued penalties for alleged violations of regulations governing preventing and managing accidents with hazardous substances, and the government also issued a fine for alleged environmental violations at one of the Oss facilities, which together totaled
$235 thousand
. The Company was subsequently advised that a criminal investigation had been initiated based upon certain of the issues that formed the basis of the administrative enforcement action by the Province. The Company intends to defend itself against any enforcement action that may result from this investigation.
In May 2015, the Environmental Protection Agency conducted an air compliance evaluation of the Company’s pharmaceutical manufacturing facility in Elkton, Virginia. As a result of the investigation, the Company
was recently issued a Notice of Noncompliance and Show Cause Notification relating to certain federally enforceable requirements applicable to the Elkton facility. The Company is attempting to resolve these alleged violations by way of settlement but will defend itself if settlement cannot be reached.
The Company and its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and other federal and state equivalents. These proceedings seek to require the operators of hazardous waste disposal facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. The Company has been made a party to these proceedings as an alleged generator of waste disposed of at the sites. In each case, the government alleges that the defendants are jointly and severally liable for the cleanup costs. Although joint and several liability is alleged, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more nearly reflects the relative contributions of the parties to the site situation. The Company’s potential liability varies greatly from site to site. For some sites the potential liability is
de minimis
and for others the final costs of cleanup have not yet been determined. While it is not feasible to predict the outcome of many of these proceedings brought by federal or state agencies or private litigants, in the opinion of the Company, such proceedings should not ultimately result in any liability which would have a material adverse effect on the financial position, results of operations, liquidity or capital resources of the Company. The Company has taken an active role in identifying and accruing for these costs and such amounts do not include any reduction for anticipated recoveries of cleanup costs from former site owners or operators or other recalcitrant potentially responsible parties.
In management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled
$83 million
and
$109 million
at
December 31, 2016
and
2015
, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next
15
years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed
$64 million
in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources for any year.
11. Equity
The Merck certificate of incorporation authorizes
6,500,000,000
shares of common stock and
20,000,000
shares of preferred stock.
Capital Stock
A summary of common stock and treasury stock transactions (shares in millions) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Common
Stock
|
|
Treasury
Stock
|
Balance January 1
|
3,577
|
|
|
796
|
|
|
3,577
|
|
|
739
|
|
|
3,577
|
|
|
650
|
|
Purchases of treasury stock
|
—
|
|
|
60
|
|
|
—
|
|
|
75
|
|
|
—
|
|
|
134
|
|
Issuances
(1)
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
(18
|
)
|
|
—
|
|
|
(45
|
)
|
Balance December 31
|
3,577
|
|
|
828
|
|
|
3,577
|
|
|
796
|
|
|
3,577
|
|
|
739
|
|
|
|
(1)
|
Issuances primarily reflect activity under share-based compensation plans.
|
12. Share-Based Compensation Plans
The Company has share-based compensation plans under which the Company grants restricted stock units (RSUs) and performance share units (PSUs) to certain management level employees. The Company also issues RSUs to employees of certain of the Company’s equity method investees. In addition, employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. These plans were approved by the Company’s shareholders.
At
December 31, 2016
,
125 million
shares collectively were authorized for future grants under the Company’s share-based compensation plans. These awards are settled primarily with treasury shares.
Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. These awards generally vest
one-third
each year over a
three
-year period, with a contractual term of
7
-
10
years. RSUs are stock awards that are granted to employees and entitle the holder to shares of common stock as the awards vest. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s stock price. PSUs are stock awards where the ultimate number of shares issued will be contingent on the Company’s performance against a pre-set objective or set of objectives. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. For RSUs and PSUs, dividends declared during the vesting period are payable to the employees only upon vesting. Over the PSU performance period, the number of shares of stock that are expected to be issued will be adjusted based on the probability of achievement of a performance target and final compensation expense will be recognized based on the ultimate number of shares issued. RSU and PSU distributions will be in shares of Company stock after the end of the vesting or performance period, generally
three
years, subject to the terms applicable to such awards.
Total pretax share-based compensation cost recorded in
2016
,
2015
and
2014
was
$300 million
,
$299 million
and
$278 million
, respectively, with related income tax benefits of
$92 million
,
$93 million
and
$86 million
, respectively.
The Company uses the Black-Scholes option pricing model for determining the fair value of option grants. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its options. The Black-Scholes model requires several assumptions including expected dividend yield, risk-free interest rate, volatility, and term of the options. The expected dividend yield is based on historical patterns of dividend payments. The risk-free rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term equal to the expected term of the option. Expected volatility is estimated using a blend of historical and implied volatility. The historical component is based on historical monthly price changes. The implied volatility is obtained from market data on the Company’s traded options. The expected life represents the amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior.
The weighted average exercise price of options granted in
2016
,
2015
and
2014
was
$54.63
,
$59.73
and
$58.14
per option, respectively. The weighted average fair value of options granted in
2016
,
2015
and
2014
was
$5.89
,
$6.46
and
$6.79
per option, respectively, and were determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Expected dividend yield
|
3.8
|
%
|
|
4.1
|
%
|
|
4.3
|
%
|
Risk-free interest rate
|
1.4
|
%
|
|
1.7
|
%
|
|
2.0
|
%
|
Expected volatility
|
19.6
|
%
|
|
19.9
|
%
|
|
22.0
|
%
|
Expected life (years)
|
6.2
|
|
|
6.2
|
|
|
6.4
|
|
Summarized information relative to stock option plan activity (options in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding January 1, 2016
|
64,668
|
|
|
$
|
41.64
|
|
|
|
|
|
Granted
|
6,220
|
|
|
54.63
|
|
|
|
|
|
Exercised
|
(23,846
|
)
|
|
39.39
|
|
|
|
|
|
Forfeited
|
(1,951
|
)
|
|
45.14
|
|
|
|
|
|
Outstanding December 31, 2016
|
45,091
|
|
|
$
|
44.47
|
|
|
4.42
|
|
$
|
654
|
|
Exercisable December 31, 2016
|
34,311
|
|
|
$
|
40.87
|
|
|
3.12
|
|
$
|
619
|
|
Additional information pertaining to stock option plans is provided in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Total intrinsic value of stock options exercised
|
$
|
444
|
|
|
$
|
332
|
|
|
$
|
626
|
|
Fair value of stock options vested
|
28
|
|
|
30
|
|
|
35
|
|
Cash received from the exercise of stock options
|
939
|
|
|
485
|
|
|
1,560
|
|
A summary of nonvested RSU and PSU activity (shares in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
PSUs
|
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested January 1, 2016
|
|
13,400
|
|
|
$
|
53.73
|
|
|
1,884
|
|
|
$
|
55.33
|
|
Granted
|
|
5,617
|
|
|
54.67
|
|
|
733
|
|
|
57.38
|
|
Vested
|
|
(4,956
|
)
|
|
45.06
|
|
|
(786
|
)
|
|
48.18
|
|
Forfeited
|
|
(795
|
)
|
|
56.65
|
|
|
(87
|
)
|
|
58.82
|
|
Nonvested December 31, 2016
|
|
13,266
|
|
|
$
|
57.19
|
|
|
1,744
|
|
|
$
|
59.24
|
|
At
December 31, 2016
, there was
$443 million
of total pretax unrecognized compensation expense related to nonvested stock options, RSU and PSU awards which will be recognized over a weighted average period of
1.9
years. For segment reporting, share-based compensation costs are unallocated expenses.
13. Pension and Other Postretirement Benefit Plans
The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. In addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans.
