Merck & Co., Inc. (Form: 10-K, Received: 02/26/2020 16:39:15)

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As filed with the Securities and Exchange Commission on February 26, 2020

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

_________________________________

FORM 10-K

(MARK ONE)



	☒	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2019



	☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 1-6571

_________________________________

Merck & Co., Inc.



2000 Galloping Hill Road
Kenilworth	New Jersey	07033

(908) 740-4000



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



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

Number of shares of Common Stock ($0.50 par value) outstanding as of January 31, 2020: 2,536,268,760.

Aggregate market value of Common Stock ($0.50 par value) held by non-affiliates on June 30, 2019 based on closing price on June 30, 2019: $215,106,000,000.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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



Documents Incorporated by Reference:
Document		Part of Form 10-K
Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2020, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report		Part III

Table of Contents



			Page
Part I
Item 1.	Business		1
Item 1A.	Risk Factors		20
	Cautionary Factors that May Affect Future Results		32
Item 1B.	Unresolved Staff Comments		33
Item 2.	Properties		33
Item 3.	Legal Proceedings		34
Item 4.	Mine Safety Disclosures		34
	Executive Officers of the Registrant		35
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		36
Item 6.	Selected Financial Data		38
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		69
Item 8.	Financial Statements and Supplementary Data		70
	(a)	Financial Statements	70
		Notes to Consolidated Financial Statements	74
		Report of Independent Registered Public Accounting Firm	124
	(b)	Supplementary Data	126
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		127
Item 9A.	Controls and Procedures		127
	Management’s Report		127
Item 9B.	Other Information		128
Part III
Item 10.	Directors, Executive Officers and Corporate Governance		129
Item 11.	Executive Compensation		129
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		130
Item 13.	Certain Relationships and Related Transactions, and Director Independence		130
Item 14.	Principal Accountant Fees and Services		130
Part IV
Item 15.	Exhibits and Financial Statement Schedules		131

Item 16.	Form 10-K Summary		135
	Signatures		136

Table of Contents

PART I


Item 1.	Business.

Merck & Co., Inc. (Merck or the Company) is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. The Company’s operations are principally managed on a products basis and include four operating segments, which are the Pharmaceutical, Animal Health, Healthcare Services and Alliances segments.

The Pharmaceutical segment includes human health pharmaceutical and vaccine products. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers such as health maintenance organizations, pharmacy benefit managers and other institutions. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The Company sells these human health vaccines primarily to physicians, wholesalers, physician distributors and government entities.

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

The 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. The Company has recently sold certain businesses in the Healthcare Services segment and is in the process of divesting the remaining businesses. While the Company continues to look for investment opportunities in this area of health care, the approach to these investments has shifted toward venture capital investments in third parties as opposed to wholly-owned businesses.

The Alliances segment primarily includes activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018.

The Company was incorporated in New Jersey in 1970.

All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted. All other trademarks or services marks are those of their respective owners.

Planned Spin-Off of Women’s Health, Legacy Brands and Biosimilars into a New Company

In February 2020, Merck announced its intention to spin-off (the Spin-Off) products from its women’s health, trusted legacy brands and biosimilars businesses into a new, yet-to-be-named, independent, publicly traded company (NewCo) through a distribution of NewCo’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The legacy brands included in the transaction consist of dermatology, pain, respiratory, and select cardiovascular products including Zetia and Vytorin, as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs will continue to be owned and developed within Merck as planned. NewCo will have development capabilities initially focused on late-stage development and life-cycle management, and is expected over time to develop research capabilities in selected therapeutic areas. The Spin-Off is expected to be completed in the first half of 2021, subject to market and certain other conditions. See “Risk Factors - Risks Related to the Proposed Spin-Off of NewCo.”

Table of Contents

Product Sales

Total Company sales, including sales of the Company’s top pharmaceutical products, as well as sales of animal health products, were as follows:



($ in millions)	2019		2018		2017
Total Sales	$	46,840	$	42,294	$	40,122
Pharmaceutical	41,751		37,689		35,390
Keytruda	11,084		7,171		3,809
Januvia/Janumet	5,524		5,914		5,896
Gardasil/Gardasil 9	3,737		3,151		2,308
ProQuad/M-M-R II/Varivax	2,275		1,798		1,676
Bridion	1,131		917		704
Isentress/Isentress HD	975		1,140		1,204
Pneumovax 23	926		907		821
NuvaRing	879		902		761
Zetia/Vytorin	874		1,355		2,095
Simponi	830		893		819
Animal Health	4,393		4,212		3,875
Livestock	2,784		2,630		2,484
Companion Animals	1,609		1,582		1,391
Other Revenues⁽¹⁾	696		393		857


⁽¹⁾	Other revenues are primarily comprised of Healthcare Services segment revenue, third-party manufacturing sales, and miscellaneous corporate revenues, including revenue hedging activities.

Pharmaceutical

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. Human health vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. Certain of the products within the Company’s franchises are as follows:

Oncology

Keytruda (pembrolizumab), the Company’s anti-PD-1 (programmed death receptor-1) therapy, as monotherapy for the treatment of certain patients with melanoma, non-small-cell lung cancer (NSCLC), small-cell lung cancer (SCLC), head and neck squamous cell carcinoma (HNSCC), classical Hodgkin Lymphoma (cHL), primary mediastinal large B-cell lymphoma (PMBCL), urothelial carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient cancer, gastric or gastroesophageal junction adenocarcinoma, esophageal cancer, cervical cancer, hepatocellular carcinoma, and merkel cell carcinoma. Keytruda is also used for the treatment of certain patients in combination with chemotherapy for metastatic squamous and non-squamous NSCLC, in combination with chemotherapy for HNSCC, in combination with axitinib for renal cell carcinoma, and in combination with lenvatinib for endometrial carcinoma; and Emend (aprepitant) for the prevention of chemotherapy-induced and post-operative nausea and vomiting. In addition, the Company recognizes alliance revenue related to sales of Lynparza (olaparib), an oral poly (ADP-ribose) polymerase (PARP) inhibitor, for certain types of advanced ovarian, breast and pancreatic cancers; and Lenvima (lenvatinib) for certain types of thyroid cancer, hepatocellular carcinoma, in combination with everolimus for certain patients with renal cell carcinoma, and in combination with Keytruda for certain patients with endometrial carcinoma.

Vaccines

Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), vaccines to help prevent certain diseases caused by certain types of human papillomavirus (HPV); ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella; M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella; Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella); Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease; RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children; and Vaqta (hepatitis A vaccine, inactivated) indicated for the prevention of disease caused by hepatitis A virus in persons 12 months of age and older.

Table of Contents

Hospital Acute Care

Bridion (sugammadex) Injection, a medication for the reversal of two types of neuromuscular blocking agents used during surgery; Noxafil (posaconazole) for the prevention of invasive fungal infections; Primaxin (imipenem and cilastatin sodium) an anti-bacterial product; Invanz (ertapenem sodium) for the treatment of certain infections; Cubicin (daptomycin for injection), an I.V. antibiotic for complicated skin and skin structure infections or bacteremia, when caused by designated susceptible organisms; Cancidas (caspofungin acetate), an anti-fungal product; and Prevymis (letermovir) for the prophylaxis of cytomegalovirus (CMV) reactivation and disease in adult CMV-seropositive recipients [R+] of an allogeneic hematopoietic stem cell transplant.

Immunology

Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases; and Remicade (infliximab), a treatment for inflammatory diseases, which the Company markets in Europe, Russia and Turkey.

Neuroscience

Belsomra (suvorexant), an orexin receptor antagonist indicated for the treatment of insomnia, characterized by difficulties with sleep onset and/or sleep maintenance.

Virology

Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection; and Zepatier (elbasvir and grazoprevir) for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with ribavirin in certain patient populations.

Cardiovascular

Zetia (ezetimibe) (marketed as Ezetrol in most countries outside the United States); Vytorin (ezetimibe/simvastatin) (marketed as Inegy outside the United States); Atozet (ezetimibe and atorvastatin) (marketed outside of the United States) and Rosuzet (ezetimibe and rosuvastatin) (marketed outside of the United States), cholesterol modifying medicines; and Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary arterial hypertension.

Diabetes

Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) for the treatment of type 2 diabetes.

Women’s Health

NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product; and Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant/Nexplanon (etonogestrel implant), a single, radiopaque, rod-shaped subdermal contraceptive implant.

Animal Health

The Animal Health segment discovers, develops, manufactures and markets a wide range of veterinary pharmaceuticals, vaccines and health management solutions and services, as well as an extensive suite of digitally connected identification, traceability and monitoring products. Principal products in this segment include:

Livestock Products

Nuflor (Florfenicol) antibiotic range for use in cattle and swine; Bovilis/Vista vaccine lines for infectious diseases in cattle; Banamine (Flunixin meglumine) bovine and swine anti-inflammatory; Estrumate (cloprostenol sodium) for the treatment of fertility disorders in cattle; Matrix (altrenogest) fertility management for swine; Resflor (florfenicol and flunixin meglumine), a combination broad-spectrum antibiotic and non-steroidal anti-inflammatory drug for bovine respiratory disease; Zuprevo (Tildipirosin) for bovine respiratory disease; Zilmax (zilpaterol hydrochloride) and Revalor (trenbolone acetate and estradiol) to improve production efficiencies in beef cattle; Safe-Guard (fenbendazole) de-wormer for cattle; M+Pac (Mycoplasma Hyopneumoniae Bacterin) swine pneumonia vaccine; Porcilis (Lawsonia intracellularis baterin) and Circumvent (Porcine Circovirus Vaccine, Type 2, Killed Baculovirus Vector) vaccine lines for infectious diseases in swine; Nobilis/Innovax (Live Marek’s Disease Vector), vaccine lines for poultry; Paracox and Coccivac coccidiosis vaccines; Exzolt, a systemic treatment for poultry red mite infestations; Slice (Emamectin benzoate) parasiticide for sea lice in salmon; Aquavac (Avirulent Live Culture)/Norvax vaccines against bacterial and viral disease in fish; Compact PD vaccine for salmon; Aquaflor (Florfenicol) antibiotic for farm-raised fish; and Allflex Livestock Intelligence solutions for animal identification, monitoring and traceability.

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Companion Animal Products

Bravecto (fluralaner), a line of oral and topical parasitic control products for dogs and cats that last up to 12 weeks; Nobivac vaccine lines for flexible dog and cat vaccination; Otomax (Gentamicin sulfate, USP; Betamethasone valerate USP; and Clotrimazole USP ointment)/Mometamax (Gentamicin sulfate, USP, Mometasone Furoate Monohydrate and Clotrimazole, USP, Otic Suspension)/Posatex (Orbifloxacin, Mometasone Furoate Monohydrate and Posaconazole, Suspension) ear ointments for acute and chronic otitis; Caninsulin/Vetsulin (porcine insulin zinc suspension) diabetes mellitus treatment for dogs and cats; Panacur (fenbendazole)/Safeguard (fenbendazole) broad-spectrum anthelmintic (de-wormer) for use in many animals; Regumate (altrenogest) fertility management for horses; Prestige vaccine line for horses; and Scalibor (Deltamethrin)/Exspot for protecting against bites from fleas, ticks, mosquitoes and sandflies.

For a further discussion of sales of the Company’s products, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

2019 Product Approvals

Set forth below is a summary of significant product approvals received by the Company in 2019.



Product	Date	Approval
Ervebo	December 2019	The U.S. Food and Drug Administration (FDA) approved Ervebo for the prevention of disease caused by Zaire ebolavirus in individuals 18 years of age and older.
Ervebo	November 2019	The European Commission (EC) granted a conditional marketing authorization for Ervebo for active immunization of individuals 18 years of age or older to protect against Ebola Virus Disease caused by Zaire Ebola virus.
Keytruda	December 2019	The Japanese Ministry of Health, Labour and Welfare (MHLW) approved Keytruda for three new first-line indications across advanced renal cell carcinoma (RCC) and recurrent or distant metastatic head and neck cancer.
	November 2019	EC approved two new regimens of Keytruda as first-line treatment for metastatic or unresectable recurrent head and neck squamous cell carcinoma (HNSCC).
	November 2019	The China National Medical Products Administration (NMPA) approved Keytruda for first-line treatment of metastatic squamous non-small cell lung cancer (NSCLC) in combination with chemotherapy.
	October 2019	NMPA approved Keytruda as monotherapy for first-line treatment of certain patients with advanced NSCLC whose tumors express PD-L1.
	September 2019	FDA approved Keytruda plus Lenvima combination treatment for patients with certain types of endometrial carcinoma.
	September 2019	EC approved Keytruda in combination with axitinib as first-line treatment for patients with advanced RCC.
	July 2019	FDA approved Keytruda for recurrent locally advanced or metastatic squamous cell carcinoma of the esophagus in patients whose tumors express PD-L1 combined positive score [CPS] (CPS ≥10) with disease progression after one of more prior lines of systemic therapy.

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Keytruda	June 2019	FDA approved Keytruda as monotherapy for patients with metastatic small-cell lung cancer (SCLC) with disease progression on or after platinum-based chemotherapy and at least one other prior line of therapy.
	June 2019	FDA approved two indications for Keytruda for first-line treatment of patients with metastatic or with unresectable, recurrent HNSCC as monotherapy for patients whose tumors express PD-L1 CPS ≥1 or in combination with platinum and fluorouracil regardless of PD-L1 expression.
	April 2019	FDA approved Keytruda in combination with axitinib for first-line treatment of patients with advanced RCC.
	April 2019	FDA approved an expanded label for Keytruda as monotherapy for the first-line treatment of patients with stage III NSCLC who are not candidates for surgical resection or definitive chemoradiation, or metastatic NSCLC, and whose tumors express PD-L1 (tumor proportion score [TPS] ≥1%) as determined by an FDA-approved test, with no epidermal growth factor receptor (EGFR) or anaplastic lymphoma kinase positive (ALK) genomic tumor aberrations.
	April 2019	EC approved new extended dosing schedule for Keytruda for all approved monotherapy indications.
	April 2019	NMPA approved Keytruda for first-line treatment of metastatic nonsquamous NSCLC in combination with chemotherapy.
	March 2019	EC approved Keytruda in combination with chemotherapy for first-line treatment of adults with metastatic squamous NSCLC.
	February 2019	FDA approved Keytruda for the adjuvant treatment of patients with melanoma with involvement of lymph node(s) following complete resection.
	January 2019	MHLW approved Keytruda for five indications, including three expanded uses in advanced NSCLC, one in melanoma, as well as a new indication in advanced microsatellite instability-high tumors.
Lynparza⁽¹⁾	December 2019	FDA approved Lynparza for first-line maintenance therapy for patients with germline BRCA-mutated (gBRCA-m) metastatic pancreatic cancer whose disease has not progressed for at least 16 weeks of a first-line, platinum-based chemotherapy regimen.
	December 2019	NMPA approved Lynparza as a first-line maintenance therapy in BRCA-m advanced ovarian cancer.
	July 2019	EC approved Lynparza as monotherapy for the maintenance treatment of adult patients with advanced BRCA-m, high-grade epithelial ovarian, fallopian tube or primary peritoneal cancer.
	June 2019	MHLW approved Lynparza as first-line maintenance therapy in patients with BRCA-m advanced ovarian cancer.
	June 2019	EC approved Lynparza for use as first-line maintenance therapy in patients with BRCA-m advanced ovarian cancer.
	April 2019	EC approved Lynparza for the treatment of gBRCA-m HER2-negative advanced breast cancer.
Pifeltro and Delstrigo	September 2019	FDA approved supplemental New Drug Applications (sNDAs) for Pifeltro (doravirine) in combination with other antiretroviral agents, and Delstrigo (doravirine, lamivudine, and tenofovir disoproxil fumarate) as a complete regimen, for use in appropriate adults with HIV-1 infection who are virologically suppressed on a stable antiretroviral regimen.

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Recarbrio	July 2019	FDA approved Recarbrio (imipenem, cilastatin, and relebactam) for the treatment of adults with complicated urinary tract and complicated intra-abdominal bacterial infections where limited or no alternative treatment options are available.
Zerbaxa	August 2019	EC approved Zerbaxa for the treatment of adults with hospital-acquired pneumonia, including ventilator-associated pneumonia (to be used in combination with an antibacterial agent active against Gram-positive pathogens when these are known or suspected to be contributing to the infectious process.)
Zerbaxa	June 2019	FDA approved Zerbaxa 3g dose for the treatment of patients 18 years and older with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP).
Bravecto	November 2019	FDA approved Bravecto Plus topical solution for cats indicated for both external and internal parasite infestations.


⁽¹⁾	In July 2017, Merck and AstraZeneca entered into a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca’s Lynparza.