Net Periodic Benefit Cost
The net periodic benefit cost for pension and other postretirement benefit plans consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
Other Postretirement Benefits
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
282
|
|
|
$
|
307
|
|
|
$
|
300
|
|
|
$
|
238
|
|
|
$
|
251
|
|
|
$
|
266
|
|
|
$
|
54
|
|
|
$
|
80
|
|
|
$
|
78
|
|
Interest cost
|
456
|
|
|
434
|
|
|
425
|
|
|
204
|
|
|
206
|
|
|
269
|
|
|
82
|
|
|
110
|
|
|
115
|
|
Expected return on plan assets
|
(831
|
)
|
|
(819
|
)
|
|
(782
|
)
|
|
(382
|
)
|
|
(379
|
)
|
|
(416
|
)
|
|
(107
|
)
|
|
(143
|
)
|
|
(139
|
)
|
Net amortization
|
64
|
|
|
158
|
|
|
74
|
|
|
76
|
|
|
104
|
|
|
59
|
|
|
(103
|
)
|
|
(59
|
)
|
|
(71
|
)
|
Termination benefits
|
23
|
|
|
22
|
|
|
53
|
|
|
4
|
|
|
1
|
|
|
11
|
|
|
4
|
|
|
7
|
|
|
22
|
|
Curtailments
|
5
|
|
|
(12
|
)
|
|
(69
|
)
|
|
(1
|
)
|
|
(9
|
)
|
|
(4
|
)
|
|
(18
|
)
|
|
(19
|
)
|
|
(39
|
)
|
Settlements
|
—
|
|
|
1
|
|
|
11
|
|
|
6
|
|
|
12
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
$
|
(1
|
)
|
|
$
|
91
|
|
|
$
|
12
|
|
|
$
|
145
|
|
|
$
|
186
|
|
|
$
|
191
|
|
|
$
|
(88
|
)
|
|
$
|
(24
|
)
|
|
$
|
(34
|
)
|
The changes in net periodic benefit (credit) cost year over year for pension plans are largely attributable to changes in the discount rate affecting net amortization. The decrease in net periodic benefit cost for other postretirement benefit plans in 2016 as compared with 2015 is largely attributable to changes in retiree medical benefits approved by the Company in December 2015.
In connection with restructuring actions (see Note 4), termination charges were recorded in
2016
,
2015
and
2014
on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments were recorded on pension and other
postretirement benefit plans and settlements were recorded on certain U.S. and international pension plans as reflected in the table above.
Obligations and Funded Status
Summarized information about the changes in plan assets and benefit obligations, the funded status and the amounts recorded at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other
Postretirement
Benefits
|
|
U.S.
|
|
International
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Fair value of plan assets January 1
|
$
|
9,266
|
|
|
$
|
9,984
|
|
|
$
|
7,204
|
|
|
$
|
7,724
|
|
|
$
|
1,913
|
|
|
$
|
1,984
|
|
Actual return on plan assets
|
941
|
|
|
(226
|
)
|
|
898
|
|
|
138
|
|
|
138
|
|
|
(34
|
)
|
Company contributions
|
63
|
|
|
66
|
|
|
424
|
|
|
163
|
|
|
68
|
|
|
63
|
|
Effects of exchange rate changes
|
—
|
|
|
—
|
|
|
(546
|
)
|
|
(568
|
)
|
|
—
|
|
|
(1
|
)
|
Benefits paid
|
(504
|
)
|
|
(523
|
)
|
|
(193
|
)
|
|
(196
|
)
|
|
(108
|
)
|
|
(99
|
)
|
Settlements
|
—
|
|
|
(35
|
)
|
|
(21
|
)
|
|
(66
|
)
|
|
—
|
|
|
—
|
|
Assets no longer restricted to the payment of postretirement benefits
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(992
|
)
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
28
|
|
|
9
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets December 31
|
$
|
9,766
|
|
|
$
|
9,266
|
|
|
$
|
7,794
|
|
|
$
|
7,204
|
|
|
$
|
1,019
|
|
|
$
|
1,913
|
|
Benefit obligation January 1
|
$
|
9,723
|
|
|
$
|
10,632
|
|
|
$
|
7,733
|
|
|
$
|
8,331
|
|
|
$
|
1,810
|
|
|
$
|
2,638
|
|
Service cost
|
282
|
|
|
307
|
|
|
238
|
|
|
251
|
|
|
54
|
|
|
80
|
|
Interest cost
|
456
|
|
|
434
|
|
|
204
|
|
|
206
|
|
|
82
|
|
|
110
|
|
Actuarial losses (gains)
(2)
|
854
|
|
|
(1,102
|
)
|
|
938
|
|
|
(127
|
)
|
|
77
|
|
|
(384
|
)
|
Benefits paid
|
(504
|
)
|
|
(523
|
)
|
|
(193
|
)
|
|
(196
|
)
|
|
(108
|
)
|
|
(99
|
)
|
Effects of exchange rate changes
|
—
|
|
|
—
|
|
|
(576
|
)
|
|
(647
|
)
|
|
2
|
|
|
(11
|
)
|
Plan amendments
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(531
|
)
|
Curtailments
|
15
|
|
|
(14
|
)
|
|
(15
|
)
|
|
(15
|
)
|
|
1
|
|
|
(3
|
)
|
Termination benefits
|
23
|
|
|
22
|
|
|
4
|
|
|
1
|
|
|
4
|
|
|
7
|
|
Settlements
|
—
|
|
|
(35
|
)
|
|
(21
|
)
|
|
(66
|
)
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
2
|
|
|
60
|
|
|
(4
|
)
|
|
—
|
|
|
3
|
|
Benefit obligation December 31
|
$
|
10,849
|
|
|
$
|
9,723
|
|
|
$
|
8,372
|
|
|
$
|
7,733
|
|
|
$
|
1,922
|
|
|
$
|
1,810
|
|
Funded status December 31
|
$
|
(1,083
|
)
|
|
$
|
(457
|
)
|
|
$
|
(578
|
)
|
|
$
|
(529
|
)
|
|
$
|
(903
|
)
|
|
$
|
103
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
$
|
—
|
|
|
$
|
179
|
|
|
$
|
451
|
|
|
$
|
567
|
|
|
$
|
—
|
|
|
$
|
359
|
|
Accrued and other current liabilities
|
(50
|
)
|
|
(48
|
)
|
|
(7
|
)
|
|
(7
|
)
|
|
(11
|
)
|
|
(10
|
)
|
Other noncurrent liabilities
|
(1,033
|
)
|
|
(588
|
)
|
|
(1,022
|
)
|
|
(1,089
|
)
|
|
(892
|
)
|
|
(246
|
)
|
(1)
As a result of certain allowable administrative actions that occurred in June 2016,
$992 million
of plan assets previously restricted for the payment of other postretirement benefits became available to fund certain other health and welfare benefits.
(2)
Actuarial losses in 2016 and actuarial gains in 2015 primarily reflect changes in discount rates.
(3)
The decline in other postretirement benefit obligations in 2015 resulting from plan amendments primarily reflects changes to Merck’s retiree medical benefits approved by the Company in December 2015. The changes provide that, beginning in 2017, Merck will provide access to retiree health insurance coverage that supplements government-sponsored Medicare through a private insurance marketplace.
At
December 31, 2016
and
2015
, the accumulated benefit obligation was
$18.4 billion
and
$16.7 billion
, respectively, for all pension plans, of which
$10.5 billion
and
$9.4 billion
, respectively, related to U.S. pension plans.
Information related to the funded status of selected pension plans at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Pension plans with a projected benefit obligation in excess of plan assets
|
|
|
|
|
|
|
|
Projected benefit obligation
|
$
|
10,849
|
|
|
$
|
1,310
|
|
|
$
|
5,486
|
|
|
$
|
5,093
|
|
Fair value of plan assets
|
9,766
|
|
|
674
|
|
|
4,457
|
|
|
3,996
|
|
Pension plans with an accumulated benefit obligation in excess of plan assets
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
$
|
9,807
|
|
|
$
|
611
|
|
|
$
|
2,692
|
|
|
$
|
4,812
|
|
Fair value of plan assets
|
9,057
|
|
|
—
|
|
|
1,898
|
|
|
3,964
|
|
Plan Assets
Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:
Level 1
— Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
— Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
— Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation. At
December 31, 2016
and
2015
,
$435 million
and
$423 million
, respectively, or approximately
2%
and
3%
, respectively, of the Company’s 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 the Company’s pension plan assets at December 31 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Fair Value Measurements Using
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
2016
|
|
|
|
2015
|
|
|
U.S. Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed markets equities
|
521
|
|
|
—
|
|
|
—
|
|
|
521
|
|
|
566
|
|
|
—
|
|
|
—
|
|
|
566
|
|
Emerging markets equities
|
104
|
|
|
—
|
|
|
—
|
|
|
104
|
|
|
87
|
|
|
—
|
|
|
—
|
|
|
87
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed markets
|
2,521
|
|
|
—
|
|
|
—
|
|
|
2,521
|
|
|
2,444
|
|
|
—
|
|
|
—
|
|
|
2,444
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency obligations
|
—
|
|
|
475
|
|
|
—
|
|
|
475
|
|
|
—
|
|
|
391
|
|
|
—
|
|
|
391
|
|
Corporate obligations
|
—
|
|
|
660
|
|
|
—
|
|
|
660
|
|
|
—
|
|
|
679
|
|
|
—
|
|
|
679
|
|
Mortgage and asset-backed securities
|
—
|
|
|
239
|
|
|
—
|
|
|
239
|
|
|
—
|
|
|
236
|
|
|
—
|
|
|
236
|
|
Other investments
|
—
|
|
|
—
|
|
|
18
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
23
|
|
Net assets in fair value hierarchy
|
$
|
3,148
|
|
|
$
|
1,376
|
|
|
$
|
18
|
|
|
$
|
4,542
|
|
|
$
|
3,097
|
|
|
$
|
1,306
|
|
|
$
|
23
|
|
|
$
|
4,426
|
|
Investments measured at NAV practical expedient
(1)
|
|
|
|
|
|
|
5,224
|
|
|
|
|
|
|
|
|
4,840
|
|
Plan assets at fair value
|
|
|
|
|
|
|
$
|
9,766
|
|
|
|
|
|
|
|
|
$
|
9,266
|
|
International Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
42
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
63
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
67
|
|
Investment funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed markets equities
|
187
|
|
|
2,846
|
|
|
—
|
|
|
3,033
|
|
|
184
|
|
|
2,738
|
|
|
—
|
|
|
2,922
|
|
Emerging markets equities
|
24
|
|
|
148
|
|
|
—
|
|
|
172
|
|
|
21
|
|
|
137
|
|
|
—
|
|
|
158
|
|
Government and agency obligations
|
123
|
|
|
1,904
|
|
|
—
|
|
|
2,027
|
|
|
305
|
|
|
1,115
|
|
|
—
|
|
|
1,420
|
|
Corporate obligations
|
2
|
|
|
282
|
|
|
—
|
|
|
284
|
|
|
173
|
|
|
103
|
|
|
—
|
|
|
276
|
|
Fixed income obligations
|
6
|
|
|
3
|
|
|
—
|
|
|
9
|
|
|
8
|
|
|
3
|
|
|
—
|
|
|
11
|
|
Real estate
(2)
|
—
|
|
|
3
|
|
|
4
|
|
|
7
|
|
|
—
|
|
|
3
|
|
|
5
|
|
|
8
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed markets
|
565
|
|
|
—
|
|
|
—
|
|
|
565
|
|
|
496
|
|
|
—
|
|
|
—
|
|
|
496
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency obligations
|
2
|
|
|
235
|
|
|
—
|
|
|
237
|
|
|
2
|
|
|
465
|
|
|
—
|
|
|
467
|
|
Corporate obligations
|
—
|
|
|
92
|
|
|
—
|
|
|
92
|
|
|
—
|
|
|
161
|
|
|
—
|
|
|
161
|
|
Mortgage and asset-backed securities
|
—
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
68
|
|
|
—
|
|
|
68
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts
(3)
|
—
|
|
|
59
|
|
|
412
|
|
|
471
|
|
|
—
|
|
|
57
|
|
|
393
|
|
|
450
|
|
Other
|
1
|
|
|
4
|
|
|
1
|
|
|
6
|
|
|
—
|
|
|
3
|
|
|
2
|
|
|
5
|
|
Net assets in fair value hierarchy
|
$
|
952
|
|
|
$
|
5,637
|
|
|
$
|
417
|
|
|
$
|
7,006
|
|
|
$
|
1,252
|
|
|
$
|
4,857
|
|
|
$
|
400
|
|
|
$
|
6,509
|
|
Investments measured at NAV practical expedient
(1)
|
|
|
|
|
|
|
788
|
|
|
|
|
|
|
|
|
695
|
|
Plan assets at fair value
|
|
|
|
|
|
|
$
|
7,794
|
|
|
|
|
|
|
|
|
$
|
7,204
|
|
|
|
(1)
|
Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2016 and 2015.
|
|
|
(2)
|
The plans’ Level 3 investments in real estate funds are generally valued by market appraisals of the underlying investments in the funds.
|
|
|
(3)
|
The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.
|
The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3) for the Company’s pension plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Insurance
Contracts
|
|
Real
Estate
|
|
Other
|
|
Total
|
|
Insurance
Contracts
|
|
Real
Estate
|
|
Other
|
|
Total
|
U.S. Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
28
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to assets still held at December 31
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Relating to assets sold during the year
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Purchases and sales, net
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Balance December 31
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
23
|
|
International Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1
|
$
|
393
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
400
|
|
|
$
|
394
|
|
|
$
|
23
|
|
|
$
|
2
|
|
|
$
|
419
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to assets still held at December 31
|
(9
|
)
|
|
1
|
|
|
—
|
|
|
(8
|
)
|
|
(28
|
)
|
|
(2
|
)
|
|
—
|
|
|
(30
|
)
|
Purchases and sales, net
|
2
|
|
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
2
|
|
|
(16
|
)
|
|
—
|
|
|
(14
|
)
|
Transfers into Level 3
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Balance December 31
|
$
|
412
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
417
|
|
|
$
|
393
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
400
|
|
The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Fair Value Measurements Using
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
2016
|
|
|
|
2015
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65
|
|
Investment funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed markets equities
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
53
|
|
|
—
|
|
|
—
|
|
|
53
|
|
Emerging markets equities
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
29
|
|
Government and agency obligations
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed markets
|
231
|
|
|
—
|
|
|
—
|
|
|
231
|
|
|
229
|
|
|
—
|
|
|
—
|
|
|
229
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency obligations
|
—
|
|
|
43
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
339
|
|
|
—
|
|
|
339
|
|
Corporate obligations
|
—
|
|
|
60
|
|
|
—
|
|
|
60
|
|
|
—
|
|
|
311
|
|
|
—
|
|
|
311
|
|
Mortgage and asset-backed securities
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
218
|
|
|
—
|
|
|
218
|
|
Net assets in fair value hierarchy
|
$
|
415
|
|
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
540
|
|
|
$
|
378
|
|
|
$
|
868
|
|
|
$
|
—
|
|
|
$
|
1,246
|
|
Investments measured at NAV practical expedient
(1)
|
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
|
667
|
|
Plan assets at fair value
|
|
|
|
|
|
|
$
|
1,019
|
|
|
|
|
|
|
|
|
$
|
1,913
|
|
|
|
(1)
|
Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2016 and 2015.
|
The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each
plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated
40%
to
60%
in U.S. equities,
20%
to
40%
in international equities,
15%
to
25%
in fixed-income investments, and up to
5%
in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio, which approximates
13%
, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For international pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.