Competition and the Health Care Environment

Competition

The markets in which the Company conducts its business and the pharmaceutical industry in general are highly competitive and highly regulated. The Company’s competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus, generic drug manufacturers and animal health care companies. The Company’s operations may be adversely affected by generic and biosimilar competition as the Company’s products mature, as well as technological advances of competitors, industry consolidation, patents granted to competitors, competitive combination products, new products of competitors, the generic availability of competitors’ branded products, and new information from clinical trials of marketed products or post-marketing surveillance. In addition, patent rights are increasingly being challenged by competitors, and the outcome can be highly uncertain. An adverse result in a patent dispute can preclude commercialization of products or negatively affect sales of existing products and could result in the payment of royalties or in the recognition of an impairment charge with respect to intangible assets associated with certain products. Competitive pressures have intensified as pressures in the industry have grown.

Pharmaceutical competition involves a rigorous search for technological innovations and the ability to market these innovations effectively. With its long-standing emphasis on research and development, the Company is well-positioned to compete in the search for technological innovations. Additional resources required to meet market challenges include quality control, flexibility to meet customer specifications, an efficient distribution system and a strong technical information service. The Company is active in acquiring and marketing products through external alliances, such as licensing arrangements and collaborations, and has been refining its sales and marketing efforts to address changing industry conditions. However, the introduction of new products and processes by competitors may result in price reductions and product displacements, even for products protected by patents. For example, the number of compounds available to treat a particular disease typically increases over time and can result in slowed sales growth or reduced sales for the Company’s products in that therapeutic category.

The highly competitive animal health business is affected by several factors including regulatory and legislative issues, scientific and technological advances, product innovation, the quality and price of the Company’s products, effective promotional efforts and the frequent introduction of generic products by competitors.

Health Care Environment and Government Regulation

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access. In the United States, federal and state governments for many years also have pursued methods to reduce the cost of drugs and vaccines for which they pay. For example, federal laws require the Company to pay specified rebates for medicines reimbursed by Medicaid and to provide discounts for outpatient medicines purchased by certain Public Health Service entities and hospitals serving a disproportionate share of low income or uninsured patients.

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Against this backdrop, the United States enacted major health care reform legislation in 2010 (the Patient Protection and Affordable Care Act (ACA)). Various insurance market reforms have since advanced and state and federal insurance exchanges were launched in 2014. With respect to the effect of the law on the pharmaceutical industry, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The law also required pharmaceutical manufacturers to pay a 50% point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”). As a result of the Balanced Budget Act of 2018 and effective at the beginning of 2019, the 50% point of service discount increased to a 70% point of service discount in the coverage gap. In addition, this point of service discount was extended to biosimilar products. Merck recorded a reduction to revenue of approximately $615 million, $365 million and $385 million in 2019, 2018 and 2017, respectively, related to the donut hole provision. Also, pharmaceutical manufacturers are required to pay an annual non-tax deductible health care reform fee. The total annual industry fee was $4.1 billion in 2018 and decreased to $2.8 billion in 2019 and is expected to remain at that amount for 2020. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid. The Company recorded $112 million, $124 million and $210 million of costs within Selling, general and administrative expenses in 2019, 2018 and 2017, respectively, for the annual health care reform fee. In February 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2022. The Company will evaluate the financial impact of these two elements when they become effective.

There is significant uncertainty about the future of the ACA in particular and health care laws in general in the United States. The Company is participating in the debate, and monitoring how any proposed changes could affect its business. The Company is unable to predict the likelihood of changes to the ACA. Depending on the nature of any repeal and replacement of the ACA, such actions could have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.

A number of states have passed pharmaceutical price and cost transparency laws. These laws typically require manufacturers to report certain product price information or other financial data to the state. Some laws also require manufacturers to provide advance notification of price increases. The Company expects that states will continue their focus on pharmaceutical price transparency and that this focus will continue to exert pressure on product pricing.

The Company also faces increasing pricing pressure globally from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care organizations, federal and state exchanges, and institutional and governmental purchasers, and (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and the ACA.

Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. As an example, health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.

The pharmaceutical industry could be considered a potential source of savings via legislative proposals that have been debated but not enacted. These types of revenue generating or cost saving proposals include additional direct price controls. In addition, Congress and/or the administration may again consider proposals to allow international reference pricing or, under certain conditions, the importation of medicines from other countries.

The administration has recently proposed a draft rule that would allow importation of certain lower-cost prescription drugs from Canada. If the rule is finalized as proposed, states or certain other non-federal governmental entities would be able to submit importation program proposals to the FDA for review and authorization of two-year programs (with the opportunity to extend for two more years). There will be a public comment period on the proposed rule which will expire on March 9, 2020. Following the comment period, the FDA will have to review and finalize its

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proposal before any states or other parties can submit their plans to comply with the federal rule. If the proposed rule is adopted, it likely will be some time before states or other parties can actually implement importation plans.

In October 2018, the administration also issued an advance notice of proposed rulemaking to implement an “International Pricing Index” (IPI) model in the United States for products covered under Medicare Part B. The proposal would: (1) reduce Medicare Part B payments for drugs based on a market basket of international prices; (2) allow private sector vendors to negotiate prices for drugs, take title to drugs, and compete for physician and hospital business; and (3) change the physician reimbursement under Medicare Part B from the current model to eliminate the buy and bill system and instead pay physicians based on a flat fee that approximates the revenue they currently receive from drugs. Public comments on the IPI proposal were accepted through late 2018 and it is unclear when the agency may issue a proposed rule on the IPI model. Adoption of one or both of the proposed rules could have a material adverse effect on the Company’s business, results of operations and financial condition.

It remains uncertain as to what proposals, if any, may be included as part of future federal legislative proposals that would directly or indirectly affect the Company.

In the U.S. private sector, consolidation and integration among health care providers is a major factor in the competitive marketplace for pharmaceutical products. Health plans and pharmacy benefit managers have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. Private third-party insurers, as well as governments, increasingly employ formularies to control costs by negotiating discounted prices in exchange for formulary inclusion. Failure to obtain timely or adequate pricing or formulary placement for Merck’s products or obtaining such placement at unfavorable pricing could adversely impact revenue. In addition to formulary tier co-pay differentials, private health insurance companies and self-insured employers have been raising co-payments required from beneficiaries, particularly for branded pharmaceuticals and biotechnology products. Private health insurance companies also are increasingly imposing utilization management tools, such as clinical protocols, requiring prior authorization for a branded product if a generic product is available or requiring the patient to first fail on one or more generic products before permitting access to a branded medicine. These same management tools are also used in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. As the U.S. payer market concentrates further and as more drugs become available in generic form, pharmaceutical companies may face greater pricing pressure from private third-party payers.

In order to provide information about the Company’s pricing practices, the Company annually posts on its website its Pricing Transparency Report for the United States. The report provides the Company’s average annual list price, net price increases, and average discounts across the Company’s U.S. portfolio dating back to 2010. In 2019, the Company’s gross U.S. sales were reduced by approximately 44% as a result of rebates, discounts and returns.

Efforts toward health care cost containment also remain intense in European countries. The Company faces competitive pricing pressure resulting from generic and biosimilar drugs. In addition, a majority of countries in Europe attempt to contain drug costs by engaging in reference pricing in which authorities examine pre-determined markets for published prices of drugs by brand. The authorities then use price data from those markets to set new local prices for brand-name drugs, including the Company’s drugs. Guidelines for examining reference pricing are usually set in local markets and can be changed pursuant to local regulations.

In addition, in Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines, which occurred in 2018 and will occur again in 2020. Furthermore, the government can order re-pricings for specific products if it determines that use of such product will exceed certain thresholds defined under applicable re-pricing rules. Pursuant to those rules, the Japanese government reduced the price of Keytruda by 17.5% effective February 2020. Additionally, Keytruda will be subject to another significant price reduction in April 2020 under a provision of the Japanese pricing rules.

The Company’s business in China has grown rapidly in the past few years, and the importance of China to the Company’s overall pharmaceutical and vaccines business has increased accordingly. Continued growth of the Company’s business in China is dependent upon ongoing development of a favorable environment for innovative pharmaceutical products and vaccines, sustained access for the Company’s current in-line products, and the absence of trade impediments or adverse pricing controls. In recent years, the Chinese government has introduced and implemented a number of structural reforms to accelerate the shift to innovative products and reduce costs. Since 2017, there have been multiple new policies introduced by the government to improve access to new innovation, reduce the

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complexity of regulatory filings, and accelerate the review and approval process. This has led to a significant increase in the number of new products being approved each year. Additionally, in 2017, the Chinese government updated the National Reimbursement Drug List for the first time in eight years. While the mechanism for drugs being added to the list evolves, inclusion may require a price negotiation which could impact the outlook in the market for selected brands. In 2019, drugs were added through two pathways, direct inclusion and price negotiations. For price negotiations, price reductions of approximately 60% on average were required for inclusion. While pricing pressure has always existed in China, health care reform has increased this pressure in part due to the acceleration of generic substitution through volume based procurement (VBP). In 2019, the government implemented the VBP program through a tendering process for mature products which have generic substitutes with a Generic Quality Consistency Evaluation approval. Mature products that have entered into the first two rounds of VBP have had, on average, a price reduction of 50%. The expansion of the VBP program remains to be seen.

The Company’s focus on emerging markets, in addition to China, has continued. Governments in many emerging markets are also focused on constraining health care costs and have enacted price controls and related measures, such as compulsory licenses, that aim to put pressure on the price of pharmaceuticals and constrain market access. The Company anticipates that pricing pressures and market access challenges will continue in 2020 to varying degrees in the emerging markets, including China.

Certain markets outside of the United States have also implemented other cost management strategies, such as health technology assessments (HTA). Examples include the UK, France, Germany, Ireland, Italy and Sweden. The HTA process is the procedure according to which the assessment of the public health impact, therapeutic impact, and the economic and social impact of use of a given medicinal product in the national health care system of the individual country is conducted. HTAs generally focus on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the health care system. Those elements of medicinal products are compared with other treatment options available on the market. The outcome of HTAs will often influence the pricing and reimbursement status granted to medicinal products by the regulatory authorities of individual European Union (EU) Member States. A negative HTA of one of the Company’s products by a leading and recognized HTA body could undermine the Company’s ability to obtain reimbursement for such product in the EU Member State in which such negative assessment was issued, and also in other EU Member States. HTA procedures require additional data, reviews and administrative processes, all of which increase the complexity, timing and costs of obtaining product reimbursement and exert downward pressure on available reimbursement. In the United States, HTAs are also being used by government and private payers.

Beyond pricing and market access challenges, other conditions in emerging market countries can affect the Company’s efforts to continue to grow in these markets, including potential political instability, changes in trade sanctions and embargoes, significant currency fluctuation and controls, financial crises, limited or changing availability of funding for health care, and other developments that may adversely impact the business environment for the Company. Further, the Company may engage third-party agents to assist in operating in emerging market countries, which may affect its ability to realize continued growth and may also increase the Company’s risk exposure.

In addressing cost containment pressures, the Company engages in public policy advocacy with policymakers and continues to work to demonstrate that its medicines provide value to patients and to those who pay for health care. The Company advocates with government policymakers to encourage a long-term approach to sustainable health care financing that ensures access to innovative medicines and does not disproportionately target pharmaceuticals as a source of budget savings. In markets with historically low rates of health care spending, the Company encourages those governments to increase their investments and adopt market reforms in order to improve their citizens’ access to appropriate health care, including medicines.

Operating conditions have become more challenging under the global pressures of competition, industry regulation and cost containment efforts. Although no one can predict the effect of these and other factors on the Company’s business, the Company continually takes measures to evaluate, adapt and improve the organization and its business practices to better meet customer needs and believes that it is well-positioned to respond to the evolving health care environment and market forces.

The pharmaceutical industry is also subject to regulation by regional, country, state and local agencies around the world focused on standards and processes for determining drug safety and effectiveness, as well as conditions for sale or reimbursement.

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Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription pharmaceuticals. In some cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States. At the same time, the FDA has committed to expediting the development and review of products bearing the “breakthrough therapy” designation, which has accelerated the regulatory review process for medicines with this designation. The FDA has also undertaken efforts to bring generic competition to market more efficiently and in a more timely manner.

The EU has adopted directives and other legislation concerning the classification, labeling, advertising, wholesale distribution, integrity of the supply chain, enhanced pharmacovigilance monitoring and approval for marketing of medicinal products for human use. These provide mandatory standards throughout the EU, which may be supplemented or implemented with additional regulations by the EU member states. In particular, EU regulators may approve products subject to a number of post-authorization conditions. Examples of typical post-authorization commitments include additional pharmacovigilance, the conduct of clinical trials, the establishment of patient registries, physician or patient education and controlled distribution and prescribing arrangements. Non-compliance with post-authorization conditions, pharmacovigilance and other obligations can lead to regulatory action, including the variation, suspension or withdrawal of the marketing authorizations, or other enforcement or regulatory actions, including the imposition of financial penalties. The Company’s policies and procedures are already consistent with the substance of these directives; consequently, it is believed that they will not have any material effect on the Company’s business.

The Company believes that it will continue to be able to conduct its operations, including launching new drugs, in this regulatory environment. (See “Research and Development” below for a discussion of the regulatory approval process.)

Access to Medicines

As a global health care company, Merck’s primary role is to discover and develop innovative medicines and vaccines. The Company also recognizes that it has an important role to play in helping to improve access to its medicines, vaccines, and to quality health care around the world. The Company’s efforts in this regard are wide-ranging and include a set of principles that the Company strives to embed into its operations and business strategies to guide the Company’s worldwide approach to expanding access to health care. In addition, through innovative social investments, including philanthropic programs and impact investing, Merck is also helping to strengthen health systems and build capacity, particularly in under-resourced communities. The Merck Patient Assistance Program provides medicines and adult vaccines for free to people in the United States who do not have prescription drug or health insurance coverage and who, without the Company’s assistance, cannot afford their Merck medicines and vaccines. In 2011, Merck launched “Merck for Mothers,” a long-term effort with global health partners to end preventable deaths from complications of pregnancy and childbirth. Merck has also provided funds to the Merck Foundation, an independent grantmaking organization, which has partnered with a variety of organizations dedicated to improving global health.

Privacy and Data Protection

The Company is subject to a significant number of privacy and data protection laws and regulations globally, many of which place restrictions on the Company’s ability to transfer, access and use personal data across its business. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly the Company’s business, including both the EU General Data Protection Regulation, which went into effect on May 25, 2018 and imposes penalties of up to 4% of global revenue, and the California Consumer Privacy Act, which became effective January 1, 2020. Additional laws and regulations enacted in the United States, Europe, Asia and Latin America, increased enforcement and litigation activity in the United States and other developed markets, and increased regulatory cooperation among privacy authorities globally. The Company has adopted a comprehensive global privacy program to manage these evolving risks which has been certified as compliant with and approved by the Asia Pacific Economic Cooperation Cross-Border Privacy Rules System, the EU-U.S. and Swiss-U.S. Privacy Shield Programs, and the Binding Corporate Rules in the EU.

Distribution

The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy

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benefit managers and other institutions. Human health vaccines are sold primarily to physicians, wholesalers, physician distributors and government entities. The Company’s professional representatives communicate the effectiveness, safety and value of the Company’s pharmaceutical and vaccine products to health care professionals in private practice, group practices, hospitals and managed care organizations. The Company sells its animal health products to veterinarians, distributors and animal producers.

Raw Materials

Raw materials and supplies, which are generally available from multiple sources, are purchased worldwide and are normally available in quantities adequate to meet the needs of the Company’s business.

Patents, Trademarks and Licenses

Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of its products in the United States and in most major foreign markets. Patents may cover products per se, pharmaceutical formulations, processes for, or intermediates useful in, the manufacture of products, or the uses of products. Protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.

The Food and Drug Administration Modernization Act includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. Current U.S. patent law provides additional patent term for periods when the patented product was under regulatory review by the FDA. The EU also provides an additional six months of pediatric market exclusivity attached to a product’s Supplementary Protection Certificate (SPC). Japan provides the additional term for pediatric studies attached to market exclusivity unrelated to patent term.

Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company has the following key patent protection in the United States, the EU, Japan and China (including the potential for patent term extensions (PTE) and SPCs where indicated) for the following marketed products:

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Product	Year of Expiration (U.S.)	Year of Expiration (EU)⁽¹⁾	Year of Expiration (Japan)⁽²⁾	Year of Expiration (China)
Emend for Injection	Expired	2020⁽³⁾	2020	N/A
Januvia	2022⁽³⁾	2022⁽³⁾	2025-2026	2022
Janumet	2022⁽³⁾	2023	N/A	2022
Janumet XR	2022⁽³⁾	N/A	N/A	2022
Isentress	2024	2023⁽³⁾	2022-2026	2022
Simponi	N/A⁽⁴⁾	2024⁽⁵⁾	N/A⁽⁴⁾	N/A⁽⁴⁾
Lenvima⁽⁶⁾	2025⁽³⁾ (with pending PTE)	2021 (patents), 2026⁽³⁾ (SPCs)	2026	2021
Adempas⁽⁷⁾	2026⁽³⁾	2028⁽³⁾	2027-2028	2023
Bridion	2026⁽³⁾ (with pending PTE)	2023	2024	2020
Nexplanon	2027 (device)	2025 (device)	Not Marketed	2025
Bravecto	2027 (with pending PTE)	2025 (patents), 2029 (SPCs)	2029	2033
Gardasil	2028	2021⁽³⁾	Expired	N/A
Gardasil 9	2028	2025 (patents), 2030⁽³⁾ (SPCs)	N/A	2025
Keytruda	2028	2028 (patents), 2030⁽³⁾ (SPCs)	2032-2033	2028
Lynparza⁽⁸⁾	2028⁽³⁾(with pending PTE)	2024 (patents), 2029⁽³⁾ (SPCs)	2028-2029	2024
Zerbaxa	2028⁽³⁾	2023 (patents), 2028⁽³⁾ (SPCs)	2028 (with pending PTE)	N/A
Belsomra	2029⁽³⁾	N/A	2031	N/A
Prevymis	2029⁽³⁾ (with pending PTE)	2024 (patents), 2029⁽³⁾(SPCs)	2029	N/A
Steglatro⁽⁹⁾	2031⁽³⁾ (with pending PTE)	2029 (patents), 2034⁽³⁾ (SPCs)	N/A	2029
Steglujan⁽⁹⁾	2031(with pending PTE)	2029 (patents), 2034 (SPCs)	N/A	2029
Segluromet⁽⁹⁾	2031 (with pending PTE)	2029 (patents), 2034 (SPCs)	N/A	2029
Delstrigo	2032 (with pending PTE)	2031 (patents), 2033 (SPCs)	N/A	N/A
Pifeltro	2032 (with pending PTE)	2031 (patents), 2033 (SPCs)	N/A	N/A
Recarbrio	2033⁽³⁾(with pending PTE)	N/A	N/A	N/A


Note:	Compound patent unless otherwise noted. Certain of the products listed may be the subject of patent litigation. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.


N/A:	Currently no marketing approval.


⁽¹⁾	The EU date represents the expiration date for the following five countries: France, Germany, Italy, Spain and the United Kingdom (Major EU Markets). If SPC applications have been filed but have not been granted in all Major EU Markets, both the patent expiry date and the SPC expiry date are listed.


⁽²⁾	The PTE system in Japan allows for a patent to be extended more than once provided the later approval is directed to a different indication from that of the previous approval. This may result in multiple PTE approvals for a given patent, each with its own expiration date.


⁽³⁾	Eligible for 6 months Pediatric Exclusivity.


⁽⁴⁾	The Company has no marketing rights in the U.S., Japan or China.


⁽⁵⁾	Expiration of the distribution agreement with Janssen Pharmaceuticals, Inc.


⁽⁶⁾	Part of a global strategic oncology collaboration with Eisai.


⁽⁷⁾	Being commercialized in a worldwide collaboration with Bayer AG.


⁽⁸⁾	Part of a global strategic oncology collaboration with AstraZeneca.


⁽⁹⁾	Being commercialized and promoted in a worldwide, except Japan, collaboration with Pfizer Inc.

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The Company also has the following key U.S. patent protection for drug candidates in Phase 3 development:



Phase 3 Drug Candidate	Currently Anticipated Year of Expiration (in the U.S.)
MK-7264 (gefapixant)	2027
MK-1242 (vericiguat)⁽¹⁾	2031
V114 (pneumoconjugate vaccine)	2031
MK-8591A (islatravir/doravirine)	2032


⁽¹⁾	Being developed in a worldwide collaboration with Bayer AG.

Unless otherwise noted, the patents in the above charts are compound patents. Each patent may be subject to a future patent term restoration of up to five years and six month pediatric market exclusivity, either or both of which may be available. In addition, depending on the circumstances surrounding any final regulatory approval of the compound, there may be other listed patents or patent applications pending that could have relevance to the product as finally approved; the relevance of any such application would depend upon the claims that ultimately may be granted and the nature of the final regulatory approval of the product. Also, regulatory exclusivity tied to the protection of clinical data is complementary to patent protection and, in some cases, may provide more effective or longer lasting marketing exclusivity than a compound’s patent estate. In the United States, the data protection generally runs five years from first marketing approval of a new chemical entity, extended to seven years for an orphan drug indication and 12 years from first marketing approval of a biological product.

While the expiration of a product patent normally results in a loss of market exclusivity for the covered pharmaceutical product, commercial benefits may continue to be derived from: (i) later-granted patents on processes and intermediates related to the most economical method of manufacture of the active ingredient of such product; (ii) patents relating to the use of such product; (iii) patents relating to novel compositions and formulations; and (iv) in the United States and certain other countries, market exclusivity that may be available under relevant law. The effect of product patent expiration on pharmaceutical products also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries.

Additions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by an increase in the number of incentives for and use of generic products. Additionally, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties.

For further information with respect to the Company’s patents, see Item 1A. “Risk Factors” and Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below.

Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely.

Royalty income in 2019 on patent and know-how licenses and other rights amounted to $135 million. Merck also incurred royalty expenses amounting to $1.7 billion in 2019 under patent and know-how licenses it holds.

Research and Development

The Company’s business is characterized by the introduction of new products or new uses for existing products through a strong research and development program. At December 31, 2019, approximately 15,600 people were employed in the Company’s research activities. The Company prioritizes its research and development efforts and focuses on candidates that it believes represent breakthrough science that will make a difference for patients and payers.

The Company maintains a number of long-term exploratory and fundamental research programs in biology and chemistry as well as research programs directed toward product development. The Company’s research and development model is designed to increase productivity and improve the probability of success by prioritizing the

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Company’s research and development resources on candidates the Company believes are capable of providing unambiguous, promotable advantages to patients and payers and delivering the maximum value of its approved medicines and vaccines through new indications and new formulations. Merck is pursuing emerging product opportunities independent of therapeutic area or modality (small molecule, biologics and vaccines) and is building its biologics capabilities. The Company is committed to ensuring that externally sourced programs remain an important component of its pipeline strategy, with a focus on supplementing its internal research with a licensing and external alliance strategy focused on the entire spectrum of collaborations from early research to late-stage compounds, as well as access to new technologies.

The Company’s clinical pipeline includes candidates in multiple disease areas, including cancer, cardiovascular diseases, diabetes and other metabolic diseases, infectious diseases, neurosciences, pain, respiratory diseases, and vaccines.

In the development of human health products, industry practice and government regulations in the United States and most foreign countries provide for the determination of effectiveness and safety of new chemical compounds through pre-clinical tests and controlled clinical evaluation. Before a new drug or vaccine may be marketed in the United States, recorded data on pre-clinical and clinical experience are included in the NDA for a drug or the Biologics License Application (BLA) for a vaccine or biologic submitted to the FDA for the required approval.

Once the Company’s scientists discover a new small molecule compound or biologic that they believe has promise to treat a medical condition, the Company commences pre-clinical testing with that compound. Pre-clinical testing includes laboratory testing and animal safety studies to gather data on chemistry, pharmacology, immunogenicity and toxicology. Pending acceptable pre-clinical data, the Company will initiate clinical testing in accordance with established regulatory requirements. The clinical testing begins with Phase 1 studies, which are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound in humans. If favorable, additional, larger Phase 2 studies are initiated to determine the efficacy of the compound in the affected population, define appropriate dosing for the compound, as well as identify any adverse effects that could limit the compound’s usefulness. In some situations, the clinical program incorporates adaptive design methodology to use accumulating data to decide how to modify aspects of the ongoing clinical study as it continues, without undermining the validity and integrity of the trial. One type of adaptive clinical trial is an adaptive Phase 2a/2b trial design, a two-stage trial design consisting of a Phase 2a proof-of-concept stage and a Phase 2b dose-optimization finding stage. If data from the Phase 2 trials are satisfactory, the Company commences large-scale Phase 3 trials to confirm the compound’s efficacy and safety. Another type of adaptive clinical trial is an adaptive Phase 2/3 trial design, a study that includes an interim analysis and an adaptation that changes the trial from having features common in a Phase 2 study (e.g. multiple dose groups) to a design similar to a Phase 3 trial. An adaptive Phase 2/3 trial design reduces timelines by eliminating activities which would be required to start a separate study. Upon completion of Phase 3 trials, if satisfactory, the Company submits regulatory filings with the appropriate regulatory agencies around the world to have the product candidate approved for marketing. There can be no assurance that a compound that is the result of any particular program will obtain the regulatory approvals necessary for it to be marketed.

Vaccine development follows the same general pathway as for drugs. Pre-clinical testing focuses on the vaccine’s safety and ability to elicit a protective immune response (immunogenicity). Pre-marketing vaccine clinical trials are typically done in three phases. Initial Phase 1 clinical studies are conducted in normal subjects to evaluate the safety, tolerability and immunogenicity of the vaccine candidate. Phase 2 studies are dose-ranging studies. Finally, Phase 3 trials provide the necessary data on effectiveness and safety. If successful, the Company submits regulatory filings with the appropriate regulatory agencies.

In the United States, the FDA review process begins once a complete NDA or BLA is submitted, received and accepted for review by the agency. Within 60 days after receipt, the FDA determines if the application is sufficiently complete to permit a substantive review. The FDA also assesses, at that time, whether the application will be granted a priority review or standard review. Pursuant to the Prescription Drug User Fee Act V (PDUFA), the FDA review period target for NDAs or original BLAs is either six months, for priority review, or ten months, for a standard review, from the time the application is deemed sufficiently complete. Once the review timelines are determined, the FDA will generally act upon the application within those timelines, unless a major amendment has been submitted (either at the Company’s own initiative or the FDA’s request) to the pending application. If this occurs, the FDA may extend the review period to allow for review of the new information, but by no more than three months. Extensions to the review period are communicated to the Company. The FDA can act on an application either by issuing an approval letter or by issuing a Complete Response Letter (CRL) stating that the application will not be approved in its present form and describing all deficiencies that the FDA has identified. Should the Company wish to pursue an application after receiving a CRL, it can resubmit the application with information that addresses the questions or issues identified by the FDA in

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order to support approval. Resubmissions are subject to review period targets, which vary depending on the underlying submission type and the content of the resubmission.

The FDA has four program designations — Fast Track, Breakthrough Therapy, Accelerated Approval, and Priority Review — to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. The Fast Track designation provides pharmaceutical manufacturers with opportunities for frequent interactions with FDA reviewers during the product’s development and the ability for the manufacturer to do a rolling submission of the NDA/BLA. A rolling submission allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. The Breakthrough Therapy designation provides manufacturers with all of the features of the Fast Track designation as well as intensive guidance on implementing an efficient development program for the product and a commitment by the FDA to involve senior managers and experienced staff in the review. The Accelerated Approval designation allows the FDA to approve a product based on an effect on a surrogate or intermediate endpoint that is reasonably likely to predict a product’s clinical benefit and generally requires the manufacturer to conduct required post-approval confirmatory trials to verify the clinical benefit. The Priority Review designation means that the FDA’s goal is to take action on the NDA/BLA within six months, compared to ten months under standard review.

In addition, under the Generating Antibiotic Incentives Now Act, the FDA may grant Qualified Infectious Disease Product (QIDP) status to antibacterial or antifungal drugs intended to treat serious or life threatening infections including those caused by antibiotic or antifungal resistant pathogens, novel or emerging infectious pathogens, or other qualifying pathogens. QIDP designation offers certain incentives for development of qualifying drugs, including Priority Review of the NDA when filed, eligibility for Fast Track designation, and a five-year extension of applicable exclusivity provisions under the Food, Drug and Cosmetic Act.

The primary method the Company uses to obtain marketing authorization of pharmaceutical products in the EU is through the “centralized procedure.” This procedure is compulsory for certain pharmaceutical products, in particular those using biotechnological processes, and is also available for certain new chemical compounds and products. A company seeking to market an innovative pharmaceutical product through the centralized procedure must file a complete set of safety data and efficacy data as part of a Marketing Authorization Application (MAA) with the European Medicines Agency (EMA). After the EMA evaluates the MAA, it provides a recommendation to the EC and the EC then approves or denies the MAA. It is also possible for new chemical products to obtain marketing authorization in the EU through a “mutual recognition procedure” in which an application is made to a single member state and, if the member state approves the pharmaceutical product under a national procedure, the applicant may submit that approval to the mutual recognition procedure of some or all other member states.

Outside of the United States and the EU, the Company submits marketing applications to national regulatory authorities. Examples of such are the Ministry of Health, Labour and Welfare in Japan, Health Canada, Agência Nacional de Vigilância Sanatária in Brazil, Korea Food and Drug Administration in South Korea, Therapeutic Goods Administration in Australia and the National Medical Products Administration in China. Each country has a separate and independent review process and timeline. In many markets, approval times can be longer as the regulatory authority requires approval in a major market, such as the United States or the EU, and issuance of a Certificate of Pharmaceutical Product from that market before initiating their local review process.

Research and Development Update

The Company currently has several candidates under regulatory review in the United States and internationally.

Keytruda is an anti-PD-1 therapy approved for the treatment of many cancers that is in clinical development for expanded indications. These approvals were the result of a broad clinical development program that currently consists of more than 1,000 clinical trials, including more than 600 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: biliary tract, cervical, colorectal, cutaneous squamous cell, endometrial, gastric, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal, non-small-cell lung, ovarian, PMBCL, prostate, renal, small-cell lung, triple-negative breast, and urothelial, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.

Keytruda is under review in the EU as monotherapy for the first-line treatment of patients with stage III NSCLC who are not candidates for surgical resection or definitive chemoradiation, or metastatic NSCLC, and whose tumors express PD-L1 (TPS ≥1%) with no EGFR or ALK genomic tumor aberrations based on results from the Phase 3 KEYNOTE-042 trial.

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Keytruda is under review in Japan as monotherapy and in combination with chemotherapy for the first-line treatment of advanced gastric or gastroesophageal junction adenocarcinoma based on results from the pivotal Phase 3 KEYNOTE-062 trial.

Keytruda is also under review in Japan as monotherapy for the second-line treatment of advanced or metastatic esophageal or esophagogastric junction carcinoma based on the results of the Phase 3 KEYNOTE-181 trial. Merck has made the decision to withdraw its Type II variation application for Keytruda for this indication in the EU.

In October 2019, the FDA accepted a supplemental BLA seeking use of Keytruda for the treatment of patients with recurrent and/or metastatic cutaneous squamous cell carcinoma (cSCC) that is not curable by surgery or radiation based on the results of the KEYNOTE-629 trial. The FDA set a PDUFA date of June 29, 2020.

In February 2020, Merck announced the FDA issued a Complete Response Letter (CRL) regarding Merck’s supplemental BLAs seeking to update the dosing frequency for Keytruda to include a 400 mg dose infused over 30 minutes every-six-weeks (Q6W) option in multiple indications. The submitted applications are based on pharmacokinetic modeling and simulation data presented at the 2018 American Society of Clinical Oncology (ASCO) Annual Meeting. These data supported the EC approval of 400 mg Q6W dosing for Keytruda monotherapy indications in March 2019. Merck is reviewing the letter and will discuss next steps with the FDA.

Additionally, Keytruda has received Breakthrough Therapy designation from the FDA in combination with neoadjuvant chemotherapy for the treatment of high-risk early-stage triple-negative breast cancer (TNBC) and in combination with enfortumab vedotin, in the first-line setting for the treatment of patients with unresectable locally advanced or metastatic urothelial cancer who are not eligible for cisplatin-containing chemotherapy. The FDA’s Breakthrough Therapy designation is intended to expedite the development and review of a candidate that is planned for use, alone or in combination, to treat a serious or life-threatening disease or condition when preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.

In September 2019, Merck announced results from the pivotal neoadjuvant/adjuvant Phase 3 KEYNOTE-522 trial in patients with early-stage TNBC. The trial investigated a regimen of neoadjuvant Keytruda plus chemotherapy, followed by adjuvant Keytruda as monotherapy (the Keytruda regimen) compared with a regimen of neoadjuvant chemotherapy followed by adjuvant placebo (the chemotherapy-placebo regimen). Interim findings were presented at the European Society for Medical Oncology (ESMO) 2019 Congress. In the neoadjuvant phase, Keytruda plus chemotherapy resulted in a statistically significant increase in pathological complete response (pCR) versus chemotherapy in patients with early-stage TNBC. The improvement seen when adding Keytruda to neoadjuvant chemotherapy was observed regardless of PD-L1 expression. In the other dual primary endpoint of event-free-survival (EFS), with a median follow-up of 15.5 months, the Keytruda regimen reduced the risk of progression in the neoadjuvant phase and recurrence in the adjuvant phase compared with the chemotherapy-placebo regimen. Merck continues to discuss interim analysis data from KEYNOTE-522 with regulatory authorities. The Keytruda breast cancer clinical development program encompasses several internal and external collaborative studies.

In February 2020, Merck announced that the pivotal Phase 3 KEYNOTE-355 trial investigating Keytruda in combination with chemotherapy met one of its dual primary endpoints of progression-free survival (PFS) in patients with metastatic triple-negative breast cancer (mTNBC) whose tumors expressed PD-L1 (CPS ≥10). Based on an interim analysis conducted by an independent Data Monitoring Committee (DMC), first-line treatment with Keytruda in combination with chemotherapy (nab-paclitaxel, paclitaxel or gemcitabine/carboplatin) demonstrated a statistically significant and clinically meaningful improvement in PFS compared to chemotherapy alone in these patients. Based on the recommendation of the DMC, the trial will continue without changes to evaluate the other dual primary endpoint of overall survival (OS).

In May 2019, Merck announced that the Phase 3 KEYNOTE-119 trial evaluating Keytruda as monotherapy for the second- or third-line treatment of patients with metastatic TNBC did not meet its pre-specified primary endpoint of superior OS compared to chemotherapy. Other endpoints were not formally tested per the study protocol because the primary endpoint of OS was not met.

In June 2019, Merck announced full results from the pivotal Phase 3 KEYNOTE-062 trial evaluating Keytruda as monotherapy and in combination with chemotherapy for the first-line treatment of advanced gastric or gastroesophageal junction adenocarcinoma. In the monotherapy arm of the study, Keytruda met a primary endpoint by demonstrating noninferiority to chemotherapy, the current standard of care, for OS in patients whose tumors expressed PD-L1 (CPS ≥1). In the combination arm of KEYNOTE-062, Keytruda plus chemotherapy was not found to be statistically superior for OS (CPS ≥1 or CPS ≥10) or PFS (CPS ≥1) compared with chemotherapy alone. Results were presented at the 2019 American Society of Clinical Oncology (ASCO) Annual Meeting. In September 2017, the FDA

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approved Keytruda as a third-line treatment for previously treated patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction cancer whose tumors express PD-L1 (CPS ≥1) as determined by an FDA-approved test. KEYNOTE-062 was a potential confirmatory trial for this accelerated, third-line approval. In addition to KEYNOTE-062, additional first-line, Phase 3 studies in Merck’s gastric clinical program include KEYNOTE-811 and KEYNOTE-859, as well as KEYNOTE-585 in the neoadjuvant and adjuvant treatment setting.

In January 2020, Merck announced that the Phase 3 KEYNOTE-604 trial investigating Keytruda in combination with chemotherapy met one of its dual primary endpoints of PFS in the first-line treatment of patients with extensive stage SCLC. At the final analysis of the study, there was also an improvement in OS for patients treated with Keytruda in combination with chemotherapy compared to chemotherapy alone; however, these OS results did not meet statistical significance per the pre-specified statistical plan. Results will be presented at an upcoming medical meeting and discussed with regulatory authorities.

Lynparza, is an oral PARP inhibitor currently approved for certain types of advanced ovarian, breast and pancreatic cancers being co-developed for multiple cancer types as part of a collaboration with AstraZeneca.

Lynparza is under review in the EU as a first-line maintenance monotherapy for patients with gBRCAm metastatic pancreatic cancer whose disease has not progressed following first-line platinum-based chemotherapy. Lynparza was approved for this indication by the FDA in December 2019 based on results from the Phase 3 POLO trial. A decision from the EMA is expected in the second half of 2020.

In January 2020, the FDA accepted a supplemental NDA for Lynparza in combination with bevacizumab for the maintenance treatment of women with advanced ovarian cancer whose disease showed a complete or partial response to first-line treatment with platinum-based chemotherapy and bevacizumab based on the results from the pivotal Phase 3 PAOLA-1 trial. A PDUFA date is set for the second quarter of 2020. This indication is also under review in the EU.

In January 2020, the FDA accepted for Priority Review a supplemental NDA for Lynparza for the treatment of patients with metastatic castration-resistant prostate cancer (mCRPC) and deleterious or suspected deleterious germline or somatic homologous recombination repair (HRR) gene mutations, who have progressed following prior treatment with a new hormonal agent based on positive results from the Phase 3 PROfound trial. A PDUFA date is set for the second quarter of 2020. This indication is also under review in the EU.

In June 2019, Merck and AstraZeneca presented full results from the Phase 3 SOLO-3 trial which evaluated Lynparza, compared to chemotherapy, for the treatment of platinum-sensitive relapsed patients with gBRCAm advanced ovarian cancer, who have received two or more prior lines of chemotherapy. The results from the trial showed a statistically-significant and clinically-meaningful improvement in objective response rate (ORR) in the Lynparza arm compared to the chemotherapy arm. The key secondary endpoint of PFS was also significantly increased in the Lynparza arm compared to the chemotherapy arm. The results were presented at the 2019 ASCO Annual Meeting.

MK-5618, selumetinib, is a MEK 1/2 inhibitor being co-developed as part of a strategic collaboration with AstraZeneca. Selumetinib is under Priority Review with the FDA as a potential new medicine for pediatric patients aged three years and older with neurofibromatosis type 1 (NF1) and symptomatic, inoperable plexiform neurofibromas. This regulatory submission was based on positive results from the National Cancer Institute Cancer Therapy Evaluation Program-sponsored SPRINT Phase 2 Stratum 1 trial. A PDUFA date is set for the second quarter of 2020.

V503 is under review in Japan for an initial indication in females for the prevention of certain HPV-related diseases and precursors.

In February 2020, the FDA accepted for Priority Review a supplemental BLA for Gardasil 9 for the prevention of certain head and neck cancers caused by vaccine-type HPV in females and males 9 through 45 years of age. The FDA set a PDUFA date of June 2020.

In addition to the candidates under regulatory review, the Company has several drug candidates in Phase 3 clinical development in addition to the Keytruda programs discussed above.

Lynparza, in addition to the indications under review discussed above, is in Phase 3 development in combination with Keytruda for the treatment of NSCLC.

Lenvima is an orally available tyrosine kinase inhibitor currently approved for certain types of thyroid cancer, HCC, and in combination for certain patients with RCC being co-developed as part of a strategic collaboration with Eisai. Pursuant to the agreement, the companies will jointly initiate clinical studies evaluating the Keytruda/Lenvima combination in six types of cancer (endometrial cancer, NSCLC, HCC, HNSCC, bladder cancer and melanoma), as well as a basket trial targeting multiple cancer types. The FDA granted Breakthrough Therapy designation

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for Keytruda in combination with Lenvima both for the potential treatment of patients with advanced and/or metastatic RCC and for the potential treatment of patients with unresectable HCC not amenable to locoregional treatment.

MK-7264, gefapixant, is a selective, non-narcotic, orally-administered P2X3-receptor antagonist being investigated in Phase 3 trials for the treatment of refractory, chronic cough and in a Phase 2 trial for the treatment of women with endometriosis-related pain.

MK-1242, vericiguat, is a sGC stimulator for the potential treatment of patients with worsening chronic heart failure being developed as part of a worldwide strategic collaboration between Merck and Bayer. Vericiguat is being studied in patients suffering from chronic heart failure with reduced ejection fraction (Phase 3 clinical trial) and from chronic heart failure with preserved ejection fraction (Phase 2 clinical trial). In November 2019, Merck announced that the Phase 3 VICTORIA study evaluating the efficacy and safety of vericiguat met the primary efficacy endpoint. Vericiguat reduced the risk of the composite endpoint of heart failure hospitalization or cardiovascular death in patients with worsening chronic heart failure with reduced ejection fraction compared to placebo when given in combination with available heart failure therapies. The results of the VICTORIA study will be presented at an upcoming medical meeting in 2020.

V114 is an investigational polyvalent conjugate vaccine for the prevention of pneumococcal disease. In June 2018, Merck initiated the first Phase 3 study in the adult population for the prevention of invasive pneumococcal disease. Currently six Phase 3 adult studies are ongoing, including studies in healthy adults 50 years of age or older, adults with risk factors for pneumococcal disease, those infected with HIV, and those who are recipients of allogeneic hematopoietic stem cell transplant. In October 2018, Merck began the first Phase 3 study in the pediatric population. Currently, eight studies are ongoing, including studies in healthy infants and in children afflicted with sickle cell disease. V114 has received Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease caused by the vaccine serotypes in pediatric patients (6 weeks to 18 years of age) and in adults.

The chart below reflects the Company’s research pipeline as of February 21, 2020. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to cancer) and additional claims, line extensions or formulations for in-line products are not shown.

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Phase 2	Phase 3 (Phase 3 Entry Date)	Under Review
Cancer	Cancer	New Molecular Entities/Vaccines
MK-3475 Keytruda	MK-3475 Keytruda	Pediatric Neurofibromatosis Type-1
Advanced Solid Tumors	Biliary Tract (September 2019)	MK-5618 (selumetinib)⁽¹⁾ (U.S.)
MK-6482	Breast (October 2015)	HPV Vaccine
Renal Cell Carcinoma	Cervical (October 2018) (EU)	V503 Human Papillomavirus 9-valent Vaccine,
MK-7123⁽²⁾	Colorectal (November 2015)	Recombinant (JPN)
Solid Tumors	Cutaneous Squamous Cell Carcinoma	Certain Supplemental Filings
MK-7339 Lynparza⁽¹⁾	(August 2019) (EU)	Cancer
Advanced Solid Tumors	Endometrial (August 2019) (EU)	MK-3475 Keytruda
MK-7690 (vicriviroc)⁽²⁾	Esophageal (December 2015) (EU)	● First-Line Metastatic Non-Small-Cell Lung
Colorectal	Gastric (May 2015) (EU)	Cancer (KEYNOTE-042) (EU)
MK-7902 Lenvima⁽¹⁾	Hepatocellular (May 2016) (EU)	● First-Line Metastatic Gastric Cancer
Biliary Tract	Mesothelioma (May 2018)	(KEYNOTE-062) (JPN)
V937	Nasopharyngeal (April 2016)	● Recurrent Locally Advanced or Metastatic
Melanoma	Ovarian (December 2018)	Esophageal Cancer (KEYNOTE-180/181)
MK-7684⁽²⁾	Prostate (May 2019)	(JPN)
Non-Small-Cell Lung	Small-Cell Lung (May 2017) (EU)	● Recurrent and/or Metastatic Cutaneous
MK-1026	MK-7339 Lynparza^(1,2)	Squamous Cell Carcinoma
Hematological Malignancies	Non-Small-Cell Lung (June 2019)	(KEYNOTE-629) (U.S.)
MK-4280⁽²⁾	MK-7902 Lenvima^(1,2)	● Alternative Dosing Regimen⁽³⁾
Hematological Malignancies	Bladder (May 2019)	(Q6W) (U.S.)
Non-Small-Cell Lung	Endometrial (June 2018) (EU)	MK-7339 Lynparza⁽¹⁾
MK-1308⁽²⁾	Head and Neck Squamous Cell Carcinoma	● First-Line gBRCAm Pancreatic Cancer
Non-Small-Cell Lung	(February 2020)	(POLO) (EU)
MK-5890⁽²⁾	Melanoma (March 2019)	● First-Line Maintenance Newly Diagnosed
Non-Small-Cell Lung	Non-Small-Cell Lung (March 2019)	Advanced Ovarian Cancer (PAOLA)
Cytomegalovirus	Cough	(U.S.) (EU)
V160	MK-7264 (gefapixant) (March 2018)	● Metastatic Prostate Cancer (PROfound)
HIV-1 Infection	Heart Failure	(U.S.) (EU)
MK-8591 (islatravir)	MK-1242 (vericiguat) (September 2016)⁽¹⁾	Footnotes:
Overgrowth Syndrome	HIV-1 Infection	⁽¹⁾ Being developed in a collaboration.
MK-7075	MK-8591A (islatravir/doravirine) (February 2020)	⁽²⁾ Being developed in combination with
Pediatric Neurofibromatosis Type-1	Pneumoconjugate Vaccine	Keytruda.
MK-5618 (selumetinib)⁽¹⁾(EU)	V114 (June 2018)	⁽³⁾The Company received a CRL in February
Respiratory Syncytial Virus		2020. Merck is reviewing the letter and will
MK-1654		discuss next steps with the FDA.
Schizophrenia
MK-8189

Employees

As of December 31, 2019, the Company had approximately 71,000 employees worldwide, with approximately 26,000 employed in the United States, including Puerto Rico. Approximately 30% of worldwide employees of the Company are represented by various collective bargaining groups.

Restructuring Activities

In early 2019, Merck approved a new global restructuring program (Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization, builds on prior restructuring programs and does not include any actions associated with the planned spin-off of NewCo. As the Company continues to evaluate its global footprint and overall operating model, it has subsequently identified additional actions under the Restructuring Program, and could identify further actions over time. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023. Actions under previous global restructuring programs have been substantially completed.

Environmental Matters

The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $19 million in 2019 and are estimated at $47 million in the aggregate for the years 2020 through 2024. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and, in management’s opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $67 million and $71 million at December 31, 2019 and 2018, respectively. Although it is not possible to predict with certainty the outcome

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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 $58 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Company’s financial condition, results of operations, liquidity or capital resources for any year.

Merck believes that climate change could present risks to its business. Some of the potential impacts of climate change to its business include increased operating costs due to additional regulatory requirements, physical risks to the Company’s facilities, water limitations and disruptions to its supply chain. These potential risks are integrated into the Company’s business planning including investment in reducing energy, water use and greenhouse gas emissions. The Company does not believe these risks are material to its business at this time.

Geographic Area Information

The Company’s operations outside the United States are conducted primarily through subsidiaries. Sales worldwide by subsidiaries outside the United States as a percentage of total Company sales were 57% of sales in each of 2019, 2018 and 2017.

The Company’s worldwide business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansion of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions.

Merck has operations in countries located in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific. Business in these developing areas, while sometimes less stable, offers important opportunities for growth over time.

Available Information

The Company’s Internet website address is www.merck.com. The Company will make available, free of charge at the “Investors” portion of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC). The address of that website is www.sec.gov. In addition, the Company will provide without charge a copy of its Annual Report on Form 10-K, including financial statements and schedules, upon the written request of any shareholder to the Office of the Secretary, Merck & Co., Inc., 2000 Galloping Hill Road, K1-4157, Kenilworth, NJ 07033 U.S.A.

The Company’s corporate governance guidelines and the charters of the Board of Directors’ four standing committees are available on the Company’s website at www.merck.com/about/leadership and all such information is available in print to any shareholder who requests it from the Company.


Item 1A.	Risk Factors.

Investors should carefully consider all of the information set forth in this Form 10-K, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones the Company faces. Additional risks not currently known to the Company or that the Company presently deems immaterial may also impair its business operations. The Company’s business, financial condition, results of operations or prospects could be materially adversely affected by any of these risks. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. The Company’s results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks it faces described below and elsewhere. See “Cautionary Factors that May Affect Future Results” below.

The Company is dependent on its patent rights, and if its patent rights are invalidated or circumvented, its business could be materially adversely affected.

Patent protection is considered, in the aggregate, to be of material importance to the Company’s marketing of human health and animal health products in the United States and in most major foreign markets. Patents covering products that it has introduced normally provide market exclusivity, which is important for the successful marketing

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and sale of its products. The Company seeks patents covering each of its products in each of the markets where it intends to sell the products and where meaningful patent protection is available.

Even if the Company succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent its patents and patent applications. It is important for the Company’s business to defend successfully the patent rights that provide market exclusivity for its products. The Company is often involved in patent disputes relating to challenges to its patents or claims by third parties of infringement against the Company. The Company defends its patents both within and outside the United States, including by filing claims of infringement against other parties. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below. In particular, manufacturers of generic pharmaceutical products from time to time file abbreviated NDAs with the FDA seeking to market generic forms of the Company’s products prior to the expiration of relevant patents owned or licensed by the Company. The Company normally responds by defending its patent, including by filing lawsuits alleging patent infringement. Patent litigation and other challenges to the Company’s patents are costly and unpredictable and may deprive the Company of market exclusivity for a patented product or, in some cases, third-party patents may prevent the Company from marketing and selling a product in a particular geographic area.

Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect the Company’s results of operations. Further, court decisions relating to other companies’ patents, potential legislation in both the U.S. and certain foreign markets relating to patents, as well as regulatory initiatives may result in a more general weakening of intellectual property protection.

If one or more important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available. The Company’s results of operations may be adversely affected by the lost sales unless and until the Company has launched commercially successful products that replace the lost sales. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively affect product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.

A chart listing the patent protection for certain of the Company’s marketed products, and U.S. patent protection for candidates in Phase 3 clinical development is set forth above in Item 1. “Business — Patents, Trademarks and Licenses.”

As the Company’s products lose market exclusivity, the Company generally experiences a significant and rapid loss of sales from those products.

The Company depends upon patents to provide it with exclusive marketing rights for its products for some period of time. Loss of patent protection for one of the Company’s products typically leads to a significant and rapid loss of sales for that product as lower priced generic versions of that drug become available. In the case of products that contribute significantly to the Company’s sales, the loss of market exclusivity can have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects. For example, the patents that provided U.S. and EU market exclusivity for certain forms of Noxafil expired in July 2019 and December 2019, respectively, and the Company anticipates a significant decline in U.S. and EU Noxafil sales. Also, the patent that provided U.S. market exclusivity for NuvaRing expired in April 2018 and generic competition began in December 2019. The Company anticipates a rapid and substantial decline in U.S. NuvaRing sales in 2020 as a result of this generic competition. In addition, the patents that provide market exclusivity for Januvia and Janumet in the U.S. expire in July 2022 (although six-month pediatric exclusivity may extend this date). The patent that provides market exclusivity for Januvia in the EU expires in July 2022 (although pediatric exclusivity may extend this date to September 2022). Finally, the SPC that provides market exclusivity for Janumet in the EU expires in April 2023. The Company anticipates sales of Januvia and Janumet in these markets will decline substantially after these patent expiries.