Expected Contributions
Expected contributions during
2017
are approximately
$50 million
for U.S. pension plans, approximately
$160 million
for international pension plans and approximately
$25 million
for other postretirement benefit plans.
Expected Benefit Payments
Expected benefit payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
International Pension
Benefits
|
|
Other
Postretirement
Benefits
|
2017
|
$
|
561
|
|
|
$
|
186
|
|
|
$
|
101
|
|
2018
|
588
|
|
|
179
|
|
|
104
|
|
2019
|
629
|
|
|
195
|
|
|
106
|
|
2020
|
638
|
|
|
202
|
|
|
111
|
|
2021
|
655
|
|
|
201
|
|
|
115
|
|
2022 — 2026
|
3,596
|
|
|
1,168
|
|
|
641
|
|
Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.
Amounts Recognized in Other Comprehensive Income
Net loss amounts reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net loss amounts in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees. The following amounts were reflected as components of
OCI
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement
Benefit Plans
|
|
U.S.
|
|
International
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Net (loss) gain arising during the period
|
$
|
(743
|
)
|
|
$
|
73
|
|
|
$
|
(2,085
|
)
|
|
$
|
(380
|
)
|
|
$
|
(66
|
)
|
|
$
|
(779
|
)
|
|
$
|
(45
|
)
|
|
$
|
209
|
|
|
$
|
(223
|
)
|
Prior service (cost) credit arising during the period
|
(10
|
)
|
|
(13
|
)
|
|
(59
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
(8
|
)
|
|
(19
|
)
|
|
511
|
|
|
(42
|
)
|
|
$
|
(753
|
)
|
|
$
|
60
|
|
|
$
|
(2,144
|
)
|
|
$
|
(382
|
)
|
|
$
|
(70
|
)
|
|
$
|
(787
|
)
|
|
$
|
(64
|
)
|
|
$
|
720
|
|
|
$
|
(265
|
)
|
Net loss amortization included in benefit cost
|
$
|
119
|
|
|
$
|
214
|
|
|
$
|
135
|
|
|
$
|
87
|
|
|
$
|
118
|
|
|
$
|
74
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
1
|
|
Prior service (credit) cost amortization included in benefit cost
|
(55
|
)
|
|
(56
|
)
|
|
(61
|
)
|
|
(11
|
)
|
|
(14
|
)
|
|
(15
|
)
|
|
(106
|
)
|
|
(64
|
)
|
|
(72
|
)
|
|
$
|
64
|
|
|
$
|
158
|
|
|
$
|
74
|
|
|
$
|
76
|
|
|
$
|
104
|
|
|
$
|
59
|
|
|
$
|
(103
|
)
|
|
$
|
(59
|
)
|
|
$
|
(71
|
)
|
The estimated net loss (gain) and prior service cost (credit) amounts that will be amortized from
AOCI
into net periodic benefit cost during
2017
are
$270 million
and
$(64) million
, respectively, for pension plans (of which
$178 million
and
$(53) million
, respectively, relates to U.S. pension plans) and
$1 million
and
$(99) million
, respectively, for other postretirement benefit plans.
Actuarial Assumptions
The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining U.S. pension and other postretirement benefit plan and international pension plan information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension and Other
Postretirement Benefit Plans
|
|
International Pension Plans
|
December 31
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.70
|
%
|
|
4.20
|
%
|
|
4.90
|
%
|
|
2.80
|
%
|
|
2.70
|
%
|
|
3.80
|
%
|
Expected rate of return on plan assets
|
8.60
|
%
|
|
8.50
|
%
|
|
8.50
|
%
|
|
5.60
|
%
|
|
5.70
|
%
|
|
6.00
|
%
|
Salary growth rate
|
4.30
|
%
|
|
4.40
|
%
|
|
4.50
|
%
|
|
2.90
|
%
|
|
2.90
|
%
|
|
3.10
|
%
|
Benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.30
|
%
|
|
4.80
|
%
|
|
4.20
|
%
|
|
2.20
|
%
|
|
2.80
|
%
|
|
2.70
|
%
|
Salary growth rate
|
4.30
|
%
|
|
4.30
|
%
|
|
4.40
|
%
|
|
2.90
|
%
|
|
2.90
|
%
|
|
2.90
|
%
|
For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid and is determined on a plan basis. In developing the expected rate of return within each plan, long-term historical returns data are considered as well as actual returns on the plan assets and other capital markets experience. Using this reference information, the long-term return expectations for each asset category and a weighted average expected return for each plan’s target portfolio is developed, according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For
2017
, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from
8.00%
to
8.75%
, as compared to a range of
7.30%
to
8.75%
in
2016
.
The health care cost trend rate assumptions for other postretirement benefit plans are as follows:
|
|
|
|
|
|
|
December 31
|
2016
|
|
2015
|
Health care cost trend rate assumed for next year
|
7.4
|
%
|
|
6.8
|
%
|
Rate to which the cost trend rate is assumed to decline
|
4.5
|
%
|
|
4.5
|
%
|
Year that the trend rate reaches the ultimate trend rate
|
2032
|
|
|
2027
|
|
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
|
$
|
12
|
|
|
$
|
(12
|
)
|
Effect on benefit obligation
|
138
|
|
|
(114
|
)
|
Savings Plans
The Company also maintains defined contribution savings plans in the United States. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in
2016
,
2015
and
2014
were
$126 million
,
$125 million
and
$124 million
, respectively.
14. Other (Income) Expense, Net
Other (income) expense, net, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Interest income
|
$
|
(328
|
)
|
|
$
|
(289
|
)
|
|
$
|
(266
|
)
|
Interest expense
|
693
|
|
|
672
|
|
|
732
|
|
Exchange losses
|
174
|
|
|
1,277
|
|
|
180
|
|
Equity income from affiliates
|
(86
|
)
|
|
(205
|
)
|
|
(257
|
)
|
Other, net
|
267
|
|
|
72
|
|
|
(12,002
|
)
|
|
$
|
720
|
|
|
$
|
1,527
|
|
|
$
|
(11,613
|
)
|
The higher exchange losses in 2015 as compared with 2016 and 2014 were related primarily to the Venezuelan Bolívar. During the second quarter of 2015, upon evaluation of evolving economic conditions in Venezuela and volatility in the country, combined with a decline in transactions that were settled at the then official (CENCOEX) rate of
6.30
VEF (Bolívar Fuertes) per U.S. dollar, the Company determined it was unlikely that all outstanding net monetary assets would be settled at the CENCOEX rate. Accordingly, during the second quarter of 2015, the Company recorded a charge of
$715 million
to devalue its net monetary assets in Venezuela to an amount that represented the Company’s estimate of the U.S. dollar amount that would ultimately be collected. During the third quarter of 2015, the Company recorded additional exchange losses of
$138 million
in the aggregate reflecting the ongoing effect of translating transactions and net monetary assets consistent with the second quarter. In the fourth quarter of 2015, as a result of the further deterioration of economic conditions in Venezuela, and continued declines in transactions which were settled at the official rate, the Company began using the SIMADI rate to report its Venezuelan operations. The Company also revalued its remaining net monetary assets at the SIMADI rate (subsequently replaced with the DICOM rate), which resulted in an additional charge in the fourth quarter of 2015 of
$161 million
. Since January 2010, Venezuela has been designated hyperinflationary and, as a result, local foreign operations are remeasured in U.S. dollars with the impact recorded in results of operations.