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Key products generate a significant amount of the Company’s profits and cash flows, and any events that adversely affect the markets for its leading products could have a material adverse effect on the Company’s results of operations and financial condition.

The Company’s ability to generate profits and operating cash flow depends largely upon the continued profitability of the Company’s key products, such as Keytruda, Gardasil/Gardasil 9, Januvia, Janumet, and Bridion. In particular, in 2019, the Company’s oncology portfolio, led by Keytruda, represented the majority of the Company’s revenue and earnings growth. As a result of the Company’s dependence on key products, any event that adversely affects any of these products or the markets for any of these products could have a significant adverse impact on results of operations and cash flows. These events could include loss of patent protection, increased costs associated with manufacturing, generic or over-the-counter availability of the Company’s product or a competitive product, the discovery of previously unknown side effects, results of post-approval trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of the product for any reason. Such events could have a material adverse effect on the sales of any such products.

The Company’s research and development efforts may not succeed in developing commercially successful products and the Company may not be able to acquire commercially successful products in other ways; in consequence, the Company may not be able to replace sales of successful products that have lost patent protection.

Like other major pharmaceutical companies, in order to remain competitive, the Company must continue to launch new products. Expected declines in sales of products after the loss of market exclusivity mean that the Company’s future success is dependent on its pipeline of new products, including new products that it may develop through collaborations and joint ventures and products that it is able to obtain through license or acquisition. To accomplish this, the Company commits substantial effort, funds and other resources to research and development, both through its own dedicated resources and through various collaborations with third parties. There is a high rate of failure inherent in the research and development process for new drugs. As a result, there is a high risk that funds invested by the Company in research programs will not generate financial returns. This risk profile is compounded by the fact that this research has a long investment cycle. To bring a pharmaceutical compound from the discovery phase to market may take a decade or more and failure can occur at any point in the process, including later in the process after significant funds have been invested.

For a description of the research and development process, see Item 1. “Business — Research and Development” above. Each phase of testing is highly regulated and during each phase there is a substantial risk that the Company will encounter serious obstacles or will not achieve its goals. Therefore, the Company may abandon a product in which it has invested substantial amounts of time and resources. Some of the risks encountered in the research and development process include the following: pre-clinical testing of a new compound may yield disappointing results; competing products from other manufacturers may reach the market first; clinical trials of a new drug may not be successful; a new drug may not be effective or may have harmful side effects; a new drug may not be approved by the regulators for its intended use; it may not be possible to obtain a patent for a new drug; payers may refuse to cover or reimburse the new product; or sales of a new product may be disappointing.

The Company cannot state with certainty when or whether any of its products now under development will be approved or launched; whether it will be able to develop, license or otherwise acquire compounds, product candidates or products; or whether any products, once launched, will be commercially successful. The Company must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover its substantial research and development costs and to replace sales that are lost as profitable products lose market exclusivity or are displaced by competing products or therapies. Failure to do so in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial condition and prospects.

The Company’s success is dependent on the successful development and marketing of new products, which are subject to substantial risks.

Products that appear promising in development may fail to reach the market or fail to succeed for numerous reasons, including the following:

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•	findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;


•	failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications, or the anticipated labeling, and uncertainties about the time required to obtain regulatory approvals and the benefit/risk standards applied by regulatory agencies in determining whether to grant approvals;


•	failure in certain markets to obtain reimbursement commensurate with the level of innovation and clinical benefit presented by the product;


•	lack of economic feasibility due to manufacturing costs or other factors; and


•	preclusion from commercialization by the proprietary rights of others.

In the future, if certain pipeline programs are cancelled or if the Company believes that their commercial prospects have been reduced, the Company may recognize material non-cash impairment charges for those programs that were measured at fair value and capitalized in connection with acquisitions or certain collaborations.

Failure to successfully develop and market new products in the short term or long term would have a material adverse effect on the Company’s business, results of operations, cash flow, financial condition and prospects.

The Company’s products, including products in development, cannot be marketed unless the Company obtains and maintains regulatory approval.

The Company’s activities, including research, pre-clinical testing, clinical trials and the manufacturing and marketing of its products, are subject to extensive regulation by numerous federal, state and local governmental authorities in the United States, including the FDA, and by foreign regulatory authorities, including in the EU, Japan and China. In the United States, the FDA administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals. In many cases, the FDA requirements have increased the amount of time and money necessary to develop new products and bring them to market in the United States. Regulation outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, reduction in the cost of drugs. The FDA and foreign regulatory authorities, including in Japan and China, have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product.

Even if the Company is successful in developing new products, it will not be able to market any of those products unless and until it has obtained all required regulatory approvals in each jurisdiction where it proposes to market the new products. Once obtained, the Company must maintain approval as long as it plans to market its new products in each jurisdiction where approval is required. The Company’s failure to obtain approval, significant delays in the approval process, or its failure to maintain approval in any jurisdiction will prevent it from selling the products in that jurisdiction. The Company would not be able to realize revenues for those new products in any jurisdiction where it does not have approval.

Developments following regulatory approval may adversely affect sales of the Company’s products.

Even after a product reaches the market, certain developments following regulatory approval may decrease demand for the Company’s products, including the following:


•	results in post-approval Phase 4 trials or other studies;


•	the re-review of products that are already marketed;


•	the recall or loss of marketing approval of products that are already marketed;


•	changing government standards or public expectations regarding safety, efficacy, quality or labeling changes; and


•	scrutiny of advertising and promotion.

In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of the Company and of competitors within the industry have raised concerns that have led to recalls, withdrawals or adverse

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labeling of marketed products. Clinical trials and post-marketing surveillance of certain marketed drugs also have raised concerns among some prescribers and patients relating to the safety or efficacy of pharmaceutical products in general that have negatively affected the sales of such products. In addition, increased scrutiny of the outcomes of clinical trials has led to increased volatility in market reaction. Further, these matters often attract litigation and, even where the basis for the litigation is groundless, considerable resources may be needed to respond.

In addition, following in the wake of product withdrawals and other significant safety issues, health authorities such as the FDA, the EMA, Japan’s PMDA and China’s NMPA have increased their focus on safety when assessing the benefit/risk balance of drugs. Some health authorities appear to have become more cautious when making decisions about approvability of new products or indications.

If previously unknown side effects are discovered or if there is an increase in negative publicity regarding known side effects of any of the Company’s products, it could significantly reduce demand for the product or require the Company to take actions that could negatively affect sales, including removing the product from the market, restricting its distribution or applying for labeling changes. Further, in the current environment in which all pharmaceutical companies operate, the Company is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and/or marketing activities. In addition, dissemination of promotional materials through evolving digital channels serves to increase visibility and scrutiny in the marketplace.

The Company faces intense competition from lower cost generic products.

In general, the Company faces increasing competition from lower-cost generic products. The patent rights that protect its products are of varying strengths and durations. In addition, in some countries, patent protection is significantly weaker than in the United States or in the EU. In the United States and the EU, political pressure to reduce spending on prescription drugs has led to legislation and other measures that encourage the use of generic and biosimilar products. Although it is the Company’s policy to actively protect its patent rights, generic challenges to the Company’s products can arise at any time, and the Company’s patents may not prevent the emergence of generic competition for its products.

Loss of patent protection for a product typically is followed promptly by generic substitutes, reducing the Company’s sales of that product. Availability of generic substitutes for the Company’s drugs may adversely affect its results of operations and cash flow. In addition, proposals emerge from time to time in the United States and other countries for legislation to further encourage the early and rapid approval of generic drugs. Any such proposal that is enacted into law could worsen this substantial negative effect on the Company’s sales and, potentially, its business, cash flow, results of operations, financial condition and prospects.

The Company faces intense competition from competitors’ products.

The Company’s products face intense competition from competitors’ products. This competition may increase as new products enter the market. In such an event, the competitors’ products may be safer or more effective, more convenient to use, have better insurance coverage or reimbursement levels or be more effectively marketed and sold than the Company’s products. Alternatively, in the case of generic competition, including the generic availability of competitors’ branded products, they may be equally safe and effective products that are sold at a substantially lower price than the Company’s products. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial condition and prospects. In addition, if products that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively impact product cash flows, the Company may recognize material non-cash impairment charges with respect to the value of those products.

The Company faces continued pricing pressure with respect to its products.

The Company faces continued pricing pressure globally and, particularly in mature markets, from managed care organizations, government agencies and programs that could negatively affect the Company’s sales and profit margins. In the United States, these include (i) practices of managed care groups and institutional and governmental purchasers, (ii) U.S. federal laws and regulations related to Medicare and Medicaid, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the ACA, and (iii) state activities aimed at increasing price transparency, including new laws as noted above in Item 1. “Competition and the Health Care Environment — Health

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Care Environment and Government Regulations.” Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. In addition, in the United States, larger customers have received higher rebates on drugs in certain highly competitive categories. The Company must also compete to be placed on formularies of managed care organizations. Exclusion of a product from a formulary can lead to reduced usage in the managed care organization.

In order to provide information about the Company’s pricing practices, the Company annually posts on its website its Pricing Transparency Report for the United States. The report provides the Company’s average annual list price and net price increases across the Company’s U.S. portfolio dating back to 2010. In 2019, the Company’s gross U.S. sales were reduced by approximately 44% as a result of rebates, discounts and returns.

Outside the United States, numerous major markets, including the EU, Japan and China have pervasive government involvement in funding health care and, in that regard, fix the pricing and reimbursement of pharmaceutical and vaccine products. Consequently, in those markets, the Company is subject to government decision making and budgetary actions with respect to its products. In Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products and certain vaccines, which will occur again in 2020. Furthermore, the government can order re-pricing for specific products if it determines that use of such product will exceed certain thresholds defined under applicable re-pricing rules. For example, pursuant to a re-pricing rule, the Japanese government reduced the price of Keytruda by 17.5%, effective February 2020. Additionally, Keytruda will be subject to another significant price reduction in April 2020 under a provision of the Japanese pricing rules.

The Company expects pricing pressures to continue in the future.

The health care industry in the United States has been, and will continue to be, subject to increasing regulation and political action.

The Company believes that the health care industry will continue to be subject to increasing regulation as well as political and legal action, as future proposals to reform the health care system are considered by the Executive branch, Congress and state legislatures.

In 2010, the United States enacted major health care reform legislation in the form of the ACA. Various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. The ACA increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program.

The ACA also requires pharmaceutical manufacturers to pay a point of service discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called “donut hole”) which increased to 70% in 2019 and was extended to biosimilar products. In 2019, the Company’s revenue was reduced by approximately $615 million due to this requirement. Also, pharmaceutical manufacturers are required to pay an annual non-tax deductible health care reform fee. In 2019, the Company recorded $112 million of costs for this annual fee.

In 2016, the Centers for Medicare & Medicaid Services (CMS) issued the Medicaid rebate final rule that implements provisions of the ACA effective April 1, 2016. The rule provides comprehensive guidance on the calculation of Average Manufacturer Price and Best Price; two metrics utilized to determine the rebates drug manufacturers are required to pay to state Medicaid programs. The impact of changes resulting from the issuance of the rule is not material to Merck at this time. However, the Company is still awaiting guidance from CMS on two aspects of the rule that were deferred for later implementation. These include a definition of what constitutes a product ‘line extension’ and a delay in the participation of the U.S. Territories in the Medicaid Drug Rebate Program until April 1, 2022. The Company will evaluate the financial impact of these two elements when they become effective.

In addition, as discussed above in “Competition and the Health Care Environment,” the administration has recently proposed a draft rule that would allow importation of certain lower-cost prescription drugs from Canada. If the rule is finalized as proposed, states or certain other non-federal governmental entities would be able to submit importation program proposals to the FDA for review and authorization of two-year programs (with the opportunity to extend for two more years). There will be a public comment period on the proposed rule which will expire on March 9, 2020. Following the comment period, the FDA will have to review and finalize its proposal before any states or other

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parties can submit their plans to comply with the federal rule. If the proposed rule is adopted, it likely will be some time before states or other parties can actually implement importation plans.

Also, in October 2018, the administration issued an advance notice of proposed rulemaking to implement an “International Pricing Index” (IPI) model in the United States for products covered under Medicare Part B. The proposal would: (1) reduce Medicare Part B payments for drugs based on a market basket of international prices; (2) allow private sector vendors to negotiate prices for drugs, take title to drugs, and compete for physician and hospital business; and (3) change the physician reimbursement under Medicare Part B from the current model to eliminate the buy and bill system and instead pay physicians based on a flat fee that approximates the revenue they currently receive from drugs. Public comments on the IPI proposal were accepted through late 2018 and it is unclear when the agency may issue a proposed rule on the IPI model. Adoption of one or both of the proposed rules could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company cannot predict the likelihood of additional future changes in the health care industry in general, or the pharmaceutical industry in particular, or what impact they may have on the Company’s business, cash flow, results of operations, financial condition and prospects.

The Company is increasingly dependent on sophisticated software applications and computing infrastructure. In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. The Company could be a target of future cyber-attacks.

The Company is increasingly dependent on sophisticated software applications and complex information technology systems and computing infrastructure (collectively, IT systems) to conduct critical operations. Certain of these systems are managed, hosted, provided or used by third parties to assist in conducting the Company’s business. Disruption, degradation, or manipulation of these IT systems through intentional or accidental means by the Company’s employees, third parties with authorized access or unauthorized third parties could adversely affect key business processes. Cyber-attacks against the Company’s IT systems or third-party providers’ IT systems, such as cloud-based systems, could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Misuse of any of these IT systems could result in the disclosure of sensitive personal information or the theft of trade secrets, intellectual property, or other confidential business information. The Company continues to leverage new and innovative technologies across the enterprise to improve the efficacy and efficiency of its business processes; the use of which can create new risks.

In 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations, and resulting losses.

The Company has insurance coverage insuring against losses resulting from cyber-attacks and has received proceeds in connection with the 2017 cyber-attack. However, there are disputes with certain of the insurers about the availability of some of the insurance coverage for claims related to the 2017 cyber-attack.

The Company has implemented a variety of measures to further enhance and modernize its systems to guard against similar attacks in the future, and also is pursuing an enterprise-wide effort to enhance the Company's resiliency against future cyber-attacks, including incidents similar to the 2017 attack. The objective of these efforts is not only to protect against future cyber-attacks, but also to improve the speed of the Company’s recovery from such attacks and enable continued business operations to the greatest extent possible during any recovery period.

Although the aggregate impact of cyber-attacks and network disruptions, including the 2017 cyber-attack, on the Company’s operations and financial condition has not been material to date, the Company continues to be a target of events of this nature and expects them to continue. The Company monitors its data, information technology and personnel usage of Company IT systems to reduce these risks and continues to do so on an ongoing basis for any current or potential threats. There can be no assurance that the Company’s efforts to protect its data and IT systems or the efforts of third-party providers to protect their IT systems will be successful in preventing disruptions to the Company’s operations, including its manufacturing, research and sales operations. Such disruptions have in the past and could in the future result in loss of revenue, or the loss of critical or sensitive information from the Company’s or the Company’s third-party providers’ databases or IT systems and have in the past and could in the future also result in financial, legal, business or reputational harm to the Company and substantial remediation costs.

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The Company is subject to a variety of U.S. and international laws and regulations.

The Company is currently subject to a number of government laws and regulations and, in the future, could become subject to new government laws and regulations. The costs of compliance with such laws and regulations, or the negative results of non-compliance, could adversely affect the business, cash flow, results of operations, financial condition and prospects of the Company; these laws and regulations include (i) additional healthcare reform initiatives in the United States or in other countries, including additional mandatory discounts or fees; (ii) the U.S. Foreign Corrupt Practices Act or other anti-bribery and corruption laws; (iii) new laws, regulations and judicial or other governmental decisions affecting pricing, drug reimbursement, and access or marketing within or across jurisdictions; (iv) changes in intellectual property laws; (v) changes in accounting standards; (vi) new and increasing data privacy regulations and enforcement, particularly in the EU and the United States; (vii) legislative mandates or preferences for local manufacturing of pharmaceutical or vaccine products; (viii) emerging and new global regulatory requirements for reporting payments and other value transfers to healthcare professionals; (ix) environmental regulations; and (x) the potential impact of importation restrictions, embargoes, trade sanctions and legislative and/or other regulatory changes.

The uncertainty in global economic conditions together with cost-reduction measures being taken by certain governments could negatively affect the Company’s operating results.

Uncertainty in global economic and geopolitical conditions may result in a slowdown to the global economy that could affect the Company’s business by reducing the prices that drug wholesalers and retailers, hospitals, government agencies and managed health care providers may be able or willing to pay for the Company’s products or by reducing the demand for the Company’s products, which could in turn negatively impact the Company’s sales and result in a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s revenue performance in 2019 was negatively affected by other cost-reduction measures taken by governments and other third-parties to lower health care costs. The Company anticipates all of these actions, and additional actions in the future, will continue to negatively affect revenue performance.