The decline in equity income from affiliates in 2016 as compared with 2015 was driven primarily by lower equity income from certain research investment funds.
Other, net (as presented in the table above) in 2016 includes a charge of
$625 million
to settle worldwide patent litigation related to
Keytruda
(see Note 10), a gain of
$117 million
related to the settlement of other patent litigation (see Note 10), gains of
$100 million
resulting from the receipt of milestone payments for out-licensed migraine clinical development programs (see Note 3) and
$98 million
of income related to AstraZeneca’s option exercise (see Note 8).
Other, net in 2015 includes a
$680 million
net charge related to the settlement of
Vioxx
shareholder class action litigation (see Note 10) and an expense of
$78 million
for a contribution of investments in equity securities to the Merck Foundation, partially offset by a
$250 million
gain on the sale of certain migraine clinical development programs (see Note 3), a
$147 million
gain on the divestiture of Merck’s remaining ophthalmics business in international markets (see Note 3), and the recognition of
$182 million
of deferred income related to AstraZeneca’s option exercise.
Other, net in 2014 includes an
$11.2 billion
gain on the divestiture of MCC (see Note 3), a gain of
$741 million
related to AstraZeneca’s option exercise, a
$480 million
gain on the divestiture of certain ophthalmic products in several international markets (see Note 3), a gain of
$204 million
related to the sale of Sirna (see Note 3) and the recognition of
$140 million
of deferred income related to AstraZeneca’s option exercise, partially offset by a
$628 million
loss on extinguishment of debt (see Note 9) and a
$93 million
goodwill impairment charge related to the Company’s joint venture with Supera.
Interest paid was
$686 million
in
2016
,
$653 million
in
2015
and
$852 million
in
2014
.
15. Taxes on Income
A reconciliation between the effective tax rate and the U.S. statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Amount
|
|
Tax Rate
|
|
Amount
|
|
Tax Rate
|
|
Amount
|
|
Tax Rate
|
U.S. statutory rate applied to income before taxes
|
$
|
1,631
|
|
|
35.0
|
%
|
|
$
|
1,890
|
|
|
35.0
|
%
|
|
$
|
6,049
|
|
|
35.0
|
%
|
Differential arising from:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign earnings
|
(1,593
|
)
|
|
(34.2
|
)
|
|
(2,105
|
)
|
|
(39.0
|
)
|
|
(1,367
|
)
|
|
(7.9
|
)
|
Unremitted foreign earnings
|
(30
|
)
|
|
(0.6
|
)
|
|
260
|
|
|
4.8
|
|
|
(209
|
)
|
|
(1.2
|
)
|
Tax settlements
|
—
|
|
|
—
|
|
|
(417
|
)
|
|
(7.7
|
)
|
|
(89
|
)
|
|
(0.5
|
)
|
AstraZeneca option exercise
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(774
|
)
|
|
(4.5
|
)
|
Sale of Sirna Therapeutics, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(357
|
)
|
|
(2.1
|
)
|
Impact of purchase accounting adjustments, including amortization
|
623
|
|
|
13.4
|
|
|
797
|
|
|
14.8
|
|
|
1,013
|
|
|
5.9
|
|
Foreign currency devaluation related to Venezuela
|
—
|
|
|
—
|
|
|
321
|
|
|
5.9
|
|
|
—
|
|
|
—
|
|
State taxes
|
173
|
|
|
3.7
|
|
|
159
|
|
|
2.9
|
|
|
7
|
|
|
—
|
|
Restructuring
|
145
|
|
|
3.1
|
|
|
167
|
|
|
3.1
|
|
|
289
|
|
|
1.7
|
|
U.S. health care reform legislation
|
68
|
|
|
1.4
|
|
|
66
|
|
|
1.2
|
|
|
134
|
|
|
0.8
|
|
Divestiture of Merck Consumer Care
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
440
|
|
|
2.5
|
|
Other
(1)
|
(299
|
)
|
|
(6.4
|
)
|
|
(196
|
)
|
|
(3.6
|
)
|
|
213
|
|
|
1.2
|
|
|
$
|
718
|
|
|
15.4
|
%
|
|
$
|
942
|
|
|
17.4
|
%
|
|
$
|
5,349
|
|
|
30.9
|
%
|
|
|
(1)
|
Other includes the tax effect of contingency reserves, research credits, and miscellaneous items.
|
The foreign earnings tax rate differentials in the tax rate reconciliation above primarily reflect the impacts of operations in jurisdictions with different tax rates than the United States, particularly Ireland and Switzerland, as well as Singapore and Puerto Rico which operate under tax incentive grants, where the earnings have been indefinitely reinvested, thereby yielding a favorable impact on the effective tax rate as compared with the
35.0%
U.S. statutory rate. The foreign earnings tax rate differentials do not include the impact of intangible asset impairment charges, amortization of purchase accounting adjustments or restructuring costs. These items are presented separately as they each represent a significant, separately disclosed pretax cost or charge, and a substantial portion of each of these items relates to jurisdictions with lower tax rates than the United States. Therefore, the impact of recording these expense items in lower tax rate jurisdictions is an unfavorable impact on the effective tax rate as compared to the
35.0%
U.S. statutory rate.
The Company’s 2015 effective tax rate reflects the impact of the Protecting Americans From Tax Hikes Act, which was signed into law on December 18, 2015, extending the research credit permanently and the controlled foreign corporation look-through provisions for five years. The Company’s 2014 effective tax rate reflects the impact of the Tax Increase Prevention Act, which was signed into law on December 19, 2014, extending the research credit and the controlled foreign corporation look-through provisions for one year only.
Income before taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Domestic
|
$
|
518
|
|
|
$
|
2,247
|
|
|
$
|
15,730
|
|
Foreign
|
4,141
|
|
|
3,154
|
|
|
1,553
|
|
|
$
|
4,659
|
|
|
$
|
5,401
|
|
|
$
|
17,283
|
|
Taxes on income consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Current provision
|
|
|
|
|
|
Federal
|
$
|
1,166
|
|
|
$
|
732
|
|
|
$
|
7,136
|
|
Foreign
|
916
|
|
|
844
|
|
|
438
|
|
State
|
157
|
|
|
130
|
|
|
375
|
|
|
2,239
|
|
|
1,706
|
|
|
7,949
|
|
Deferred provision
|
|
|
|
|
|
Federal
|
(1,255
|
)
|
|
(552
|
)
|
|
(2,162
|
)
|
Foreign
|
(225
|
)
|
|
(163
|
)
|
|
(201
|
)
|
State
|
(41
|
)
|
|
(49
|
)
|
|
(237
|
)
|
|
(1,521
|
)
|
|
(764
|
)
|
|
(2,600
|
)
|
|
$
|
718
|
|
|
$
|
942
|
|
|
$
|
5,349
|
|
Deferred income taxes at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Intangibles
|
$
|
86
|
|
|
$
|
3,734
|
|
|
$
|
—
|
|
|
$
|
4,962
|
|
Inventory related
|
30
|
|
|
660
|
|
|
49
|
|
|
752
|
|
Accelerated depreciation
|
28
|
|
|
927
|
|
|
43
|
|
|
910
|
|
Unremitted foreign earnings
|
—
|
|
|
2,044
|
|
|
—
|
|
|
2,124
|
|
Pensions and other postretirement benefits
|
727
|
|
|
109
|
|
|
435
|
|
|
131
|
|
Compensation related
|
438
|
|
|
—
|
|
|
535
|
|
|
—
|
|
Unrecognized tax benefits
|
383
|
|
|
—
|
|
|
412
|
|
|
—
|
|
Net operating losses and other tax credit carryforwards
|
437
|
|
|
—
|
|
|
565
|
|
|
—
|
|
Other
|
1,128
|
|
|
46
|
|
|
1,217
|
|
|
—
|
|
Subtotal
|
3,257
|
|
|
7,520
|
|
|
3,256
|
|
|
8,879
|
|
Valuation allowance
|
(268
|
)
|
|
|
|
(304
|
)
|
|
|
Total deferred taxes
|
$
|
2,989
|
|
|
$
|
7,520
|
|
|
$
|
2,952
|
|
|
$
|
8,879
|
|
Net deferred income taxes
|
|
|
$
|
4,531
|
|
|
|
|
$
|
5,927
|
|
Recognized as:
|
|
|
|
|
|
|
|
Other assets
|
$
|
546
|
|
|
|
|
$
|
608
|
|
|
|
Deferred income taxes
|
|
|
$
|
5,077
|
|
|
|
|
$
|
6,535
|
|
The Company has net operating loss (NOL) carryforwards in several jurisdictions. As of
December 31, 2016
,
$243 million
of deferred taxes on NOL carryforwards relate to foreign jurisdictions, none of which are individually significant. Valuation allowances of
$268 million
have been established on these foreign NOL carryforwards and other foreign deferred tax assets. In addition, the Company has
$194 million
of deferred tax assets relating to various U.S. tax credit carryforwards and NOL carryforwards, all of which are expected to be fully utilized prior to expiry.
Income taxes paid in
2016
,
2015
and
2014
were
$1.8 billion
,
$1.8 billion
and
$7.9 billion
, respectively. Income taxes paid in 2014 reflects approximately
$5.0 billion
of taxes paid on the divestiture of MCC. Tax benefits relating to stock option exercises were
$147 million
in
2016
,
$109 million
in
2015
and
$202 million
in
2014
.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance January 1
|
$
|
3,448
|
|
|
$
|
3,534
|
|
|
$
|
3,503
|
|
Additions related to current year positions
|
196
|
|
|
198
|
|
|
389
|
|
Additions related to prior year positions
|
75
|
|
|
53
|
|
|
23
|
|
Reductions for tax positions of prior years
(1)
|
(90
|
)
|
|
(59
|
)
|
|
(156
|
)
|
Settlements
(1)
|
(92
|
)
|
|
(184
|
)
|
|
(161
|
)
|
Lapse of statute of limitations
|
(43
|
)
|
|
(94
|
)
|
|
(64
|
)
|
Balance December 31
|
$
|
3,494
|
|
|
$
|
3,448
|
|
|
$
|
3,534
|
|
|
|
(1)
|
Amounts reflect the settlements with the IRS as discussed below.
|
If the Company were to recognize the unrecognized tax benefits of
$3.5 billion
at
December 31, 2016
, the income tax provision would reflect a favorable net impact of
$3.3 billion
.
The Company is under examination by numerous tax authorities in various jurisdictions globally. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits as of
December 31, 2016
could decrease by up to
$1.7 billion
in the next
12
months as a result of various audit closures, settlements or the expiration of the statute of limitations. The ultimate finalization of the Company’s examinations with relevant taxing authorities can include formal administrative and legal proceedings, which could have a significant impact on the timing of the reversal of unrecognized tax benefits. The Company believes that its reserves for uncertain tax positions are adequate to cover existing risks or exposures. However, there is one item that is currently under discussion with the Internal Revenue Service (IRS) relating to the 2006 through 2008 examination. The Company has concluded that its position should be sustained upon audit. However, if this item were to result in an unfavorable outcome or settlement, it could have a material adverse impact on the Company’s financial position, liquidity and results of operations.
Expenses for interest and penalties associated with uncertain tax positions amounted to
$134 million
in
2016
,
$102 million
in
2015
and
$9 million
in
2014
. These amounts reflect the beneficial impacts of various tax settlements, including those discussed below. Liabilities for accrued interest and penalties were
$886 million
and
$766 million
as of
December 31, 2016
and
2015
, respectively.
The IRS is currently conducting examinations of the Company’s tax returns for the years 2006 through 2008, as well as 2010 and 2011. Although the IRS’s examination of the Company’s 2002-2005 federal tax returns was concluded prior to 2015, one issue relating to a refund claim remained open. During 2015, this issue was resolved and the Company received a refund of approximately
$715 million
, which exceeded the receivable previously recorded by the Company, resulting in a tax benefit of
$410 million
.
In addition, various state and foreign tax examinations are in progress. For most of its other significant tax jurisdictions (both U.S. state and foreign), the Company’s income tax returns are open for examination for the period 2003 through 2016.
At
December 31, 2016
, foreign earnings of
$63.1 billion
have been retained indefinitely by subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability. In addition, the Company has subsidiaries operating in Puerto Rico and Singapore under tax incentive grants that begin to expire in 2022.
16. Earnings per Share
The calculations of earnings per share (shares in millions) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Net income attributable to Merck & Co., Inc.
|
$
|
3,920
|
|
|
$
|
4,442
|
|
|
$
|
11,920
|
|
Average common shares outstanding
|
2,766
|
|
|
2,816
|
|
|
2,894
|
|
Common shares issuable
(1)
|
21
|
|
|
25
|
|
|
34
|
|
Average common shares outstanding assuming dilution
|
2,787
|
|
|
2,841
|
|
|
2,928
|
|
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders
|
$
|
1.42
|
|
|
$
|
1.58
|
|
|
$
|
4.12
|
|
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders
|
$
|
1.41
|
|
|
$
|
1.56
|
|
|
$
|
4.07
|
|
|
|
(1)
|
Issuable primarily under share-based compensation plans.
|
In
2016
,
2015
and
2014
,
13 million
,
9 million
and
4 million
, respectively, of common shares issuable under share-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.