If credit and economic conditions worsen, the resulting economic and currency impacts in the affected markets and globally could have a material adverse effect on the Company’s results.

The Company has significant global operations, which expose it to additional risks, and any adverse event could have a material adverse effect on the Company’s results of operations and financial condition.

The extent of the Company’s operations outside the United States is significant. Risks inherent in conducting a global business include:


•	changes in medical reimbursement policies and programs and pricing restrictions in key markets;


•	multiple regulatory requirements that could restrict the Company’s ability to manufacture and sell its products in key markets;


•	trade protection measures and import or export licensing requirements, including the imposition of trade sanctions or similar restrictions by the United States or other governments;


•	foreign exchange fluctuations;


•	diminished protection of intellectual property in some countries; and


•	possible nationalization and expropriation.

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

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In 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” As a result of that referendum and subsequent negotiations, the UK left the EU on January 31, 2020. A transitional period will apply from January 31, 2020 until December 31, 2020, and during this period the EU will treat the UK as if it were an EU Member State, and the UK will continue to participate in the EU Customs Union allowing for the freedom of movement for people and goods. During the transitional period the EU and the UK will continue to negotiate a trade agreement to formalize the terms of the UK’s future relationship with the EU. The Company has taken actions and made certain contingency plans for scenarios in which the UK and the EU do not reach a mutually satisfactory understanding as to a future trade agreement. It is not possible at this time to predict whether there will be any such understanding before the end of 2020, or if such an understanding is reached, whether its terms will vary in ways that result in greater restrictions on imports and exports between the UK and EU countries, increased regulatory complexities, and/or cross border labor issues that could materially adversely impact the Company’s business operations in the UK.

Failure to attract and retain highly qualified personnel could affect the Company’s ability to successfully develop and commercialize products.

The Company’s success is largely dependent on its continued ability to attract and retain highly qualified scientific, technical and management personnel, as well as personnel with expertise in clinical research and development, governmental regulation and commercialization. Competition for qualified personnel in the pharmaceutical industry is intense. The Company cannot be sure that it will be able to attract and retain quality personnel or that the costs of doing so will not materially increase.

In the past, the Company has experienced difficulties and delays in manufacturing certain of its products, including vaccines.

Merck has, in the past, experienced difficulties in manufacturing certain of its products, including vaccines. In addition, the network cyber-attack experienced by the Company in June 2017 led to a disruption of the Company’s operations, including its manufacturing operations. The Company may, in the future, experience difficulties and delays inherent in manufacturing its products, such as (i) failure of the Company or any of its vendors or suppliers to comply with Current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to manufacturing shutdowns, product shortages and delays in product manufacturing; (ii) delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for the Company’s products; and (iii) other manufacturing or distribution problems including changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, or physical limitations that could impact continuous supply. In addition, the Company could experience difficulties or delays in manufacturing its products caused by natural disasters, such as hurricanes. For example, in 2017, the Company’s lone manufacturing plant in Puerto Rico was negatively affected by Hurricane Maria. Manufacturing difficulties can result in product shortages, leading to lost sales and reputational harm to the Company.

The Company may not be able to realize the expected benefits of its investments in emerging markets.

The Company has been taking steps to increase its sales in emerging markets. However, there is no guarantee that the Company’s efforts to expand sales in these markets will succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for the Company to successfully implement its emerging markets strategy, it must attract and retain qualified personnel. The Company may also be required to increase its reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and, if such currencies devalue and the Company cannot offset the devaluations, the Company’s financial performance within such countries could be adversely affected.

The Company’s business in China has grown rapidly in the past few years, and the importance of China to the Company’s overall pharmaceutical and vaccines business outside the United States has increased accordingly. Continued growth of the Company’s business in China is dependent upon ongoing development of a favorable environment for innovative pharmaceutical products and vaccines, sustained access for the Company’s currently marketed products, and the absence of trade impediments or adverse pricing controls. As noted above in “Health Care Environment and Government Regulation,” pricing pressure in China has increased as the Chinese government has been taking steps to reduce costs, including implementing healthcare reform that has led to the acceleration of generic

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substitution, where available. While pricing pressure has always existed in China, health care reform has increased this pressure in part due to the acceleration of generic substitution through the government’s VBP program. In 2019, the government implemented the VBP program through a tendering process for mature products which have generic substitutes with a Generic Quality Consistency Evaluation approval. Mature products that have entered into the first two rounds of VBP had, on average, a price reduction of 50%. The expansion of the VBP program remains to be seen. In addition, the Company anticipates that the reported inquiries made by various governmental authorities involving multinational pharmaceutical companies in China may continue.

Also, in December 2019, a new Coronavirus, now known as COVID-19, which has proved to be highly contagious, emerged in Wuhan, China. The outbreak of the virus has caused material disruptions to the Chinese economy, including its health care system, which will have a negative effect on the Company’s first quarter 2020 results which, at this time, is not expected to be material. Since the future course and duration of the COVID-19 outbreak are unknown, the Company is currently unable to determine whether the outbreak will have a further negative effect on the Company’s results in 2020. The outbreak of COVID-19 currently has also had a limited effect on the Company’s supply chain of drugs into and raw materials out of China. The outbreak has also negatively affected certain of the Company’s clinical trials.

For all these reasons, sales within emerging markets carry significant risks. However, a failure to maintain the Company’s presence in emerging markets could have a material adverse effect on the Company’s business, cash flow, results of operations, financial condition and prospects.

The Company is exposed to market risk from fluctuations in currency exchange rates and interest rates.

The Company operates in multiple jurisdictions and virtually all sales are denominated in currencies of the local jurisdiction. Additionally, the Company has entered and will enter into business development transactions, borrowings or other financial transactions that may give rise to currency and interest rate exposure.

Since the Company cannot, with certainty, foresee and mitigate against such adverse fluctuations, fluctuations in currency exchange rates, interest rates and inflation could negatively affect the Company’s business, cash flow, results of operations, financial condition and prospects.

In order to mitigate against the adverse impact of these market fluctuations, the Company will from time to time enter into hedging agreements. While hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful.

Certain of the Company’s interest rate derivatives and investments are based on the London Interbank Offered Rate (LIBOR), and a portion of Merck’s indebtedness bears interest at variable interest rates, primarily based on LIBOR. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform, which may cause LIBOR to cease to exist entirely after 2021. While the Company expects that reasonable alternatives to LIBOR will be implemented prior to the 2021 target date, the Company cannot predict the consequences and timing of these developments, which could include an increase in interest expense and may also require the amendment of contracts that reference LIBOR.

The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations and financial condition.

The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates. Significant judgment is required for determining the Company’s tax liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company believes that its accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. In addition, the Company may be negatively affected by changes in tax laws, or new tax laws, affecting, for example, tax rates, and/or revised tax law interpretations in domestic or foreign jurisdictions.

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Pharmaceutical products can develop unexpected safety or efficacy concerns.

Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims, including potential civil or criminal governmental actions.

Reliance on third-party relationships and outsourcing arrangements could materially adversely affect the Company’s business.

The Company depends on third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third-party service providers, for key aspects of its business including development, manufacture and commercialization of its products and support for its IT systems. Failure of these third parties to meet their contractual, regulatory and other obligations to the Company or the development of factors that materially disrupt the relationships between the Company and these third parties could have a material adverse effect on the Company’s business.

Negative events in the animal health industry could have a material adverse effect on future results of operations and financial condition.

Future sales of key animal health products could be adversely affected by a number of risk factors including certain risks that are specific to the animal health business. For example, the outbreak of disease carried by animals, such as African Swine Fever, could lead to their widespread death and precautionary destruction as well as the reduced consumption and demand for animals, which could adversely affect the Company’s results of operations. Also, the outbreak of any highly contagious diseases near the Company’s main production sites could require the Company to immediately halt production of vaccines at such sites or force the Company to incur substantial expenses in procuring raw materials or vaccines elsewhere. Other risks specific to animal health include epidemics and pandemics, government procurement and pricing practices, weather and global agribusiness economic events. As the Animal Health segment of the Company’s business becomes more significant, the impact of any such events on future results of operations would also become more significant.

Biologics and vaccines carry unique risks and uncertainties, which could have a material adverse effect on the Company’s future results of operations and financial condition.

The successful development, testing, manufacturing and commercialization of biologics and vaccines, particularly human and animal health vaccines, is a long, complex, expensive and uncertain process. There are unique risks and uncertainties related to biologics and vaccines, including:

•

There may be limited access to, and supply of, normal and diseased tissue samples, cell lines, pathogens, bacteria, viral strains and other biological materials. In addition, government regulations in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of, such materials. If the Company loses access to sufficient sources of such materials, or if tighter restrictions are imposed on the use of such materials, the Company may not be able to conduct research activities as planned and may incur additional development costs.

•

The development, manufacturing and marketing of biologics and vaccines are subject to regulation by the FDA, the EMA and other regulatory bodies. These regulations are often more complex and extensive than the regulations applicable to other pharmaceutical products. For example, in the United States, a BLA, including both pre-clinical and clinical trial data and extensive data regarding the manufacturing procedures, is required for human vaccine candidates, and FDA approval is generally required for the release of each manufactured commercial lot.

•

Manufacturing biologics and vaccines, especially in large quantities, is often complex and may require the use of innovative technologies to handle living micro-organisms. Each lot of an approved biologic and vaccine must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures, product recalls or spoilage. When changes are made to

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the manufacturing process, the Company may be required to provide pre-clinical and clinical data showing the comparable identity, strength, quality, purity or potency of the products before and after such changes.


•	Biologics and vaccines are frequently costly to manufacture because production ingredients are derived from living animal or plant material, and most biologics and vaccines cannot be made synthetically. In particular, keeping up with the demand for vaccines may be difficult due to the complexity of producing vaccines.


•	The use of biologically derived ingredients can lead to variability in the manufacturing process and could lead to allegations of harm, including infections or allergic reactions, which allegations would be reviewed through a standard investigation process that could lead to closure of product facilities due to possible contamination. Any of these events could result in substantial costs.

Product liability insurance for products may be limited, cost prohibitive or unavailable.

As a result of a number of factors, product liability insurance has become less available while the cost of such insurance has increased significantly. The Company is subject to a substantial number of product liability claims. See Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities” below for more information on the Company’s current product liability litigation. With respect to product liability, the Company self-insures substantially all of its risk, as the availability of commercial insurance has become more restrictive. The Company has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities. The Company will continually assess the most efficient means to address its risk; however, there can be no guarantee that insurance coverage will be obtained or, if obtained, will be sufficient to fully cover product liabilities that may arise.

Social media platforms present risks and challenges.

The inappropriate and/or unauthorized use of certain social media channels could cause brand damage or information leakage or could lead to legal implications, including from the improper collection and/or dissemination of personally identifiable information. In addition, negative or inaccurate posts or comments about the Company or its products on any social networking platforms could damage the Company’s reputation, brand image and goodwill. Further, the disclosure of non-public Company-sensitive information by the Company’s workforce or others through external media channels could lead to information loss. Although there is an internal Company Social Media Policy that guides employees on appropriate personal and professional use of social media about the Company, the processes in place may not completely secure and protect information. Identifying new points of entry as social media continues to expand also presents new challenges.

Risks Related to the Proposed Spin-Off of NewCo.

The proposed Spin-Off of NewCo may not be completed on the terms or timeline currently contemplated, if at all, and may not achieve the expected results.

In February 2020, the Company announced its intention to Spin-Off products from its women’s health, trusted legacy brands and biosimilars businesses into a new, yet-to-be-named, independent, publicly traded company (NewCo) through a distribution of NewCo’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The transaction is expected to be completed in the first half of 2021. Completion of the Spin-Off will be subject to a number of factors and conditions, and there can be no assurances that the Company will be able to complete the Spin-Off on the terms or on the timeline that was announced, if at all. Unanticipated developments could delay, prevent or otherwise adversely affect the proposed Spin-Off, including but not limited to disruptions in general or financial market conditions or potential problems or delays in obtaining various regulatory and tax approvals or clearances. In addition, consummation of the proposed Spin-Off will require final approval from the Company’s Board of Directors.

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The costs to complete the proposed Spin-Off will be significant. In addition, the Company may be unable to achieve some or all of the strategic and financial benefits that it expects to achieve from the Spin-Off of NewCo.

The Company will incur significant expenses in connection with the Spin-Off. In addition, the Company may not be able to achieve the full strategic and financial benefits that are expected to result from the Spin-Off. The anticipated benefits of the Spin-Off are based on a number of assumptions, some of which may prove incorrect.

Following the Spin-Off, the price of shares of the Company’s common stock may fluctuate significantly.

The Company cannot predict the effect of the Spin-Off on the trading price of shares of its common stock, and the market value of shares of its common stock may be less than, equal to or greater than the market value of shares of its common stock prior to the Spin-Off. In addition, the price of Merck’s common stock may be more volatile around the time of the Spin-Off.

There could be significant income tax liability if the Spin-Off or certain related transactions are determined to be taxable for U.S. federal income tax purposes.

The Company expects that prior to completion of the Spin-Off it will receive an opinion from its U.S. tax counsel that concludes, among other things, that the Spin-Off of all of the outstanding NewCo shares to Merck shareholders and certain related transactions will qualify as tax-free to Merck and its shareholders under Sections 355, 361 and 368 of the U.S. Internal Revenue Code, except to the extent of any cash received in lieu of fractional shares of NewCo common stock. Any such opinion is not binding on the Internal Revenue Service (IRS). Accordingly, while the Company believes the risk is low, the IRS may reach conclusions with respect to the Spin-Off that are different from the conclusions reached in the opinion. The opinion will rely on certain facts, assumptions, representations and undertakings from Merck and NewCo regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter the conclusions of the party giving such opinion.

If the proposed Spin-Off ultimately is determined to be taxable, which the Company believes is unlikely, the Spin-Off could be treated as a taxable dividend to Merck’s shareholders for U.S. federal income tax purposes, and Merck’s shareholders could incur significant U.S. federal income tax liabilities. In addition, Merck would recognize a taxable gain to the extent that the fair market value of NewCo common stock exceeds Merck’s tax basis in such stock on the date of the Spin-Off.

Cautionary Factors that May Affect Future Results

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

This report and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are based on management’s current expectations and are subject to risks and uncertainties which may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as “anticipates,” “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning, or negative variations of any of the foregoing. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results, product development, product approvals, product potential, and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. The Company cautions you not to place undue reliance on these forward-looking statements. Although it is not possible to predict or identify all such factors, they may include the following:

•Competition from generic and/or biosimilar products as the Company’s products lose patent protection.

•Increased “brand” competition in therapeutic areas important to the Company’s long-term business performance.

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•The difficulties and uncertainties inherent in new product development. The outcome of the lengthy and complex process of new product development is inherently uncertain. A drug candidate can fail at any stage of the process and one or more late-stage product candidates could fail to receive regulatory approval. New product candidates may appear promising in development but fail to reach the market because of efficacy or safety concerns, the inability to obtain necessary regulatory approvals, the difficulty or excessive cost to manufacture and/or the infringement of patents or intellectual property rights of others. Furthermore, the sales of new products may prove to be disappointing and fail to reach anticipated levels.

•Pricing pressures, both in the United States and abroad, including rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general.

•Changes in government laws and regulations, including laws governing intellectual property, and the enforcement thereof affecting the Company’s business.

•Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales.

•Significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage.

•Legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products.

•Cyber-attacks on the Company’s or third-party providers’ information technology systems, which could disrupt the Company’s operations.

•Lost market opportunity resulting from delays and uncertainties in the approval process of the FDA and foreign regulatory authorities.

•Increased focus on privacy issues in countries around the world, including the United States and the EU. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly the Company’s business, including recently enacted laws in a majority of states in the United States requiring security breach notification.

•Changes in tax laws including changes related to the taxation of foreign earnings.

•Changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to the Company.

•Economic factors over which the Company has no control, including changes in inflation, interest rates and foreign currency exchange rates.

•The proposed Spin-Off might be delayed or the costs to complete the Spin-Off might be more significant than expected.

This list should not be considered an exhaustive statement of all potential risks and uncertainties. See “Risk Factors” above.


Item 1B.	Unresolved Staff Comments.

None.


Item 2.	Properties.

The Company’s corporate headquarters is located in Kenilworth, New Jersey. The Company also maintains operational or divisional headquarters in Kenilworth, New Jersey, Madison, New Jersey and Upper Gwynedd, Pennsylvania. Principal U.S. research facilities are located in Rahway and Kenilworth, New Jersey, West Point, Pennsylvania, Palo Alto, California, Boston, Massachusetts, South San Francisco, California and Elkhorn, Nebraska (Animal Health). Principal research facilities outside the United States are located in the United Kingdom, Switzerland

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and China. Merck’s manufacturing operations are headquartered in Whitehouse Station, New Jersey. The Company also has production facilities for human health products at nine locations in the United States and Puerto Rico. Outside the United States, through subsidiaries, the Company owns or has an interest in manufacturing plants or other properties in Japan, Singapore, South Africa, and other countries in Western Europe, Central and South America, and Asia.