17. Other Comprehensive Income (Loss)
Changes in
AOCI
by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
Investments
|
|
Employee
Benefit
Plans
|
|
Cumulative
Translation
Adjustment
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
Balance January 1, 2014, net of taxes
|
$
|
132
|
|
|
$
|
54
|
|
|
$
|
(909
|
)
|
|
$
|
(1,474
|
)
|
|
$
|
(2,197
|
)
|
Other comprehensive income (loss) before reclassification adjustments, pretax
|
778
|
|
|
48
|
|
|
(3,196
|
)
|
|
(412
|
)
|
|
(2,782
|
)
|
Tax
|
(285
|
)
|
|
(17
|
)
|
|
1,067
|
|
|
(92
|
)
|
|
673
|
|
Other comprehensive income (loss) before reclassification adjustments, net of taxes
|
493
|
|
|
31
|
|
|
(2,129
|
)
|
|
(504
|
)
|
|
(2,109
|
)
|
Reclassification adjustments, pretax
|
(146
|
)
|
(1)
|
43
|
|
(2)
|
62
|
|
(3)
|
—
|
|
|
(41
|
)
|
Tax
|
51
|
|
|
(17
|
)
|
|
(10
|
)
|
|
—
|
|
|
24
|
|
Reclassification adjustments, net of taxes
|
(95
|
)
|
|
26
|
|
|
52
|
|
|
—
|
|
|
(17
|
)
|
Other comprehensive income (loss), net of taxes
|
398
|
|
|
57
|
|
|
(2,077
|
)
|
|
(504
|
)
|
|
(2,126
|
)
|
Balance December 31, 2014, net of taxes
|
530
|
|
|
111
|
|
|
(2,986
|
)
|
|
(1,978
|
)
|
|
(4,323
|
)
|
Other comprehensive income (loss) before reclassification adjustments, pretax
|
526
|
|
|
(9
|
)
|
|
710
|
|
|
(158
|
)
|
|
1,069
|
|
Tax
|
(177
|
)
|
|
(13
|
)
|
|
(272
|
)
|
|
(28
|
)
|
|
(490
|
)
|
Other comprehensive income (loss) before reclassification adjustments, net of taxes
|
349
|
|
|
(22
|
)
|
|
438
|
|
|
(186
|
)
|
|
579
|
|
Reclassification adjustments, pretax
|
(731
|
)
|
(1)
|
(73
|
)
|
(2)
|
203
|
|
(3)
|
(22
|
)
|
|
(623
|
)
|
Tax
|
256
|
|
|
25
|
|
|
(62
|
)
|
|
—
|
|
|
219
|
|
Reclassification adjustments, net of taxes
|
(475
|
)
|
|
(48
|
)
|
|
141
|
|
|
(22
|
)
|
|
(404
|
)
|
Other comprehensive income (loss), net of taxes
|
(126
|
)
|
|
(70
|
)
|
|
579
|
|
|
(208
|
)
|
|
175
|
|
Balance December 31, 2015, net of taxes
|
404
|
|
|
41
|
|
|
(2,407
|
)
|
(4)
|
(2,186
|
)
|
|
(4,148
|
)
|
Other comprehensive income (loss) before reclassification adjustments, pretax
|
210
|
|
|
(38
|
)
|
|
(1,199
|
)
|
|
(150
|
)
|
|
(1,177
|
)
|
Tax
|
(72
|
)
|
|
16
|
|
|
363
|
|
|
(19
|
)
|
|
288
|
|
Other comprehensive income (loss) before reclassification adjustments, net of taxes
|
138
|
|
|
(22
|
)
|
|
(836
|
)
|
|
(169
|
)
|
|
(889
|
)
|
Reclassification adjustments, pretax
|
(314
|
)
|
(1)
|
(31
|
)
|
(2)
|
37
|
|
(3)
|
—
|
|
|
(308
|
)
|
Tax
|
110
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
119
|
|
Reclassification adjustments, net of taxes
|
(204
|
)
|
|
(22
|
)
|
|
37
|
|
|
—
|
|
|
(189
|
)
|
Other comprehensive income (loss), net of taxes
|
(66
|
)
|
|
(44
|
)
|
|
(799
|
)
|
|
(169
|
)
|
|
(1,078
|
)
|
Balance December 31, 2016, net of taxes
|
$
|
338
|
|
|
$
|
(3
|
)
|
|
$
|
(3,206
|
)
|
(4)
|
$
|
(2,355
|
)
|
|
$
|
(5,226
|
)
|
|
|
(1)
|
Relates to foreign currency cash flow hedges that were reclassified from
AOCI
to
Sales
.
|
|
|
(2)
|
Represents net realized (gains) losses on the sales of available-for-sale investments that were reclassified from
AOCI
to
Other (income) expense, net
.
|
|
|
(3)
|
Includes net amortization of prior service cost and actuarial gains and losses included in net periodic benefit cost (see Note 13).
|
|
|
(4)
|
Includes pension plan net loss of $
3.9 billion
and
$3.3 billion
at December 31,
2016
and
2015
, respectively, and other postretirement benefit plan net loss of
$115 million
and
$86 million
at December 31,
2016
and in
2015
, respectively, as well as pension plan prior service credit of
$361 million
and
$414 million
at December 31,
2016
and
2015
, respectively, and other postretirement benefit plan prior service credit of
$466 million
and
$547 million
at December 31,
2016
and
2015
, respectively.
|
18. Segment Reporting
The Company’s operations are principally managed on a products basis and are comprised of
four
operating segments – Pharmaceutical, Animal Health, Healthcare Services and Alliances. The Animal Health, Healthcare Services and Alliances segments are not material for separate reporting.
The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities. A large component of pediatric and adolescent vaccine sales are made to the U.S. Centers for Disease Control and Prevention Vaccines for Children program, which is funded by the U.S. government. Additionally, the Company sells vaccines to the Federal government for placement into vaccine stockpiles. Sales of vaccines in most major European markets were marketed through the Company’s SPMSD joint venture until its termination on December 31, 2016 (see Note 8).
The Company also has animal health operations that discover, develop, manufacture and market animal health products, including vaccines, which the Company sells to veterinarians, distributors and animal producers. During 2016, the Company made changes to the composition of the Animal Health segment that resulted in the inclusion of certain revenues and costs that were previously included in non-segment revenues and profits. Prior periods have been recast to reflect these changes on a comparable basis. The Company’s Healthcare Services segment provides services and solutions that focus on engagement, health analytics and clinical services to improve the value of care delivered to patients. Merck’s Alliances segment primarily includes results from the Company’s relationship with AZLP until the termination of that relationship on June 30, 2014 (see Note 8). On October 1, 2014, the Company divested its Consumer Care segment that developed, manufactured and marketed over-the-counter, foot care and sun care products (see Note 3).
Sales of the Company’s products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Primary Care and Women’s Health
|
|
|
|
|
|
Cardiovascular
|
|
|
|
|
|
Zetia
|
$
|
2,560
|
|
|
$
|
2,526
|
|
|
$
|
2,650
|
|
Vytorin
|
1,141
|
|
|
1,251
|
|
|
1,516
|
|
Diabetes
|
|
|
|
|
|
Januvia
|
3,908
|
|
|
3,863
|
|
|
3,931
|
|
Janumet
|
2,201
|
|
|
2,151
|
|
|
2,071
|
|
General Medicine and Women’s Health
|
|
|
|
|
|
NuvaRing
|
777
|
|
|
732
|
|
|
723
|
|
Implanon/Nexplanon
|
606
|
|
|
588
|
|
|
502
|
|
Dulera
|
436
|
|
|
536
|
|
|
460
|
|
Follistim AQ
|
355
|
|
|
383
|
|
|
412
|
|
Hospital and Specialty
|
|
|
|
|
|
Hepatitis
|
|
|
|
|
|
Zepatier
|
555
|
|
|
—
|
|
|
—
|
|
HIV
|
|
|
|
|
|
Isentress
|
1,387
|
|
|
1,511
|
|
|
1,673
|
|
Hospital Acute Care
|
|
|
|
|
|
Cubicin
(1)
|
1,087
|
|
|
1,127
|
|
|
25
|
|
Noxafil
|
595
|
|
|
487
|
|
|
402
|
|
Invanz
|
561
|
|
|
569
|
|
|
529
|
|
Cancidas
|
558
|
|
|
573
|
|
|
681
|
|
Bridion
|
482
|
|
|
353
|
|
|
340
|
|
Primaxin
|
297
|
|
|
313
|
|
|
329
|
|
Immunology
|
|
|
|
|
|
Remicade
|
1,268
|
|
|
1,794
|
|
|
2,372
|
|
Simponi
|
766
|
|
|
690
|
|
|
689
|
|
Oncology
|
|
|
|
|
|
Keytruda
|
1,402
|
|
|
566
|
|
|
55
|
|
Emend
|
549
|
|
|
535
|
|
|
553
|
|
Temodar
|
283
|
|
|
312
|
|
|
350
|
|
Diversified Brands
|
|
|
|
|
|
Respiratory
|
|
|
|
|
|
Singulair
|
915
|
|
|
931
|
|
|
1,092
|
|
Nasonex
|
537
|
|
|
858
|
|
|
1,099
|
|
Other
|
|
|
|
|
|
Cozaar/Hyzaar
|
511
|
|
|
667
|
|
|
806
|
|
Arcoxia
|
450
|
|
|
471
|
|
|
519
|
|
Fosamax
|
284
|
|
|
359
|
|
|
470
|
|
Zocor
|
186
|
|
|
217
|
|
|
258
|
|
Vaccines
(2)
|
|
|
|
|
|
Gardasil/Gardasil
9
|
2,173
|
|
|
1,908
|
|
|
1,738
|
|
ProQuad/M-M-R II/Varivax
|
1,640
|
|
|
1,505
|
|
|
1,394
|
|
Zostavax
|
685
|
|
|
749
|
|
|
765
|
|
RotaTeq
|
652
|
|
|
610
|
|
|
659
|
|
Pneumovax 23
|
641
|
|
|
542
|
|
|
746
|
|
Other pharmaceutical
(3)
|
4,703
|
|
|
5,105
|
|
|
6,233
|
|
Total Pharmaceutical segment sales
|
35,151
|
|
|
34,782
|
|
|
36,042
|
|
Other segment sales
(4)
|
3,862
|
|
|
3,667
|
|
|
5,758
|
|
Total segment sales
|
39,013
|
|
|
38,449
|
|
|
41,800
|
|
Other
(5)
|
794
|
|
|
1,049
|
|
|
437
|
|
|
$
|
39,807
|
|
|
$
|
39,498
|
|
|
$
|
42,237
|
|
|
|
(1)
|
Sales of
Cubicin
in 2015 represent sales subsequent to the Cubist acquisition date. Sales of
Cubicin
in 2014 reflect sales in Japan pursuant to a previously existing licensing agreement.