Capital expenditures were $3.5 billion in 2019, $2.6 billion in 2018 and $1.9 billion in 2017. In the United States, these amounted to $1.9 billion in 2019, $1.5 billion in 2018 and $1.2 billion in 2017. Abroad, such expenditures amounted to $1.6 billion in 2019, $1.1 billion in 2018 and $728 million in 2017.

The Company and its subsidiaries own their principal facilities and manufacturing plants under titles that they consider to be satisfactory. The Company believes that its properties are in good operating condition and that its machinery and equipment have been well maintained. The Company believes that its plants for the manufacture of products are suitable for their intended purposes and have capacities and projected capacities, including previously-disclosed capital expansion projects, that will be adequate for current and projected needs for existing Company products. Some capacity of the plants is being converted, with any needed modification, to the requirements of newly introduced and future products.


Item 3.	Legal Proceedings.

The information called for by this Item is incorporated herein by reference to Item 8. “Financial Statements and Supplementary Data,” Note 10. “Contingencies and Environmental Liabilities”.


Item 4.	Mine Safety Disclosures.

Not Applicable.

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Executive Officers of the Registrant (ages as of February 1, 2020)

All officers listed below serve at the pleasure of the Board of Directors. None of these officers was elected pursuant to any arrangement or understanding between the officer and any other person(s).



Name	Age	Offices and Business Experience
Kenneth C. Frazier	65	Chairman, President and Chief Executive Officer (since December 2011)
Sanat Chattopadhyay	60	Executive Vice President and President, Merck Manufacturing Division (since March 2016); Senior Vice President, Operations, Merck Manufacturing Division (November 2009-March 2016)
Frank Clyburn	55	Executive Vice President, Chief Commercial Officer (since January 2019); President, Global Oncology Business Unit (October 2013-December 2018)
Robert M. Davis	53	Executive Vice President, Global Services, and Chief Financial Officer (since April 2016); Executive Vice President and Chief Financial Officer (April 2014-April 2016)
Richard R. DeLuca, Jr.	57	Executive Vice President and President, Merck Animal Health (since September 2011)
Michael W. Fleming	61	Senior Vice President, Chief Ethics and Compliance Officer (since March 2019); Senior Vice President, International Legal and Compliance (January 2017-March 2019); Vice President, International Legal and Compliance (July 2008-January 2017)
Julie L. Gerberding	64	Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health (since July 2016); Executive Vice President for Strategic Communications, Global Public Policy and Population Health (January 2015-July 2016)
Rita A. Karachun	56	Senior Vice President Finance - Global Controller (since March 2014)
Steven C. Mizell	59	Executive Vice President, Chief Human Resources Officer (since October 2018); Executive Vice President, Chief Human Resources Officer (December 2016-October 2018) and Executive Vice President, Human Resources, Monsanto Company (August 2011-December 2016)
Michael T. Nally	44	Executive Vice President, Chief Marketing Officer (since January 2019); President, Global Vaccines, Global Human Health (September 2016-January 2019); Managing Director, United Kingdom and Ireland, Global Human Health (January 2014-September 2016)
Roger M. Perlmutter, M.D., Ph.D.	67	Executive Vice President and President, Merck Research Laboratories (since April 2013)
Jennifer Zachary	42	Executive Vice President, General Counsel and Corporate Secretary (since January 2020); Executive Vice President and General Counsel (April 2018-January 2020); Partner, Covington & Burling LLP (January 2013-March 2018)

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PART II


Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The principal market for trading of the Company’s Common Stock is the New York Stock Exchange (NYSE) under the symbol MRK.

As of January 31, 2020, there were approximately 109,500 shareholders of record of the Company’s Common Stock.

Issuer purchases of equity securities for the three months ended December 31, 2019 were as follows:

Issuer Purchases of Equity Securities



			($ in millions)
Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs⁽¹⁾
October 1 — October 31	5,064,526	$83.63	$7,796
November 1 — November 30	4,182,277	$84.72	$7,441
December 1 — December 31	3,053,800	$89.16	$7,169
Total	12,300,603	$85.37	$7,169


⁽¹⁾	All shares purchased during the period were made as part of a plan approved by the Board of Directors in October 2018 to purchase up to $10 billion in Merck shares for its treasury.

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Performance Graph

The following graph assumes a $100 investment on December 31, 2014, and reinvestment of all dividends, in each of the Company’s Common Shares, the S&P 500 Index, and a composite peer group of major U.S. and European-based pharmaceutical companies, which are: AbbVie Inc., Amgen Inc., AstraZeneca plc, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly and Company, GlaxoSmithKline plc, Novartis AG, Pfizer Inc., Roche Holding AG, and Sanofi SA.

Comparison of Five-Year Cumulative Total Return*

Merck & Co., Inc., Composite Peer Group and S&P 500 Index



	End of Period Value	2019/2014 CAGR*
MERCK	$187	13%
PEER GRP.**	152	9%
S&P 500	174	12%



	2014	2015	2016	2017	2018	2019
MERCK	100.0	96.0	110.5	108.8	152.5	186.5
PEER GRP.	100.0	103.0	99.9	119.6	127.8	151.6
S&P 500	100.0	101.4	113.5	138.3	132.2	173.8


*	Compound Annual Growth Rate


**	Peer group average was calculated on a market cap weighted basis.

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

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Item 6.	Selected Financial Data.

The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report.

Merck & Co., Inc. and Subsidiaries

($ in millions except per share amounts)



	2019 ⁽¹⁾			2018⁽²⁾			2017⁽³⁾			2016⁽⁴⁾		2015 ⁽⁵⁾
Results for Year:
Sales	$	46,840		$	42,294		$	40,122		$	39,807	$	39,498
Cost of sales	14,112			13,509			12,912			14,030		15,043
Selling, general and administrative	10,615			10,102			10,074			10,017		10,508
Research and development	9,872			9,752			10,339			10,261		6,796
Restructuring costs	638			632			776			651		619
Other (income) expense, net	139			(402		)	(500		)	189		1,131
Income before taxes	11,464			8,701			6,521			4,659		5,401
Taxes on income	1,687			2,508			4,103			718		942
Net income	9,777			6,193			2,418			3,941		4,459
Less: Net (loss) income attributable to noncontrolling interests	(66		)	(27		)	24			21		17
Net income attributable to Merck & Co., Inc.	9,843			6,220			2,394			3,920		4,442
Basic earnings per common share attributable to Merck & Co., Inc. common shareholders	$	3.84		$	2.34		$	0.88		$	1.42	$	1.58
Earnings per common share assuming dilution attributable to Merck & Co., Inc. common shareholders	$	3.81		$	2.32		$	0.87		$	1.41	$	1.56
Cash dividends declared	5,820			5,313			5,177			5,135		5,115
Cash dividends declared per common share	$	2.26		$	1.99		$	1.89		$	1.85	$	1.81
Capital expenditures	3,473			2,615			1,888			1,614		1,283
Depreciation	1,679			1,416			1,455			1,611		1,593
Average common shares outstanding (millions)	2,565			2,664			2,730			2,766		2,816
Average common shares outstanding assuming dilution (millions)	2,580			2,679			2,748			2,787		2,841
Year-End Position:
Working capital	$	5,263		$	3,669		$	6,152		$	13,410	$	10,550
Property, plant and equipment, net	15,053			13,291			12,439			12,026		12,507
Total assets	84,397			82,637			87,872			95,377		101,677
Long-term debt	22,736			19,806			21,353			24,274		23,829
Total equity	26,001			26,882			34,569			40,308		44,767
Year-End Statistics:
Number of stockholders of record	110,023			115,800			121,700			129,500		135,500
Number of employees	71,000			69,000			69,000			68,000		68,000


⁽¹⁾	Amounts for 2019 include a charge for the acquisition of Peloton Therapeutics, Inc.


⁽²⁾	Amounts for 2018 include a charge related to the formation of a collaboration with Eisai Co., Ltd.


⁽³⁾	Amounts for 2017 include a provisional net tax charge related to the enactment of U.S. tax legislation and a charge related to the formation of a collaboration with AstraZeneca PLC.


⁽⁴⁾	Amounts for 2016 include a charge related to the settlement of worldwide patent litigation related to Keytruda.


⁽⁵⁾	Amounts for 2015 include a net charge related to the settlement of Vioxx shareholder class action litigation, foreign exchange losses related to Venezuela, gains on the dispositions of businesses and other assets, and the favorable benefit of certain tax items.

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Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following section of this Form 10-K generally discusses 2019 and 2018 results and year-to-year comparisons between 2019 and 2018. Discussion of 2017 results and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed on February 27, 2019.

Description of Merck’s Business

The Alliances segment primarily includes activity from the Company’s relationship with AstraZeneca LP related to sales of Nexium and Prilosec, which concluded in 2018.

Planned Spin-Off of Women’s Health, Legacy Brands and Biosimilars into New Company

In February 2020, Merck announced its intention to spin-off products from its women’s health, trusted legacy brands and biosimilars businesses into a new, yet-to-be-named, independent, publicly traded company (NewCo) through a distribution of NewCo’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The legacy brands included in the transaction consist of dermatology, pain, respiratory, and select cardiovascular products including Zetia and Vytorin, as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs will continue to be owned and developed within Merck as planned. NewCo will have development capabilities initially focused on late-stage development and life-cycle management, and is expected over time to develop research capabilities in selected therapeutic areas. The spin-off is expected to be completed in the first half of 2021, subject to market and certain other conditions.

Overview

Merck’s performance during 2019 demonstrates execution in both commercial and research operations driven by a focus on key growth drivers and innovative pipeline investment reinforcing the Company’s science-led strategy. In 2019, Merck enhanced its portfolio and pipeline with external innovation, increased investment in new capital projects focused primarily on expanding manufacturing capacity across Merck’s key businesses, and returned capital to shareholders.

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Worldwide sales were $46.8 billion in 2019, an increase of 11% compared with 2018, including a 2% unfavorable effect from foreign exchange. The sales increase was driven primarily by Merck’s growth pillars of oncology, human health vaccines, certain hospital acute care products, and animal health. Growth in these areas was partially offset by the ongoing effects of generic competition, particularly in the diversified brands and cardiovascular franchises, as well as by competitive pressure, particularly in the diabetes and virology franchises.

Merck continued to prioritize business development aimed at enhancing its portfolio and strengthening its pipeline by executing several business development transactions in 2019. To expand its oncology presence, Merck completed the acquisitions of Peloton Therapeutics, Inc. (Peloton), a clinical-stage biopharmaceutical company focused on the development of novel small molecule therapeutic candidates for the treatment of cancer and other diseases, and Immune Design, a late-stage immunotherapy company employing next-generation in vivo approaches to enable the body’s immune system to fight disease. Merck also announced an agreement to acquire ArQule, Inc. (ArQule), a biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of cancer and other diseases; the acquisition closed in January 2020. To augment Merck’s animal health business, the Company acquired Antelliq Group (Antelliq), a leader in digital animal identification, traceability and monitoring solutions.

During 2019, the Company received numerous regulatory approvals and progressed many important pipeline candidates through clinical development. Within oncology, Keytruda received multiple additional approvals in the United States, European Union (EU), China and Japan as monotherapy in the therapeutic areas of non-small-cell lung cancer (NSCLC), small-cell lung cancer (SCLC), esophageal cancer and in combination with axitinib for the treatment of renal cell carcinoma (RCC), in combination with chemotherapy for head and neck squamous cell carcinoma (HNSCC), and in combination with Lenvima for endometrial carcinoma. Lynparza, which is being developed in collaboration with AstraZeneca PLC (AstraZeneca), received U.S. Food and Drug Administration (FDA) approval for the treatment of appropriate patients with germline BRCA-mutated (gBRCAm) pancreatic cancer and European Commission (EC) approval for use in certain patients with advanced ovarian cancer and advanced or metastatic breast cancer.

In addition to oncology, the Company received regulatory approvals in the hospital acute care and vaccines therapeutic areas. The FDA approved Recarbrio (imipenem, cilastatin, and relebactam) for injection, a new combination antibacterial for the treatment of certain patients with complicated urinary tract infections caused by certain Gram-negative microorganisms. Recarbrio was approved by the EC in February 2020. The FDA and EC also approved expanded indications for Zerbaxa for the treatment of patients with hospital-acquired bacterial pneumonia and ventilator-associated bacterial pneumonia (HABP/VABP) caused by certain susceptible Gram-negative microorganisms. Additionally, Ervebo (Ebola Zaire Vaccine, Live), a vaccine for the prevention of disease caused by Zaire ebolavirus in adults, was approved in the United States and received conditional approval in the EU.

In addition to the recent regulatory approvals discussed above, the Company advanced its late-stage pipeline, particularly in oncology, with several regulatory submissions for Keytruda, Lynparza and Lenvima in the United States and internationally. The Company’s Phase 3 oncology programs include Keytruda in the therapeutic areas of biliary tract, breast, cervical, colorectal, cutaneous squamous cell, endometrial, esophageal, gastric, hepatocellular, mesothelioma, nasopharyngeal, ovarian, prostate and small-cell lung cancers; Lynparza in combination with Keytruda for non-small cell lung cancer; and Lenvima in combination with Keytruda for bladder, endometrial, head and neck, melanoma and non-small-cell lung cancers. Additionally, the Company has candidates in Phase 3 clinical development in several other therapeutic areas, including V114, an investigational polyvalent conjugate vaccine for the prevention of pneumococcal disease that received Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease caused by the vaccine serotypes in pediatric patients (6 weeks to 18 years of age) and in adults; MK-7264, gefapixant, a selective, non-narcotic, orally-administered P2X3-receptor antagonist being developed for the treatment of refractory, chronic cough; MK-8591A, islatravir, an investigational nucleoside reverse transcriptase translocation inhibitor (NRTTI) in combination with doravirine for the treatment of HIV-1 infection; and MK-1242, vericiguat, an investigational treatment for heart failure being developed in a collaboration (see “Research and Development” below).

The Company is allocating resources to effectively support its commercial opportunities in the near term while making the necessary investments to support long-term growth. Research and development expenses in 2019 reflect higher clinical development spending and increased investment in discovery research and early drug development.

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In November 2019, Merck’s Board of Directors approved an increase to the Company’s quarterly dividend, raising it to $0.61 per share from $0.55 per share on the Company’s outstanding common stock. During 2019, the Company returned $10.5 billion to shareholders through dividends and share repurchases.

Earnings per common share assuming dilution attributable to common shareholders (EPS) for 2019 were $3.81 compared with $2.32 in 2018. EPS in both years reflects the impact of acquisition and divestiture-related costs, as well as restructuring costs and certain other items. Certain other items in 2019 include a charge related to the acquisition of Peloton and in 2018 include a charge related to the formation of a collaboration with Eisai Co., Ltd. (Eisai). Non-GAAP EPS, which excludes these items, was $5.19 in 2019 and $4.34 in 2018 (see “Non-GAAP Income and Non-GAAP EPS” below).

Pricing

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s revenue performance in 2019 was negatively affected by other cost-reduction measures taken by governments and other third-parties to lower health care costs. The Company anticipates all of these actions and additional actions in the future will continue to negatively affect revenue performance.

Operating Results

Sales



($ in millions)	2019		% Change		% Change Excluding Exchange		2018		% Change		% Change Excluding Exchange		2017
United States	$	20,325	12	%	12	%	$	18,212	5	%	5	%	$	17,424
International	26,515		10	%	13	%	24,083		6	%	6	%	22,698
Total	$	46,840	11	%	13	%	$	42,294	5	%	5	%	$	40,122

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

Worldwide sales grew 11% in 2019 driven primarily by higher sales in the oncology franchise reflecting strong growth of Keytruda, as well as increased alliance revenue related to Lynparza and Lenvima. Also contributing to revenue growth were higher sales of vaccines, including Gardasil/Gardasil 9, Varivax, ProQuad and M‑M‑R II, as well as increased sales of certain hospital acute care products, including Bridion. Higher sales of animal health products also drove revenue growth in 2019.

Sales growth in 2019 was partially offset by the effects of generic competition for cardiovascular products Zetia and Vytorin, hospital acute care products Invanz, Cubicin and Noxafil, oncology product Emend, and products within the diversified brands franchise, as well as biosimilar competition for immunology product Remicade. The diversified brands franchise includes certain products that are approaching the expiration of their marketing exclusivity or that are no longer protected by patents in developed markets. Lower sales of diabetes products Januvia and Janumet and HIV products Isentress/Isentress HD also partially offset revenue growth in 2019.

Sales in the United States grew 12% in 2019 driven primarily by higher sales of Keytruda, combined sales of ProQuad, M-M-R II and Varivax, and Bridion, as well as higher alliance revenue from Lenvima and Lynparza. Revenue growth was partially offset by lower sales of Januvia, Janumet, Invanz, Emend, Isentress/Isentress HD, Cubicin and Noxafil.

International sales grew 10% in 2019. Performance in international markets was led by China, which had total sales of $3.2 billion in 2019, representing growth of 47% compared with 2018, including a 7% unfavorable effect from foreign exchange. The increase in international sales primarily reflects growth in Keytruda, Gardasil/Gardasil 9, combined sales of ProQuad, M-M-R II and Varivax, as well as higher alliance revenue from Lynparza and Lenvima. Sales growth was partially offset by lower sales of Zetia, Vytorin, Zepatier, Remicade, and products within the diversified brands franchise. International sales represented 57% of total sales in both 2019 and 2018.

See Note 18 to the consolidated financial statements for details on sales of the Company’s products. A discussion of performance for select products in the franchises follows.

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Pharmaceutical Segment

Oncology



($ in millions)	2019		% Change		% Change Excluding Exchange		2018		% Change		% Change Excluding Exchange		2017
Keytruda	$	11,084	55	%	58	%	$	7,171	88	%	88	%	$	3,809
Alliance Revenue - Lynparza⁽¹⁾	444		137	%	141	%	187		*		*		20
Alliance Revenue - Lenvima ⁽¹⁾	404		171	%	173	%	149		N/A		N/A		—
Emend	388		(26	)%	(24	)%	522		(6	)%	(7	)%	556

* Calculation not meaningful.

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

Keytruda is an anti-PD-1 therapy that has been approved for the treatment of multiple malignancies including cervical cancer, classical Hodgkin lymphoma (cHL), esophageal cancer, gastric or gastroesophageal junction adenocarcinoma, HNSCC, hepatocellular carcinoma (HCC), NSCLC, SCLC, melanoma, Merkel cell carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient cancer, primary mediastinal large B-cell lymphoma (PMBCL), RCC and urothelial carcinoma. The Keytruda clinical development program includes studies across a broad range of cancer types (see “Research and Development” below).

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

In July 2019, the FDA approved Keytruda as monotherapy for the treatment of certain patients with recurrent locally advanced or metastatic squamous cell carcinoma of the esophagus whose tumors express PD-L1 (Combined Positive Score [CPS] ≥10) as determined by an FDA-approved test, based on the results of the KEYNOTE-181 and KEYNOTE-180 trials.

In June 2019, the FDA approved Keytruda as monotherapy or in combination with chemotherapy for the first-line treatment of patients with metastatic or unresectable, recurrent HNSCC based on results from the pivotal Phase 3 KEYNOTE-048 trial. Keytruda was initially approved for HNSCC under the FDA’s accelerated approval process based on data from the Phase 1b KEYNOTE-012 trial. In accordance with the accelerated approval process, continued approval was contingent upon verification and description of clinical benefit, which has now been demonstrated in KEYNOTE-048 and has resulted in the FDA converting the accelerated approval to a full (regular) approval. Keytruda was approved for these indications by the EC in November 2019 and by Japan’s Ministry of Health, Labour and Welfare (MHLW) in December 2019.

Also in June 2019, the FDA approved Keytruda as monotherapy for the treatment of certain patients with metastatic SCLC based on pooled data from the KEYNOTE-158 (cohort G) and KEYNOTE-028 (cohort C1) clinical trials.

In April 2019, the FDA approved Keytruda in combination with Inlyta (axitinib), a tyrosine kinase inhibitor, for the first-line treatment of patients with advanced RCC, the most common type of kidney cancer, based on findings from the pivotal Phase 3 KEYNOTE-426 trial. Keytruda was approved for this indication by the EC in September 2019 and by Japan’s MHLW in December 2019.

Also in April 2019, the FDA approved an expanded label for Keytruda as monotherapy for the first-line treatment of patients with NSCLC expressing PD-L1 (Tumor Proportion Score [TPS] ≥1%) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations, in stage III disease where patients are not candidates for surgical resection or definitive chemoradiation, and in metastatic disease. The approval was based on results from the Phase 3 KEYNOTE-042 trial.

In September 2019, the FDA approved the combination of Keytruda plus Lenvima for the treatment of certain patients with advanced endometrial carcinoma that is not MSI-H or mismatch repair deficient.

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In March 2019, the EC approved Keytruda in combination with carboplatin and either paclitaxel or nab-paclitaxel for the first-line treatment of adults with metastatic squamous NSCLC based on data from the Phase 3 KEYNOTE-407 trial. Keytruda was approved for this indication by the FDA in October 2018.

In April 2019, the EC approved a new extended dosing schedule of 400 mg every six weeks (Q6W) delivered as an intravenous infusion over 30 minutes for all approved monotherapy indications in the EU. The Q6W dose is available in addition to the formerly approved dose of Keytruda 200 mg every three weeks (Q3W) infused over 30 minutes.

Additionally, in 2019, Keytruda received the following approvals from China’s National Medical Products Administration (NMPA): in combination with pemetrexed and platinum chemotherapy for the first-line treatment of patients with metastatic nonsquamous NSCLC, with no EGFR or ALK genomic tumor aberrations, based on data from the pivotal Phase 3 KEYNOTE-189 trial; as monotherapy for the first-line treatment of patients with locally advanced or metastatic NSCLC whose tumors express PD-L1 as determined by a NMPA-approved test, with no EGFR or ALK genomic tumor aberrations, based on the results from the Phase 3 KEYNOTE-042 trial; and in combination with carboplatin and paclitaxel for the first-line treatment of patients with metastatic squamous NSCLC based on findings from the pivotal Phase 3 KEYNOTE-407 trial.

Global sales of Keytruda grew 55% in 2019 driven by higher demand as the Company continues to launch Keytruda with multiple new indications globally. Sales in the United States continue to build across the multiple approved indications, in particular for the treatment of NSCLC as monotherapy and in combination with chemotherapy for both nonsquamous and squamous metastatic NSCLC, along with uptake in the recently launched RCC and adjuvant melanoma indications. Other indications contributing to U.S. sales growth include HNSCC, urothelial carcinoma, melanoma, and MSI-H cancer. Keytruda sales growth in international markets was driven primarily by performance in Europe, Japan and China reflecting increased use in the treatment of NSCLC, as well as for the more recently approved indications as described above.

The Company is a party to certain third-party license agreements pursuant to which the Company pays royalties on sales of Keytruda. Under the terms of the more significant of these agreements, Merck pays a royalty of 6.5% on worldwide sales of Keytruda through 2023 to one third party; this royalty will decline to 2.5% for 2024 through 2026 and will terminate thereafter. The Company pays an additional 2% royalty on worldwide sales of Keytruda to another third party, the termination date of which varies by country; this royalty will expire in the United States in 2024 and in major European markets in 2025. The royalties are included in Cost of sales.

Pursuant to a re-pricing rule, the Japanese government reduced the price of Keytruda by 17.5% effective February 2020. Additionally, Keytruda will be subject to another significant price reduction in April 2020 under a provision of the Japanese pricing rules.

Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca entered into in July 2017 (see Note 4 to the consolidated financial statements), is approved for the treatment of certain types of advanced ovarian, breast and pancreatic cancers. The increase in alliance revenue related to Lynparza in 2019 was driven primarily by expanded use in the United States, the EU, Japan and China reflecting in part the ongoing launch of new indications. Lynparza received approval for the treatment of certain types of advanced ovarian cancer in the United States in December 2018, in the EU and in Japan in June 2019, and in China in December 2019 based on the results of the Phase 3 SOLO-1 trial. Also, in April 2019, the EC approved Lynparza for the treatment of certain adult patients with advanced breast cancer based on the results of the Phase 3 OlympiAD trial. Additionally, in December 2019, the FDA approved Lynparza for the maintenance treatment of certain adult patients with advanced pancreatic cancer based on the results of the Phase 3 POLO trial.

Lenvima, an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai entered into in March 2018 (see Note 4 to the consolidated financial statements), is approved for the treatment of certain types of thyroid cancer, HCC, and in combination with evorolimus for certain patients with RCC. Additionally, in September 2019, the FDA approved the combination of Keytruda plus Lenvima for the treatment of certain patients with advanced endometrial carcinoma that is not MSI-H or mismatch repair deficient. This marks the first U.S. approval for the combination of Keytruda plus Lenvima. The increase in alliance revenue related to Lenvima in 2019 reflects strong performance in the treatment of HCC following recent worldwide launches, as well as a full year of collaboration activity in 2019.

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Global sales of Emend, for the prevention of chemotherapy-induced and post-operative nausea and vomiting, declined 26% in 2019 driven primarily by lower demand and pricing in the United States due to competition, including recent generic competition for Emend for Injection following U.S. patent expiry in September 2019. The patent that provided U.S. market exclusivity for Emend expired in 2015 and the patent that provided market exclusivity in most major European markets expired in May 2019. Additionally, Emend for Injection will lose market exclusivity in major European markets in August 2020. The Company anticipates that sales of Emend for Injection in these markets will decline significantly thereafter.

Vaccines



($ in millions)	2019		% Change		% Change Excluding Exchange		2018		% Change		% Change Excluding Exchange		2017
Gardasil/Gardasil 9	$	3,737	19	%	21	%	$	3,151	37	%	36	%	$	2,308
ProQuad	756		27	%	29	%	593		12	%	12	%	528
M-M-R II	549		28	%	29	%	430		13	%	12	%	382
Varivax	970		25	%	28	%	774		1	%	1	%	767
RotaTeq	791		9	%	10	%	728		6	%	6	%	686

Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of HPV, grew 19% in 2019 driven primarily by higher demand in the Asia Pacific region, particularly in China, and higher demand in certain European markets reflecting increased vaccination rates for both boys and girls. Growth was partially offset by lower sales in the United States. The U.S. sales decline was driven by the borrowing of Gardasil 9 doses from the U.S. Centers for Disease and Control Prevention (CDC) Pediatric Vaccine Stockpile, offset in part by higher demand and pricing.

In 2019, the Company borrowed doses of Gardasil 9 from the CDC Pediatric Vaccine Stockpile. The borrowing reduced sales in 2019 by approximately $120 million and the Company recognized a corresponding liability. During 2018, the Company replenished doses borrowed from the CDC Pediatric Vaccine Stockpile in 2017 resulting in the recognition of sales of $125 million in 2018 and a reversal of the liability related to that borrowing.

The decision of Japan’s MHLW to suspend the active recommendation for HPV vaccination is still under review.

The Company is a party to certain third-party license agreements pursuant to which the Company pays royalties on sales of Gardasil/Gardasil 9. Under the terms of the more significant of these agreements, Merck pays a 7% royalty on worldwide sales of Gardasil/Gardasil 9 to one third party (this agreement expires in December 2023) and an additional 7% royalty on sales of Gardasil/Gardasil 9 in the United States to another third party (this agreement expires in December 2028). The royalties are included in Cost of sales.

Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, grew 27% in 2019 driven primarily by higher volumes and pricing in the United States, as well as volume growth in the EU largely reflecting a competitor supply issue.

Worldwide sales of M-M-R II, a vaccine to help protect against measles, mumps and rubella, grew 28% in 2019 driven primarily by higher sales in the United Sates reflecting increased demand due to measles outbreaks, as well as higher pricing. The Company anticipates that U.S. sales of M-M-R II will decline in 2020 driven by lower expected demand related to fewer measles outbreaks.

Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), grew 25% in 2019 driven primarily by government tenders in Latin America, as well as higher pricing and volume growth in the United States. Varivax sales are expected to decline in 2020 due in part to the timing of government tenders and competition in select Latin American markets.

Global sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, grew 9% in 2019 driven primarily by continued uptake from the launch in China and higher volumes in the United States, partially offset by lower volumes in Latin America.

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In December 2019, the FDA approved Ervebo for the prevention of disease caused by Zaire ebolavirus in individuals 18 years of age and older. As previously announced, Merck is working to initiate manufacturing of licensed doses and expects these doses to start becoming available in approximately the third quarter of 2020. Merck is working closely with the U.S. government, the World Health Organization (WHO), UNICEF, and Gavi (the Vaccine Alliance) to plan for how eventual, licensed doses will support future public health preparedness and response efforts against Zaire ebolavirus disease. Merck is not seeking to profit from sales of this vaccine; rather, to ensure the vaccine is sustainable by recovering manufacturing and operational costs associated with the program. Ervebo was also granted a conditional marking authorization by the EC. Additionally, Merck has made submissions to African country national regulatory authorities in collaboration with the African Vaccine Regulatory Forum that will allow the vaccine to be registered in African countries considered to be at-risk for Ebola outbreaks by the WHO. In February 2020, Merck confirmed that four African countries have approved Ervebo. Approvals in additional countries in Africa are anticipated in the near future.

Hospital Acute Care



($ in millions)	2019		% Change		% Change Excluding Exchange		2018		% Change		% Change Excluding Exchange		2017
Bridion	$	1,131	23	%	26	%	$	917	30	%	30	%	$	704
Noxafil	662		(11	)%	(7	)%	742		17	%	15	%	636
Invanz	263		(47	)%	(44	)%	496		(18	)%	(17	)%	602
Cubicin	257		(30	)%	(28	)%	367		(4	)%	(5	)%	382

Global sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, grew 23% in 2019 driven by higher demand globally, particularly in the United States.

Worldwide sales of Noxafil, for the prevention of invasive fungal infections, declined 11% in 2019 driven primarily by generic competition in the United States. The patent that provided U.S. market exclusivity for certain forms of Noxafil representing the majority of U.S. Noxafil sales expired in July 2019. Accordingly, the Company is experiencing a decline in U.S. Noxafil sales as a result of generic competition and expects the decline to continue. Additionally, the patent for Noxafil expired in a number of major European markets in December 2019. As a result, the Company anticipates sales of Noxafil in these markets will decline significantly in future periods.

Global sales of Invanz, for the treatment of certain infections, declined 47% in 2019 driven by generic competition in the United States. The patent that provided U.S. market exclusivity for Invanz expired in November 2017 and generic competition began in the second half of 2018. The Company subsequently experienced a significant decline in Invanz sales in the United States as a result of this generic competition and has since lost most of its U.S. Invanz sales.

Global sales of Cubicin, an I.V. antibiotic for complicated skin and skin structure infections or bacteremia when caused by designated susceptible organisms, declined 30% in 2019 resulting primarily from ongoing generic competition in the United States following expiration of the U.S. composition patent for Cubicin in 2016.

In 2019, the FDA and EC approved expanded indications for Zerbaxa for the treatment of HABP/VABP caused by certain susceptible Gram-negative microorganisms based on the results of the pivotal Phase 3 ASPECT-NP trial. Zerbaxa was previously approved in the United States and EU for the treatment of adults with certain complicated urinary tract and intra-abdominal infections.

In July 2019, the FDA approved Recarbrio for injection, a new combination antibacterial for the treatment of adults who have limited or no alternative treatment options with complicated urinary tract infections and complicated intra-abdominal infections caused by certain susceptible Gram-negative microorganisms. Recarbrio was approved by the EC in February 2020. Merck anticipates making Recarbrio available in the first half of 2020.

In January 2020, the FDA approved Dificid (fidaxomicin) for oral suspension and Dificid tablets for the treatment of Clostridioides (formerly Clostridium) difficile-associated diarrhea in children aged six months and older.

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Immunology



($ in millions)	2019		% Change		% Change Excluding Exchange		2018		% Change		% Change Excluding Exchange		2017
Simponi	$	830	(7	)%	(2	)%	$	893	9	%	5	%	$	819
Remicade	411		(29	)%	(25	)%	582		(31	)%	(33	)%	837

Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), declined 7% in 2019 driven by the unfavorable effect of foreign exchange and lower pricing in Europe. Sales of Simponi are being unfavorably affected by the launch of biosimilars for a competing product. The Company expects this competition will continue to unfavorably affect sales of Simponi.

Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), declined 29% in 2019 driven by ongoing biosimilar competition in the Company’s marketing territories. The Company lost market exclusivity for Remicade in major European markets in 2015 and no longer has market exclusivity in any of its marketing territories. The Company is experiencing pricing and volume declines in these markets as a result of biosimilar competition and expects the declines to continue.

Virology



($ in millions)	2019		% Change		% Change Excluding Exchange		2018		% Change		% Change Excluding Exchange		2017
Isentress/Isentress HD	$	975	(15	)%	(10	)%	$	1,140	(5	)%	(5	)%	$	1,204

Worldwide sales of Isentress/Isentress HD, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, declined 15% in 2019 primarily reflecting lower demand in the United States and in the EU due to competitive pressure.

In September 2019, the FDA approved supplemental New Drug Applications (NDA) for Pifeltro (doravirine) in combination with other antiretroviral agents, and for Delstrigo (doravirine/lamivudine/tenofovir disoproxil fumarate) as a complete regimen, that expand their indications to include adult patients with HIV-1 infection who are virologically suppressed on a stable antiretroviral regimen.

Cardiovascular



($ in millions)	2019		% Change		% Change Excluding Exchange		2018		% Change		% Change Excluding Exchange	2017
Zetia/Vytorin	$	874	(35	)%	(34	)%	$	1,355	(35	)%	(38