|
|
|
(2)
|
These amounts do not reflect sales of vaccines sold in most major European markets through the Company’s joint venture, SPMSD, the results of which are reflected in equity income from affiliates which is included in
Other (income) expense, net
. These amounts do, however, reflect supply sales to SPMSD. On December 31, 2016, Merck and Sanofi terminated the SPMSD joint venture (see Note 8).
|
|
|
(3)
|
Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.
|
|
|
(4)
|
Represents the non-reportable segments of Animal Health, Healthcare Services and Alliances, as well as Consumer Care until its divestiture on October 1, 2014 (see Note 3). The Alliances segment includes revenue from the Company’s relationship with AZLP until termination on June 30, 2014 (see Note 8).
|
|
|
(5)
|
Other is primarily comprised of miscellaneous corporate revenues, including revenue hedging activities, as well as third-party manufacturing sales. Other in 2016 and 2014 also includes approximately
$170 million
and
$232 million
, respectively, in connection with the sale of the marketing rights to certain products.
|
Consolidated revenues by geographic area where derived are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
18,478
|
|
|
$
|
17,519
|
|
|
$
|
17,071
|
|
Europe, Middle East and Africa
|
10,953
|
|
|
10,677
|
|
|
13,174
|
|
Asia Pacific
|
3,918
|
|
|
3,825
|
|
|
3,952
|
|
Japan
|
2,846
|
|
|
2,673
|
|
|
3,471
|
|
Latin America
|
2,155
|
|
|
2,825
|
|
|
3,151
|
|
Other
|
1,457
|
|
|
1,979
|
|
|
1,418
|
|
|
$
|
39,807
|
|
|
$
|
39,498
|
|
|
$
|
42,237
|
|
A reconciliation of total segment profits to consolidated
Income before taxes
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2016
|
|
2015
|
|
2014
|
Segment profits:
|
|
|
|
|
|
Pharmaceutical segment
|
$
|
22,180
|
|
|
$
|
21,658
|
|
|
$
|
22,164
|
|
Other segments
|
1,507
|
|
|
1,573
|
|
|
2,386
|
|
Total segment profits
|
23,687
|
|
|
23,231
|
|
|
24,550
|
|
Other profits
|
481
|
|
|
810
|
|
|
627
|
|
Unallocated:
|
|
|
|
|
|
Interest income
|
328
|
|
|
289
|
|
|
266
|
|
Interest expense
|
(693
|
)
|
|
(672
|
)
|
|
(732
|
)
|
Equity income from affiliates
|
(19
|
)
|
|
135
|
|
|
59
|
|
Depreciation and amortization
|
(1,585
|
)
|
|
(1,573
|
)
|
|
(2,452
|
)
|
Research and development
|
(9,084
|
)
|
|
(5,871
|
)
|
|
(5,823
|
)
|
Amortization of purchase accounting adjustments
|
(3,692
|
)
|
|
(4,816
|
)
|
|
(4,182
|
)
|
Restructuring costs
|
(651
|
)
|
|
(619
|
)
|
|
(1,013
|
)
|
Gain on sale of certain migraine clinical development programs
|
100
|
|
|
250
|
|
|
—
|
|
Charge related to the settlement of worldwide
Keytruda
patent litigation
|
(625
|
)
|
|
—
|
|
|
—
|
|
Gain on divestiture of certain ophthalmic products
|
—
|
|
|
147
|
|
|
480
|
|
Foreign currency devaluation related to Venezuela
|
—
|
|
|
(876
|
)
|
|
—
|
|
Net charge related to the settlement of
Vioxx
shareholder class action litigation
|
—
|
|
|
(680
|
)
|
|
—
|
|
Gain on divestiture of Merck Consumer Care
|
—
|
|
|
—
|
|
|
11,209
|
|
Gain on AstraZeneca option exercise
|
—
|
|
|
—
|
|
|
741
|
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
(628
|
)
|
Other unallocated, net
|
(3,588
|
)
|
|
(4,354
|
)
|
|
(5,819
|
)
|
|
$
|
4,659
|
|
|
$
|
5,401
|
|
|
$
|
17,283
|
|
Segment profits are comprised of segment sales less standard costs and certain operating expenses directly incurred by the segments. For internal management reporting presented to the chief operating decision maker, Merck does not allocate materials and production costs, other than standard costs, the majority of research and development expenses or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. In addition, costs related to restructuring activities, as well as the amortization of purchase accounting adjustments are not allocated to segments.
Other profits are primarily comprised of miscellaneous corporate profits, as well as operating profits related to third-party manufacturing sales.
Other unallocated, net includes expenses from corporate and manufacturing cost centers, goodwill and other intangible asset impairment charges, gains or losses on sales of businesses, expense or income related to changes in the estimated fair value of contingent consideration, and other miscellaneous income or expense items.
Equity income from affiliates and depreciation and amortization included in segment profits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical
|
|
All Other
|
|
Total
|
Year Ended December 31, 2016
|
|
|
|
|
|
Included in segment profits:
|
|
|
|
|
|
Equity income from affiliates
|
$
|
105
|
|
|
$
|
—
|
|
|
$
|
105
|
|
Depreciation and amortization
|
(160
|
)
|
|
(23
|
)
|
|
(183
|
)
|
Year Ended December 31, 2015
|
|
|
|
|
|
Included in segment profits:
|
|
|
|
|
|
Equity income from affiliates
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
70
|
|
Depreciation and amortization
|
(82
|
)
|
|
(18
|
)
|
|
(100
|
)
|
Year Ended December 31, 2014
|
|
|
|
|
|
Included in segment profits:
|
|
|
|
|
|
Equity income from affiliates
|
$
|
90
|
|
|
$
|
108
|
|
|
$
|
198
|
|
Depreciation and amortization
|
(39
|
)
|
|
(18
|
)
|
|
(57
|
)
|
Property, plant and equipment, net by geographic area where located is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
8,114
|
|
|
$
|
8,467
|
|
|
$
|
8,727
|
|
Europe, Middle East and Africa
|
2,732
|
|
|
2,844
|
|
|
3,120
|
|
Asia Pacific
|
775
|
|
|
842
|
|
|
897
|
|
Latin America
|
234
|
|
|
182
|
|
|
207
|
|
Japan
|
164
|
|
|
164
|
|
|
172
|
|
Other
|
7
|
|
|
8
|
|
|
13
|
|
|
$
|
12,026
|
|
|
$
|
12,507
|
|
|
$
|
13,136
|
|
The Company does not disaggregate assets on a products and services basis for internal management reporting and, therefore, such information is not presented.